NICOLET BANKSHARES INC (Form: 10-K, Received: 03/10/2017 14:19:35)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2016

¨ 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

(920) 430-1400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		The NASDAQ Stock Market LLC

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d). Yes ¨ No x

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

As of June 30, 2016, (the last business day of the registrant’s most recently completed second fiscal quarter) the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $284.9 million based on the closing sale price of $38.08 per share as reported on Nasdaq on June 30, 2016. The registrant’s common stock commenced trading on the Nasdaq Capital Market on February 24, 2016.

As of February 28, 2017, 8,588,634 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K – Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders.

Nicolet Bankshares, Inc.

TABLE OF CONTENTS

			PAGE
PART I

	Item 1.	Business	3-10

	Item 1A.	Risk Factors	10-15

	Item 1B.	Unresolved Staff Comments	16

	Item 2.	Properties	16

	Item 3.	Legal Proceedings	16

	Item 4.	Mine Safety Disclosures	16

PART II

	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17-18

	Item 6.	Selected Financial Data	18-19

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	20-47

	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	47

	Item 8.	Financial Statements and Supplementary Data	48-98

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99

	Item 9A.	Controls and Procedures	99

	Item 9B.	Other Information	99

PART III

	Item 10.	Directors, Executive Officers and Corporate Governance	100

	Item 11.	Executive Compensation	100

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100

	Item 13.	Certain Relationships and Related Transactions, and Director Independence	100

	Item 14.	Principal Accountant Fees and Services	100

PART IV

	Item 15.	Exhibits and Financial Statement Schedules	101-102

	Signatures		103

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities law. Statements in this report that are not strictly historical are forward-looking and based upon current expectations that may differ materially from actual results. These forward-looking statements, identified by words such as “will”, “expect”, “believe” and “prospects”, involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statement made herein. These risks and uncertainties include, but are not limited to, general economic trends and changes in interest rates, increased competition, regulatory or legislative developments affecting the financial industry generally or Nicolet Bankshares, Inc. specifically, changes in consumer demand for financial services, the possibility of unforeseen events affecting the industry generally or Nicolet Bankshares, Inc. specifically, the uncertainties associated with newly developed or acquired operations and market disruptions. Nicolet Bankshares, Inc. undertakes no obligation to release revisions to these forward-looking statements publicly to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission (“SEC”).

PART I

ITEM 1.

BUSINESS

General

Nicolet Bankshares, Inc. (individually referred to herein as the “Parent Company” and together with all its subsidiaries collectively referred to herein as “Nicolet,” the “Company,” “we,” “us” or “our”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Wisconsin. At December 31, 2016, Nicolet had total assets of $2.3 billion, loans of $1.6 billion, deposits of $2.0 billion and total stockholders’ equity of $276 million. For the year ended December 31, 2016, Nicolet earned net income of $18.5 million, and after $0.6 million of preferred stock dividends, net income available to common shareholders was $17.9 million or $2.37 per diluted common share. For 2016, Nicolet’s return on average assets was 0.95%.

Nicolet is a Wisconsin corporation, originally incorporated on April 5, 2000 as Green Bay Financial Corporation, a Wisconsin corporation, to serve as the holding company for and the sole shareholder of Nicolet National Bank. It amended and restated its articles of incorporation and changed its name to Nicolet Bankshares, Inc. on March 14, 2002. It subsequently became the holding company for the Bank upon the completion of the Bank’s reorganization into a holding company structure on June 6, 2002. Nicolet elected to become a financial holding company in 2008.

Nicolet conducts operations through its wholly owned subsidiary, Nicolet National Bank, a commercial bank which was organized in 2000 as a national bank under the laws of the United States and opened for business, in Green Bay, Brown County, Wisconsin, on November 1, 2000 (referred to herein as the “Bank”). Structurally, Nicolet also wholly owns a registered investment advisory firm, Brookfield Investment Partners, LLC. (“Brookfield”), that principally provides investment strategy and transactional services to select community banks, wholly owns a registered investment advisory firm, Nicolet Advisory Services, LLC (“Nicolet Advisory”), that conducts brokerage and financial advisory services primarily to individual consumers, and entered into a joint venture that provides for 50% ownership of the building in which Nicolet is headquartered. Structurally, the Bank wholly owns an investment subsidiary based in Nevada, wholly owns a subsidiary in Green Bay that provides a web-based investment management platform for financial advisor trades and related activity, and the Bank owns 99.2% of United Financial Services, Inc (“UFS Inc.”) which in turn owns 50.2% of UFS, LLC, a data processing services company located in Grafton, Wisconsin (collectively referred to herein as “UFS”). These subsidiaries are closely related to or incidental to the business of banking and none are individually or collectively significant to Nicolet’s financial position or results as of December 31, 2016.

The Bank is a full-service community bank, offering traditional banking products and services, and trust and brokerage products and services, to businesses and individuals in the markets it serves, delivered through a branch network serving northeast and central Wisconsin communities and Menominee, Michigan, as well as through on-line and mobile banking capabilities.

Nicolet’s profitability is significantly dependent upon net interest income (interest income earned on loans and other interest-earning assets such as investments, net of interest expense on deposits and other borrowed funds), and noninterest income sources (including but not limited to service charges on deposits, trust and brokerage fees, and mortgage income from sales of residential mortgages into the secondary market), offset by the level of the provision for loan losses, noninterest expenses (largely employee compensation and overhead expenses tied to processing and operating the Bank’s business), and income taxes.

Since its opening in late 2000, Nicolet has supplemented its organic growth with the December 2003 purchase of a branch and deposits in Menominee, Michigan, the July 2010 purchase of 4 branches and deposits in Brown County, the April 2013 merger transaction with Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), the August 2013 acquisition of selected assets and liabilities of Bank of Wausau through a transaction with the Federal Deposit Insurance Corporation (“FDIC”) (the latter two collectively referred to as the “2013 acquisitions”), and two transactions completed in the first half of 2016 (collectively the “2016 acquisitions”) consisting of a private transaction to hire a select group of financial advisors and to purchase their respective books of business and operating platform completed on April 1, 2016 and the merger transaction with Baylake Corp. (“Baylake”) consummated on April 29, 2016.

On November 4, 2016, Nicolet announced the signing of an Agreement and Plan of Merger with First Menasha Bancshares, Inc. (“First Menasha” (OTCQX: FMBJ)) pursuant to which First Menasha will merge with and into Nicolet. As of December 31, 2016, First Menasha had total assets of $465 million, loans of $365 million, deposits of $383 million and total stockholders’ equity of $47 million. The merger with First Menasha is expected to close in April of 2017.

Products and Services Overview

Nicolet’s principal business is banking, consisting of lending and deposit gathering, as well as ancillary banking-related products and services, to businesses and individuals of the communities it serves, and the operational support to deliver, fund and manage such banking products and services. Additionally, through the Bank and Nicolet Advisory, trust, brokerage and other investment management services for individuals and retirement plan services for business customers are offered. Nicolet delivers its products and services principally through 36 bank branch locations, on-line banking, mobile banking and an interactive website. Nicolet’s call center also services customers.

Nicolet offers a variety of loans, deposits and related services to business customers (especially small and medium-sized businesses and professional concerns), including but not limited to: business checking and other business deposit products and cash management services, international banking services, business loans, lines of credit, commercial real estate financing, construction loans, agricultural real estate or production loans, and letters of credit, as well as retirement plan services. Similarly, Nicolet offers a variety of banking products and services to consumers, including but not limited to: residential mortgage loans and mortgage refinancing, home equity loans and lines of credit, residential construction loans, personal loans, checking, savings and money market accounts, various certificates of deposit and individual retirement accounts, safe deposit boxes, and personal brokerage, trust and fiduciary services. Nicolet also provides on-line services including commercial, retail and trust on-line banking, automated bill payment, mobile banking deposits and account access, remote deposit capture, and telephone banking, and other services such as wire transfers, debit cards, credit cards, pre-paid gift cards, direct deposit, official bank checks and U.S. savings bonds.

Lending is critical to Nicolet’s balance sheet and earnings potential. Nicolet seeks creditworthy borrowers principally within the geographic area of its branch locations. As a community bank with experienced commercial lenders and residential mortgage lenders, the primary lending function is to make commercial loans (consisting of commercial, industrial, and business loans and lines of credit, owner-occupied commercial real estate (“owner-occupied CRE”), and agricultural (“AG”) production loans]; commercial real estate (“CRE”) loans [consisting of investment real estate loans (“CRE investment”), AG real estate, and construction and land development loans); residential real estate loans (consisting of residential first lien mortgages, junior lien mortgages, home equity loans and lines of credit, and to a lesser degree residential construction loans); and other loans, mainly consumer in nature. As of December 31, 2016, Nicolet’s loan portfolio mix was as follows:

Loan category	% of Total Loans
Commercial & industrial		27	%
Owner-occupied CRE		23	%
AG production		3	%
Total commercial loans		53	%
AG real estate		3	%
CRE investment		13	%
Construction & land development		4	%
Total CRE loans		20	%
Residential construction		1	%
Residential first mortgages		19	%
Residential junior mortgages		6	%
Total residential real estate loans		26	%
Other		1	%

Lending involves credit risk. Nicolet has and follows extensive loan policies and procedures to standardize processes, meet compliance requirements and prudently manage underwriting, credit and other risks. Credit risk is further controlled and monitored through active asset quality management including the use of lending standards, thorough review of current and potential borrowers through Nicolet’s underwriting process, close relationships with and regular check-ins with borrowers, and active asset quality administration. For further discussion of credit risk management, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” under Part II, Item 7.

Employees

At December 31, 2016, Nicolet had approximately 480 full-time equivalent employees. None of our employees are represented by unions.

Market Area and Competition

The Bank is a full-service community bank, providing a full range of traditional commercial and retail banking services throughout northeastern and central Wisconsin and the upper peninsula of Michigan. Nicolet markets its services to owner-managed companies, the individual owners of these businesses, and other residents of its market area, which at December 31, 2016 is through 36 branches located within 11 Wisconsin counties (Brown, Door, Outagamie, Kewaunee, Marinette, Taylor, Clark, Marathon, Oneida, Price and Vilas) and in Menominee, Michigan. Based on deposit market share data published by the FDIC as of June 30, 2016, the Bank ranks in the top three of market share for Brown, Door, Kewaunee, Taylor and Clark counties and in the top five for Menominee, Marinette and Price counties.

The financial services industry is highly competitive. Nicolet competes for loans, deposits and wealth management or financial services in all its principal markets. Nicolet competes directly with other bank and nonbank institutions located within our markets (some that may have an established customer base or name recognition), internet-based banks, out-of-market banks that advertise or otherwise serve its markets, money market and other mutual funds, brokerage houses, mortgage companies, insurance companies or other commercial entities that offer financial services products. Competition involves efforts to retain current or procure new customers, obtain new loans and deposits, increase the scope and type of products or services offered, and offer competitive interest rates paid on deposits or earned on loans, as well as to deliver other aspects of banking competitively. Many of Nicolet’s competitors may enjoy competitive advantages, including greater financial resources, broader geographic presence, more accessible branches or more advanced technologic delivery of products or services, more favorable pricing alternatives and lower origination or operating costs.

We believe our competitive pricing, personalized service and community engagement enable us to effectively compete in our markets. Nicolet employs seasoned banking and wealth management professionals with experience in its market areas and who are active in their communities. Nicolet’s emphasis on meeting customer needs in a relationship-focused manner, combined with local decision making on extensions of credit, distinguishes Nicolet from its competitors, particularly in the case of large financial institutions. Nicolet believes it further distinguishes itself by providing a range of products and services characteristic of a large financial institution while providing the personalized service, real conversation, and convenience characteristic of a local, community bank.

Supervision and Regulation

Set forth below is an explanation of the major pieces of legislation and regulation affecting the banking industry and how that legislation and regulation affects Nicolet’s business. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the business and prospects of Nicolet or the Bank, and legislative changes and the policies of various regulatory authorities may significantly affect their operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on the future business and earnings of Nicolet or the Bank.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. The Dodd-Frank Act made extensive changes in the regulation of financial institutions and their holding companies.

Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole or on Nicolet’s and the Bank’s business, results of operations, and financial condition. Many aspects of the Dodd-Frank Act are in the process of being implemented while other aspects remain subject to further rulemaking. These regulations are scheduled to take effect over several years, making it difficult to anticipate the overall financial impact on Nicolet, its customers or the financial industry more generally. However, full implementation of the Dodd-Frank Act would likely increase the regulatory burden, compliance costs and interest expense for Nicolet and the Bank. Some of the rules that have been adopted to comply with the Dodd-Frank Act’s mandates are discussed below.

Regulation of Nicolet

Because Nicolet owns all of the capital stock of the Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a result, Nicolet is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Wisconsin, the Wisconsin Department of Financial Institutions (the “WDFI”) also regulates and monitors all significant aspects of its operations.

Acquisitions of Banks . The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

acquiring all or substantially all of the assets of any bank; or

merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved in the transaction and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Bank Holding Company Act, if adequately capitalized and adequately managed, Nicolet or any other bank holding company located in Wisconsin may purchase a bank located outside of Wisconsin. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Wisconsin may purchase a bank located inside Wisconsin. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.

Change in Bank Control . Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities of the bank holding company. The regulations provide a procedure for challenging rebuttable presumptions of control.

Permitted Activities . The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company to engage in activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among other activities, certain insurance, advisory and security activities.

Nicolet meets the qualification standards applicable to financial holding companies, and elected to become a financial holding company in 2008. In order to remain a financial holding company, Nicolet must continue to be considered well managed and well capitalized by the Federal Reserve, and the Bank must continue to be considered well managed and well capitalized by the Office of the Comptroller of the Currency (the “OCC”) and have at least a “satisfactory” rating under the Community Reinvestment Act.

Support of Subsidiary Institutions . Under Federal Reserve policy and the Dodd-Frank Act, Nicolet is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank. This support may be required at times when, without this Federal Reserve policy or the related rules, Nicolet might not be inclined to provide it.

In addition, any capital loans made by Nicolet to the Bank will be repaid only after the Bank’s deposits and various other obligations are repaid in full.

Capital Adequacy . Nicolet is subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of the Bank, which are summarized below.

Dividend Restrictions . Under Federal Reserve policies, bank holding companies may pay cash dividends on common stock only out of income available over the past year if prospective earnings retention is consistent with the organization's expected future needs and financial condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve policy also provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries.

Regulation of the Bank

Because the Bank is chartered as a national bank, it is primarily subject to the supervision, examination, and reporting requirements of the National Bank Act and the regulations of the OCC. The OCC regularly examines the Bank’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Because the Bank’s deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations and the FDIC also has examination authority and back-up enforcement power over the Bank. The Bank is also subject to numerous state and federal statutes and regulations that affect Nicolet, its business, activities, and operations.

Branching. National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under Wisconsin law and the Dodd-Frank Act, and with the prior approval of the OCC, the Bank may open branch offices within or outside of Wisconsin, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Wisconsin or other states.

Capital Adequacy. Banks and bank holding companies, as regulated institutions, are required to maintain minimum levels of capital. The Federal Reserve and the OCC have adopted minimum risk-based capital requirements (Tier 1 capital, common equity Tier 1 capital (“CET1”) and total capital) and leverage capital requirements, as well as guidelines that define components of the calculation of capital and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines.

In addition to the minimum risk-based capital and leverage ratios, banking organizations must maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increases the minimum CET1 capital, Tier 1 capital, and total capital ratios for U.S. banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The capital conservation buffer is phased in over a 5-year period beginning January 1, 2016.

The following table presents the risk-based and leverage capital requirements applicable to the Bank:

	Adequately Capitalized Requirement	Well-Capitalized Requirement	Well-Capitalized with Buffer, fully phased in 2019
Leverage	4.0%	5.0%	5.0%
CET1	4.5%	6.5%	7.0%
Tier 1	6.0%	8.0%	8.5%
Total Capital	8.0%	10.0%	10.5%

Although capital instruments such as trust preferred securities and cumulative preferred shares were required by the Dodd-Frank Act to be phased-out of Tier 1 capital by January 1, 2016, for certain larger banking organizations, Nicolet’s trust preferred securities are permanently grandfathered as Tier 1 capital (provided they do not exceed 25% of Tier 1 capital) as a result of Nicolet qualifying as a smaller entity.

The capital rules require that goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities (“DTLs”), be deducted from CET1 capital. Additionally, deferred tax assets (“DTAs”) that arise from net operating loss and tax credit carryforwards, net of associated DTLs and valuation allowances, are fully deducted from CET1 capital. However, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial institutions” are partially includible in CET1 capital, subject to deductions defined in the rules.

The OCC also considers interest rate risk (arising when the interest rate sensitivity of the Bank’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of the bank’s capital adequacy. Banks with excessive interest rate risk exposure are required to hold additional amounts of capital against their exposure to losses resulting from that risk. Through the risk-weighting of assets, the regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk related to a bank’s lending and trading activities.

The Bank’s capital categories are determined solely for the purpose of applying the “prompt corrective action” rules described below and they are not necessarily an accurate representation of its overall financial condition or prospects for other purposes. Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. See “Prompt Corrective Action” below.

Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each category.

A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure, pursuant to any written agreement, order, capital directive, or prompt corrective action directive, and has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a common equity Tier 1 capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.

As of December 31, 2016, the Bank satisfied the requirements of “well-capitalized” under the regulatory framework for prompt corrective action. See Note 19, “Regulatory Capital Requirements and Restrictions of Dividends,” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for Nicolet and the Bank regulatory capital ratios.

As a bank’s capital position deteriorates, federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories: undercapitalized, significantly undercapitalized, and critically undercapitalized. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

FDIC Insurance Assessments. The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC up to the maximum amount permitted by law, which was permanently increased to $250,000 by the Dodd-Frank Act. The FDIC uses the Deposit Insurance Fund to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. The Bank is thus subject to FDIC deposit premium assessments. The cost of premium assessments are impacted by, among other things, a bank’s capital category under the prompt corrective action system.

Commercial Real Estate Lending. The federal banking regulators have issued the following guidance to help identify institutions that are potentially exposed to significant commercial real estate lending risk and may warrant greater supervisory scrutiny:

total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or

total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

At December 31, 2016 the Bank’s commercial real estate lending levels are below the guidance levels noted above.

Enforcement Powers . The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1,893,610 per day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Payment of Dividends. Statutory and regulatory limitations apply to the Bank’s payment of dividends to Nicolet. If, in the opinion of the OCC, the Bank were engaged in or about to engage in an unsafe or unsound practice, the OCC could require that the Bank stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.

The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed (1) the total of the Bank’s net profits for that year, plus (2) the Bank’s retained net profits of the preceding two years, less any required transfers to surplus. The payment of dividends may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines or any conditions or restrictions that may be imposed by regulatory authorities.

Transactions with Affiliates and Insiders . The Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which encompasses Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Federal law also places restrictions on the Bank’s ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties; and must not involve more than the normal risk of repayment or present other unfavorable features.

USA PATRIOT Act . The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act") requires each financial institution to: (i) establish an anti-money laundering program; and (ii) establish due diligence policies, procedures and controls with respect to its private and correspondent banking accounts involving foreign individuals and certain foreign banks. In addition, the USA PATRIOT Act encourages cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Customer Protection . The Bank is also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and Procedures Act, the Fair Credit Reporting Act and the Federal Trade Commission Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.

Consumer Financial Protection Bureau. The Dodd-Frank Act centralized responsibility for consumer financial protection including implementing, examining and enforcing compliance with federal consumer financial laws with the Consumer Financial Protection Bureau (the “CFPB”). Depository institutions with less than $10 billion in assets, such as the Bank, will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes.

UDAP and UDAAP. Bank regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act—the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has brought a variety of enforcement actions for violations of UDAAP provisions and CFPB guidance continues to evolve.

Mortgage Reform. The CFPB has adopted final rules implementing minimum standards for the origination of residential mortgages, including standards regarding a customer's ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.

Available Information

Nicolet became a public reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on March 26, 2013, when Nicolet’s registration statement related to its acquisition of Mid-Wisconsin Financial Services, Inc. (Registration Statement on Form S-4, Regis. No. 333-186401) became effective. Nicolet registered its common stock under Section 12(b) of the Exchange Act on February 24, 2016 in connection with listing on the Nasdaq Capital Market. Nicolet files annual, quarterly, and current reports, and other information with the SEC. These filings are available to the public on the Internet at the SEC’s website at www.sec.gov . Shareholders may also read and copy any document that we file at the SEC’s public reference rooms located at 100 F Street, NE, Washington, DC 20549. Shareholders may call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Nicolet’s internet address is www.nicoletbank.com . We make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 1A.

RISK FACTORS

An investment in our common stock involves risks. If any of the following risks, or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occurs, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Risks Relating to Nicolet’s Business

Nicolet may not be able to sustain its historical rate of growth, or may encounter issues associated with its growth, either of which could adversely affect our financial condition, results of operations, and share price.

We have grown over the past several years and intend to continue to pursue a significant growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. We may not be able to further expand our market presence in existing markets or to enter new markets successfully, nor can we guarantee that any such expansion would not adversely affect our results of operations. Failure to manage growth effectively could have a material adverse effect on the business, future prospects, financial condition or results of our operations, and could adversely affect our ability to successfully implement business strategies. Also, if such growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and the ability to manage our growth. While we believe we have the management resources and internal systems in place to manage future growth successfully, there can be no assurance that growth opportunities will be available or that any growth will be managed successfully. In addition, our recent growth may distort some of our historical financial ratios and statistics.

As part of our growth strategy, we regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services.

As noted above in Item 1, Business, Nicolet completed its acquisition of Baylake on April 29, 2016, and completed the hiring of a select group of financial advisors and purchase of their respective books of business and operating platform on April 1, 2016. In addition, on November 4, 2016, we announced the signing of a definitive merger agreement pursuant to which Nicolet will acquire First Menasha. As evidenced by our pending acquisition of First Menasha, we intend to continue pursuing a growth strategy for our business through attractive acquisition opportunities.

Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things, difficulty in estimating the value of the target company, payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term, potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, potential volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts, difficulty and expense of integrating the operations and personnel of the target company, inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and / or other projected benefits, potential disruption to our business, potential diversion of our management’s time and attention, and the possible loss of key employees and customers of the target company.

As a community bank, Nicolet’s success depends upon local and regional economic conditions and has different lending risks than larger banks.

We provide services to our local communities. Our ability to diversify economic risks is limited by our own local markets and economies. We lend primarily to individuals and small- to medium-sized businesses, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments. We can make no assurance that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on its business, profitability or financial condition.

The core industries in our market area are manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. The area has a broad range of diversified equipment manufacturing services related to these core industries and others. The residential and commercial real estate markets throughout these areas depend primarily on the strength of these core industries. A material decline in any of these sectors will affect the communities we serve and could negatively impact our financial results and have a negative impact on profitability.

If the communities in which we operate do not grow or if the prevailing economic conditions locally or nationally are less favorable than we have assumed, our ability to maintain our low volume of non-performing loans and other real estate owned and implement our business strategies may be adversely affected and our actual financial performance may be materially different from our projections.

Nicolet may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, results of operations, and share price.

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If management’s assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease net income. We expect our allowance to continue to fluctuate; however, given current and future market conditions, we can make no assurance that our allowance will be adequate to cover future loan losses.

In addition, the market value of the real estate securing our loans as collateral could be adversely affected by the economy and unfavorable changes in economic conditions in our market areas. As of December 31, 2016, approximately 40% of our loans were secured by commercial-based real estate, 3% of loans were secured by agriculture-based real estate, and 26% of our loans were secured by residential real estate. Any sustained period of increased payment delinquencies, foreclosures, or losses caused by adverse market and economic conditions, including another downturn in the real estate market, in our markets could adversely affect the value of our assets, revenues, results of operations, and financial condition.

Nicolet is subject to extensive regulation that could limit or restrict our activities, which could have a material adverse effect on our results of operations or share price.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations, including compliance with regulatory commitments, is costly and restricts certain of our activities, including the declaration and payment of cash dividends to stockholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations.

The laws and regulations applicable to the banking industry have recently changed and may continue to change, and we cannot predict the effects of these changes on our business and profitability. Some or all of the changes, including the rulemaking authority granted to the CFPB, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens for us, and many of our competitors that are not banks or bank holding companies may remain free from such limitations. This could affect our ability to attract and retain depositors, to offer competitive products and services, and to expand our business. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect our ability to operate profitably.

Congress may consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions, bank holding companies and financial holding companies. Such legislation may change existing banking statutes and regulations, as well as the current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

Nicolet’s profitability is sensitive to changes in the interest rate environment.

As a financial institution, our earnings significantly depend on net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

In addition, we cannot predict whether interest rates will continue to remain at present levels, or the timing of any anticipated changes. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates. If there is a substantial increase in interest rates, our investment portfolio is at risk of experiencing price declines that may negatively impact our total capital position through changes in other comprehensive income. In addition, any significant increase in prevailing interest rates could adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer refinancing and purchase money mortgage originations.

We rely on other companies to provide key components of our business infrastructure.

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

Negative publicity could damage our reputation.

Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending or foreclosure practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.

Competition in the banking industry is intense and Nicolet faces strong competition from larger, more established competitors.

The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions that operate in our primary market areas and elsewhere.

We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in its markets, we may face a competitive disadvantage as compared to large national or regional banks as a result of our smaller size and relative lack of geographic diversification.

Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts, and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.

Nicolet continually encounters technological change and we may have fewer resources than our competition to continue to invest in technological improvements, and Nicolet’s information systems may experience an interruption or breach in security.

The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in operations. Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driving products and services, which could reduce our ability to effectively compete.

In addition, we rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in customer relationship management, general ledger, deposit, loan functionality and the effective operation of other systems. While we have policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Risks Related to Ownership of Nicolet’s Common Stock

Our stock price can be volatile.

Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. Our stock price can fluctuate widely in response to a variety of factors including, among other things:

•

actual or anticipated variations in quarterly results of operations or financial condition;

•

operating results and stock price performance of other companies that investors deem comparable to us;

•

news reports relating to trends, concerns, and other issues in the financial services industry;

•

perceptions in the marketplace regarding us and / or our competitors;

•

new technology used or services offered by competitors;

•

significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;

•

failure to integrate acquisitions or realize anticipated benefits from acquisitions;

•

changes in government regulations;

•

geopolitical conditions such as acts or threats of terrorism or military conflicts;

•

available supply and demand of investors interested in trading our common stock;

•

our own participation in the market through our buyback program; and

•

recommendations by securities analysts.

General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of our operating results.

Nicolet has not historically paid dividends to our common shareholders, and we cannot guarantee that it will pay dividends to such shareholders in the future.

The holders of our common stock receive dividends if and when declared by the Nicolet board of directors out of legally available funds. Nicolet’s board of directors has not declared a dividend on the common stock since our inception in 2000 and does not expect to do so in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of Nicolet’s board of directors and will depend on a number of factors, including the company’s future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that the board of directors may deem relevant.

Our principal business operations are conducted through the Bank. Cash available to pay dividends to our shareholders is derived primarily, if not entirely, from dividends paid by the Bank. The ability of the Bank to pay dividends to us, as well as our ability to pay dividends to our shareholders, is subject to and limited by certain legal and regulatory restrictions, as well as contractual restrictions related to our junior subordinated debentures. Further, any lenders making loans to us may impose financial covenants that may be more restrictive than regulatory requirements with respect to the payment of dividends by us. There can be no assurance of whether or when we may pay dividends in the future.

Nicolet may need to raise additional capital in the future but that capital may not be available when it is needed or may be dilutive to our shareholders.

We are required by federal and state regulatory authorities to maintain adequate capital levels to support our operations. In order to support our operations and comply with regulatory standards, we may need to raise capital in the future. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on favorable terms. The capital and credit markets have experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of volatility worsen, our ability to raise additional capital may be disrupted. If we cannot raise additional capital when needed, our results of operations and financial condition may be adversely affected, and our banking regulators may subject us to regulatory enforcement action, including receivership. In addition, the issuance of additional shares of our equity securities will dilute the economic ownership interest of our common shareholders.

Nicolet’s directors and executive officers own a significant portion of our common stock and can influence shareholder decisions.

Our directors and executive officers, as a group, beneficially owned approximately 14% of our fully diluted issued and outstanding common stock as of December 31, 2016. As a result of their ownership, our directors and executive officers have the ability, if they voted their shares in concert, to influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

Holders of Nicolet’s subordinated debentures have rights that are senior to those of its common shareholders.

We have supported our continued growth by issuing trust preferred securities and accompanying junior subordinated debentures and by assuming the trust preferred securities and accompanying junior subordinated debentures issued by companies we have acquired. As of December 31, 2016, we had outstanding trust preferred securities and associated junior subordinated debentures with an aggregate par principal amount of approximately $32.6 million.

We have unconditionally guaranteed the payment of principal and interest on our trust preferred securities. Also, the junior debentures issued to the special purpose trusts that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the junior subordinated debentures before we can pay any dividends on our common stock, and in the event of our bankruptcy, dissolution or liquidation, holders of our junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We do have the right to defer distributions on our junior subordinated debentures (and related trust preferred securities) for up to five years, but during that time would not be able to pay dividends on our common stock.

Because Nicolet is a regulated bank holding company, your ability to obtain “control” or to act in concert with others to obtain control over Nicolet without the prior consent of the Federal Reserve or other applicable bank regulatory authorities is limited and may subject you to regulatory oversight.

Nicolet is a bank holding company and, as such, is subject to significant regulation of its business and operations. In addition, under the provisions of the Bank Holding Company Act and the Change in Bank Control Act, certain regulatory provisions may become applicable to individuals or groups who are deemed by the regulatory authorities to “control” Nicolet or our subsidiary bank. The Federal Reserve and other bank regulatory authorities have very broad interpretive discretion in this regard and it is possible that the Federal Reserve or some other bank regulatory authority may, whether through a merger or through subsequent acquisition of Nicolet’s shares, deem one or more of Nicolet’s shareholders to control or to be acting in concert for purposes of gaining or exerting control over Nicolet. Such a determination may require a shareholder or group of shareholders, among other things, to make voluminous regulatory filings under the Change in Bank Control Act, including disclosure to the regulatory authorities of significant amounts of confidential personal or corporate financial information. In addition, certain groups or entities may also be required to either register as a bank holding company under the Bank Holding Company Act, becoming themselves subject to regulation by the Federal Reserve under that Act and the rules and regulations promulgated thereunder, which may include requirements to materially limit other operations or divest other business concerns, or to divest immediately their investments in Nicolet.

In addition, these limitations on the acquisition of our stock may generally serve to reduce the potential acquirers of our stock or to reduce the volume of our stock that any potential acquirer may be able to acquire. These restrictions may serve to generally limit the liquidity of our stock and, consequently, may adversely affect its value.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years following the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if our total annual gross revenues equal or exceed $1 billion in a fiscal year. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Nicolet’s securities are not FDIC insured.

Our securities are not savings or deposit accounts or other obligations of the Bank, and are not insured by the Deposit Insurance Fund, or any other agency or private entity and are subject to investment risk, including the possible loss of some or all of the value of your investment.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

The corporate headquarters of both Nicolet and the Bank is located at 111 North Washington Street, Green Bay, Wisconsin. At year-end 2016, including the main office, the Bank operated 36 bank branch locations, 28 of which are owned and eight that are leased. In addition, we have one leased location solely related to Nicolet Advisory. Most of the offices are free-standing, newer buildings that provide adequate access, customer parking, and drive-through and/or ATM services. The properties are in good condition and considered adequate for present and near term requirements. In addition, Nicolet owns or leases other real property that, when considered in aggregate, is not significant to its financial position. None of the owned properties are subject to a mortgage or similar encumbrance.

Four of the leased locations involve directors, executive officers, or direct relatives of a director or executive officer, each with lease terms that management considers arms-length. For additional disclosure, see Note 17, “Related Party Transactions,” of the Notes to Consolidated Financial Statements under Part II, Item 8.

During the fourth quarter of 2016, six bank branch locations were closed and are not included in the numbers above. An additional two branch locations are expected to be closed in March 2017.

ITEM 3.

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 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Nicolet registered its common stock under Section 12(b) of the Exchange Act on February 24, 2016, in connection with listing on the Nasdaq Capital Market, and trades under the symbol “NCBS”. Prior to February 24, 2016, Nicolet’s common stock was traded on the Over-The-Counter Markets (“OTCBB”), also under the symbol “NCBS”. The trading volume of Nicolet’s common stock is less than that of banks with larger market capitalizations, even though Nicolet has improved accessibility to its common stock first through the OTCBB and more recently through its listing on Nasdaq. As of February 28, 2017, Nicolet had approximately 2,400 shareholders of record.

The following table sets forth the high and low sales prices (beginning February 24, 2016) or the high and low bid prices (prior to February 24, 2016) and quarter end closing prices of Nicolet’s common stock as reported by Nasdaq and the OTCBB for the periods presented.

For The Quarter Ended

	High Sales/Bid Prices		Low Sales/ Bid Prices		Closing Sales Prices

December 31, 2016	$	48.00	$	37.21	$	47.69
September 30, 2016		39.91		35.63		38.35
June 30, 2016		47.00		33.72		38.08
March 31, 2016		38.91		30.51		38.85

December 31, 2015	$	32.49	$	30.60	$	31.79
September 30, 2015		34.75		30.80		32.00
June 30, 2015		31.50		27.00		30.80
March 31, 2015		27.50		25.00		27.50

Nicolet has not paid dividends on its common stock since its inception in 2000, nor does it currently have any plans to pay dividends on Nicolet common stock in the foreseeable future. Any cash dividends paid by Nicolet on its common stock must comply with applicable Federal Reserve policies described further in “Business—Regulation of Nicolet—Dividend Restrictions.” The Bank is also subject to regulatory restrictions on the amount of dividends it is permitted to pay to Nicolet as further described in “Business—Regulation of the Bank – Payment of Dividends” and in Note 19, “Regulatory Capital Requirements and Restrictions of Dividends,” in the Notes to Consolidated Financial Statements under Part II, Item 8.

Following are Nicolet’s monthly common stock purchases during the fourth quarter of 2016.

	Total Number of Shares Purchased		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
		(#)		($)		(#)		(#)
Period

October 1 – October 31, 2016		52,485	$	38.82		48,687		281,000
November 1– November 30, 2016		3,070	$	42.73		—		281,000
December 1 – December 31, 2016		—		—		—		281,000
Total		55,555	$	39.03		48,687		281,000

(a) During the fourth quarter of 2016, the Company repurchased 4,198 and 2,340 shares for minimum tax withholding settlements on restricted stock and net settlements of stock options, respectively. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors’ authorization.

(b) During early 2014, a common stock repurchase program was approved which authorized, with subsequent modifications through January 2017, the use of up to $30 million to repurchase up to 1,050,000 shares of outstanding common stock. The common stock repurchase program has no expiration date. During 2016 and 2015, Nicolet spent $4.4 million and $4.2 million to repurchase and cancel 114,914 and 146,404 shares, respectively, at a weighted average price per share of $37.98 and $28.35, respectively, including commissions. Since the commencement of the common stock repurchase program through December 31, 2016, Nicolet has used $14.2 million to repurchase and cancel 518,609 shares at a weighted average price per share of $27.31 including commissions. Given the pending merger with First Menasha, Nicolet has suspended its repurchase program.

Performance Graph

The following graph shows the cumulative stockholder return on our common stock for the period of May 17, 2013 to December 31, 2016, compared with the KBW NASDAQ Bank Index and the S&P 500 Index. The graph assumes a $100 investment on May 17, 2013, the date Nicolet began trading on the OTCBB.

		Period Ending
Index	05/17/13	12/31/13	12/31/14	12/31/15	12/31/16
Nicolet Bankshares, Inc.	100.00	103.38	156.25	198.69	298.06
S&P 500 Index	100.00	112.30	127.67	129.43	144.91
KBW Nasdaq Bank Index	100.00	114.66	125.40	126.02	161.95

ITEM 6.

SELECTED FINANCIAL DATA

The selected consolidated financial data presented as of December 31, 2016 and 2015 and for each of the years in the three-year period ended December 31, 2016 is derived from the audited consolidated financial statements and related notes included in this report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data for all other periods shown is derived from audited consolidated financial statements that are not required to be included in this report.

EARNINGS SUMMARY AND SELECTED FINANCIAL DATA

(In thousands, except per share data)	At and for the year ended December 31,
	2016			2015			2014			2013			2012
Results of operations:
Interest income	$	75,467		$	48,597		$	48,949		$	43,196		$	28,795
Interest expense		7,334			7,213			7,067			6,292			6,530
Net interest income		68,133			41,384			41,882			36,904			22,265
Provision for loan losses		1,800			1,800			2,700			6,200			4,325
Net interest income after provision for loan losses		66,333			39,584			39,182			30,704			17,940
Other income		26,674			17,708			14,185			25,736			10,744
Other expense		64,942			39,648			38,709			36,431			24,062
Income before income taxes		28,065			17,644			14,658			20,009			4,622
Income tax expense		9,371			6,089			4,607			3,837			1,529
Net income		18,694			11,555			10,051			16,172			3,093
Net income attributable to noncontrolling interest		232			127			102			31			57
Net income attributable to Nicolet Bankshares, Inc.		18,462			11,428			9,949			16,141			3,036
Preferred stock dividends and discount accretion		633			212			244			976			1,220
Net income available to common shareholders	$	17,829		$	11,216		$	9,705		$	15,165		$	1,816
Earnings per common share:
Basic	$	2.49		$	2.80		$	2.33		$	3.81		$	0.53
Diluted		2.37			2.57			2.25			3.80			0.53
Weighted average common shares outstanding:
Basic		7,158			4,004			4,165			3,977			3,440
Diluted		7,514			4,362			4,311			3,988			3,442
Year-End Balances:
Loans	$	1,568,907		$	877,061		$	883,341		$	847,358		$	552,601
Allowance for loan losses		11,820			10,307			9,288			9,232			7,120
Investment securities available for sale, at fair value		365,287			172,596			168,475			127,515			55,901
Total assets		2,300,879			1,214,439			1,215,285			1,198,803			745,255
Deposits		1,969,986			1,056,417			1,059,903			1,034,834			616,093
Other debt		1,000			15,412			21,175			39,538			39,190
Junior subordinated debentures		24,732			12,527			12,328			12,128			6,186
Subordinated notes		11,885			11,849			-			-			-
Common equity		275,947			97,301			86,608			80,462			52,933
Stockholders’ equity		275,947			109,501			111,008			104,862			77,333
Book value per common share		32.26			23.42			21.34			18.97			15.45
Average Balances:
Loans	$	1,346,304		$	883,904		$	859,256		$	753,284		$	521,209
Interest-earning assets		1,723,600			1,083,967			1,084,408			913,104			614,252
Total assets		1,934,770			1,185,921			1,191,348			997,372			674,222
Deposits		1,641,894			1,021,155			1,028,336			830,884			545,896
Interest-bearing liabilities		1,307,471			851,957			892,872			756,606			511,572
Common equity		217,432			90,787			84,033			70,737			52,135
Stockholders’ equity		226,265			112,012			108,433			95,137			76,535
Financial Ratios:
Return on average assets		0.95	%		0.96	%		0.84	%		1.62	%		0.45	%
Return on average equity		8.16	%		10.20	%		9.18	%		16.97	%		3.97	%
Return on average common equity		8.20	%		12.35	%		11.55	%		21.44	%		3.48	%
Average equity to average assets		11.69	%		9.45	%		9.10	%		9.54	%		11.35	%
Net interest margin		4.01	%		3.88	%		3.89	%		4.06	%		3.67	%
Stockholders’ equity to assets		11.99	%		9.02	%		9.13	%		8.75	%		10.38	%
Net loan charge-offs to average loans		0.02	%		0.09	%		0.31	%		0.54	%		0.60	%
Nonperforming loans to total loans		1.29	%		0.40	%		0.61	%		1.21	%		1.27	%
Nonperforming assets to total assets		0.97	%		0.32	%		0.61	%		1.02	%		0.97	%

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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

The detailed financial discussion that follows focuses on 2016 results compared to 2015. See “2015 Compared to 2014” for the summary comparing 2015 and 2014 results. Some tabular information is shown for trends of three years or for five years as required under SEC regulations.

Overview

Nicolet is a bank holding company headquartered in Green Bay, Wisconsin, providing a diversified range of traditional commercial and retail banking services, as well as wealth management services, to individuals, business owners, and businesses in its market area primarily through, as of year-end 2016, the 36 bank branch offices of its banking subsidiary, the Bank, located within 11 Wisconsin counties (Brown, Door, Outagamie, Kewaunee, Marinette, Taylor, Clark, Marathon, Oneida, Price and Vilas) and in Menominee, Michigan.

Nicolet’s primary revenue sources are net interest income, representing interest income from loans and other interest-earning assets such as investments, less interest expense on deposits and other borrowings, and noninterest income, including, among others, trust and brokerage fees, service charges on deposit accounts, secondary mortgage income and other fees or revenue from financial services provided to customers or ancillary to loans and deposits. Business volumes and pricing drive revenue potential and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth and competitive conditions within the marketplace.

As previously noted in Item 1, Business, Nicolet has used acquisitions as part of its growth strategy. Nicolet’s 2016 acquisitions (described in detail in Note 2, “Acquisitions,” of the Notes to Consolidated Financial Statements under Part II, Item 8) included the transformative stock-for-stock merger with Baylake (announced in September 2015 and consummated on April 29, 2016) which nearly doubled the size of the Bank, provided opportunity for economies of scale, and added Door County and Kewaunee County to the footprint. On April 1, 2016, Nicolet completed a smaller but strategically important transaction to hire a select group of financial advisors and to purchase their respective books of business and operating platform, enhancing the leadership and growth of the wealth management business. In November 2016 Nicolet signed a definitive merger agreement with First Menasha; this acquisition, subject to First Menasha shareholder approval, regulatory approvals and other customary closing conditions, is expected to close in April of 2017 and would position Nicolet as the lead-local community bank in the Fox Valley area of Wisconsin.

2016 was a year for execution on growth, capital management and performance. At December 31, 2016, Nicolet had assets of $2.3 billion, loans of $1.6 billion, deposits of $2.0 billion and total stockholders’ equity of $276 million, representing increases over December 31, 2015 of 89%, 79%, 86% and 152%, in assets, loans, deposits and total equity, respectively. This balance sheet growth was predominantly attributable to the merger with Baylake, which added assets of $1.0 billion, loans of $0.7 billion, deposits of $0.8 billion, core deposit intangible of $17 million and goodwill of $66 million (as of the consummation date and based on estimated fair values), for a total purchase price of $164 million, including the issuance of 4.3 million shares of Nicolet common stock and assumption of outstanding Baylake equity awards. Asset quality remained strong, despite some elevation in nonperforming assets resulting from assets acquired in the Baylake merger, with net charge offs to average loans of 0.02% for 2016 and nonperforming assets to assets of 0.97% at December 31, 2016, reflecting diligent integration of acquired loans and continuing sound credit practices. Common equity increased in 2016 predominantly from new equity issued in the 2016 acquisitions. Nicolet redeemed $12.2 million (half) of its outstanding preferred stock in September 2015 and the remaining half in September 2016, as part of its capital plan and partially motivated by the adjustment of the preferred stock dividend rate from 1% to 9% effective March 1, 2016. Nicolet also repurchased $4.4 million of common stock in 2016 under its common stock repurchase program. As further capital management, Nicolet closed seven branches in 2016 that were in close proximity to other Nicolet branches, one concurrent with the Baylake merger, one in October and five in December 2016.

Net income attributable to Nicolet was $18.5 million for 2016, 62% higher than 2015, and after preferred stock dividends, diluted earnings per common share was $2.37, compared to $2.57 for 2015. The 8% decline in diluted earnings per share was largely attributable to the 72% increase in diluted weighted average shares and higher preferred stock dividends ($0.6 million for 2016 versus $0.2 million for 2015). Return on average assets of 0.95% and return on average common equity of 8.20% for 2016, reflect favorable performance in light of absorbing merger and integration costs and new shares from the 2016 acquisitions.

Evaluation of financial performance and average balances between 2016 and 2015 was impacted in general from the timing of the two 2016 acquisitions. Since the balances and results of operations of the acquired entities are appropriately not included in the accompanying consolidated financial statements until their consummation dates, income statement results and average balances for 2016 included partial period contributions from the 2016 acquisitions versus no contribution in 2015. The inclusion of the Baylake balance sheet (at about 83% of Nicolet’s pre-merger asset size) and operational results for approximately eight months in 2016 analytically explains most of the increase in certain average balances and income statement line items between 2016 and 2015, while the financial advisory business acquisition primarily impacts the brokerage fee income, personnel expense and certain other expense line items. In addition, the 2016 acquisitions and the pending First Menasha transaction impacted pre-tax net income by inclusion of non-recurring direct merger expenses of approximately $0.8 million in 2015 ($0.1 million in third quarter and $0.7 million in fourth quarter), and $1.3 million in 2016 ($0.4 million, $0.4 million, $0.1 million and $0.4 million in first through fourth quarters, respectively), along with a $1.7 million lease termination charge in second quarter 2016 related to a Nicolet branch closed concurrent with the Baylake merger.

For 2017, Nicolet’s focus will remain on the consummation and integration of its pending First Menasha acquisition, efficiencies from increased scale, and organic growth in our expanded markets and in brokerage services. The First Menasha transaction is a cash and stock transaction, subject to proration procedures and other terms and limitations as outlined in the definitive merger agreement. It is on target for an April 2017 consummation subject to customary closing conditions, including approvals by regulators and by First Menasha shareholders. Based upon the financial results as of December 31, 2016, the combined company would have approximately $2.8 billion in assets, $1.9 billion in loans and $2.4 billion in deposits, prior to any purchase accounting fair value marks. Appropriately, the transaction will not be included in Nicolet’s financial position or financial results until its consummation date in 2017. At year-end 2016 Nicolet had plans to close three of its branches in 2017, two in March (one outlier branch and one in close proximity to another Nicolet branch) and one concurrent upon consummation of the pending First Menasha transaction (which will bring in five new branch locations).

Performance Summary

Net income attributable to Nicolet was $18.5 million for 2016, and after $0.6 million of preferred stock dividends, net income available to common shareholders was $17.9 million, or $2.37 per diluted common share. Comparatively, 2015 net income attributable to Nicolet was $11.4 million, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $11.2 million or $2.57 per diluted common share. Between the years, net income increased 62%, predominantly due to inclusion of results from the 2016 acquisitions, and diluted earnings per common share decreased 8%, largely attributable to a 72% increase in diluted weighted average shares and higher preferred stock dividends. Return on average assets was 0.95% and 0.96% for 2016 and 2015, respectively, while return on average common equity was 8.20% for 2016 and 12.35% for 2015, with the 2016 ratios absorbing higher merger and integration costs and new shares from the 2016 acquisitions. Book value per common share was $32.26 at December 31, 2016, up 38% over $23.42 at December 31, 2015. Affecting total capital and the amount of preferred stock dividends between the years were the rate on and amount of preferred stock outstanding. Beginning March 1, 2016, the annual dividend rate on preferred stock moved from 1% to 9% in accordance with contractual terms. In advance of such increase, Nicolet redeemed $12.2 million (half) of its then outstanding preferred stock in September 2015 and redeemed the remaining half in September 2016, eliminating preferred stock and preferred dividends going forward.

As previously noted under the Overview section, the timing of the 2016 Baylake merger analytically explains most of the increase in certain average balances and income statement line items, while the timing of the financial advisors acquisition mostly impacts brokerage fee income, personnel expense and certain other expense between 2016 and 2015.

•

Net interest income was $68.1 million for 2016, an increase of $26.7 million or 65% compared to 2015. The improvement was primarily the result of favorable volume variances, driven by the addition of Baylake net interest-earning assets, and net favorable rate variances, predominantly from lower cost of funds. The earning asset yield was 4.44% for 2016 and 4.54% for 2015, influenced mainly by the earning asset mix, with more balances in lower-yielding assets. Loans, investments and other interest-earning assets (mostly low-earning cash) represented 78%, 17% and 5% of average earning assets, respectively for 2016, compared to 82%, 15% and 3%, respectively, for 2015. The cost of funds was 0.56% for 2016, 28 bps lower than 2015, driven by a lower cost of deposits between the years. As a result, the interest rate spread was 3.88% for 2016, 18 bps higher than 2015. The net interest margin was 4.01% for 2016 compared to 3.88% for 2015, with a lower contribution from net free funds partly offsetting the increase in interest rate spread.

•

Loans were $1.6 billion at December 31, 2016, up $0.7 billion or 78% over December 31, 2015; however, excluding the impact of the $0.7 billion loans added at acquisition, loans were essentially unchanged (up 0.1%) with underlying organic growth replacing acquired loan run off. Average loans were $1.3 billion in 2016 yielding 5.11%, compared to $884 million in 2015 yielding 5.12%, a 52% increase in average balances. The minimal change in loan yield was due to downward pressure on rates of new and renewing loans in the 2016 competitive rate environment offset by $3.9 million higher aggregate discount accretion on acquired loans between 2016 and 2015.

•

Total deposits were $2.0 billion at December 31, 2016, up $0.9 billion or 86% over December 31, 2015. Excluding the impact of the $0.8 billion deposits added at acquisition, deposits grew 8.7%. Between 2016 and 2015, average deposits were up $0.6 billion or 61%, with noninterest-bearing deposits representing 23% and 21% of total deposits for 2016 and 2015, respectively. Interest-bearing deposits cost 0.41% for 2016 and 0.64% for 2015 benefiting from deposit product rate changes in December 2015 and inclusion of Baylake deposits carrying a lower overall cost.

•

Asset quality measures remained strong, despite some elevation in nonperforming assets due to assets acquired in the Baylake merger. Nonperforming assets were $22.3 million (or 0.97% of total assets) at December 31, 2016, compared to the pre-merger level of $3.9 million (or 0.32% of assets) at December 31, 2015. For 2016, the provision for loan losses was $1.8 million, exceeding net charge offs of $0.3 million, versus provision of $1.8 million and net charge offs of $0.8 million for 2015. The allowance for loan losses (“ALLL”) was $11.8 million at December 31, 2016 (representing 0.75% of loans), compared to $10.3 million (representing 1.18% of loans) at December 31, 2015. The decline in the ratio of the ALLL to loans resulted from recording the Baylake loan portfolio at fair value with no carryover of its allowance at the time of the merger.

•

Noninterest income was $26.7 million (including $0.1 million of net gain on sale or write-down of assets), compared to $17.7 million for 2015 (including $1.7 million of net gain on sale or write-down of assets). Removing these net gains, noninterest income was up $10.6 million or 66.6%, with increases in all line items, except rental income, aided largely by the 2016 acquisitions. The most notable increase over prior year was brokerage fee income (up $3.0 million or 440.9%), directly related to the 2016 financial advisor business acquisition. Net mortgage income was up $2.2 million or 68.6% on increased production over a broader geographic footprint and higher servicing fees. Other income was up $3.3 million or 144.0%, mostly attributable to higher card interchange income (up $1.6 million given stronger volumes) and income from equity in UFS, a data processing company interest acquired in the Baylake merger (up $1.0 million).

•

Noninterest expense was $64.9 million (which included $1.3 million direct merger-related expenses and a non-recurring $1.7 million lease termination charge), compared to $39.6 million for 2015 (which included $0.8 million merger-related expenses). Removing these noted merger-related and lease charge expenses from both years, noninterest expense was up approximately $23.1 million or 59%, commensurate with the larger operating base and timing of the 2016 acquisitions. Additionally, the $2.4 million increase in intangibles amortization was exclusively attributable to the 2016 acquisitions, and $0.2 million in other expenses was related to the in-process implementation of a customer relationship management system.

Net Interest Income

Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustments) was $68.1 million in 2016, up 64.6% compared to $41.4 million in 2015. Taxable equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 34% tax rate) were $1.9 million for 2016 and $1.1 million for 2015, resulting in taxable equivalent net interest income of $70.0 million for 2016 and $42.5 million for 2015.

Taxable 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.

Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount, mix and composition of interest-earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.

Tables 1, 2, and 3 present information to facilitate the review and discussion of selected average balance sheet items, taxable equivalent net interest income, interest rate spread and net interest margin.

Table 1: Average Balance Sheet and Net Interest Income Analysis — Taxable-Equivalent Basis

(dollars in thousands)

	Years Ended December 31,
	2016							2015							2014
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
ASSETS
Earning assets
Loans (1)(2)(3)	$	1,346,304	$	69,687		5.11	%	$	883,904	$	45,745		5.12	%	$	859,256	$	46,206		5.32	%
Investment securities
Taxable		159,421		3,029		1.90	%		75,069		1,460		1.94	%		83,692		1,606		1.92	%
Tax-exempt (2)		131,250		3,292		2.51	%		87,609		2,083		2.38	%		55,678		1,463		2.63	%
Other interest-earning assets		86,625		1,327		1.53	%		37,385		443		1.18	%		85,782		469		0.55	%
Total interest-earning assets		1,723,600	$	77,335		4.44	%		1,083,967	$	49,731		4.54	%		1,084,408	$	49,744		4.54	%
Cash and due from banks		40,474							25,172							39,954
Other assets		170,696							76,782							66,986
Total assets	$	1,934,770						$	1,185,921						$	1,191,348
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	193,933	$	221		0.11	%	$	126,894	$	305		0.24	%	$	110,969	$	274		0.25	%
Interest-bearing demand		325,383		1,786		0.55	%		204,844		1,703		0.83	%		207,121		1,541		0.74	%
MMA		451,373		599		0.13	%		250,500		557		0.22	%		265,693		711		0.27	%
Core time deposits		259,730		2,220		0.85	%		197,862		2,211		1.12	%		226,112		2,348		1.04	%
Brokered deposits		28,329		318		1.12	%		29,431		414		1.41	%		38,319		468		1.22	%
Total interest-bearing deposits		1,258,748		5,144		0.41	%		809,531		5,190		0.64	%		848,214		5,342		0.63	%
Other interest-bearing liabilities		48,723		2,190		4.44	%		42,426		2,023		4.72	%		44,658		1,725		3.81	%
Total interest-bearing liabilities		1,307,471		7,334		0.56	%		851,957		7,213		0.84	%		892,872		7,067		0.79	%
Noninterest-bearing demand		383,146							211,624							180,122
Other liabilities		17,888							10,328							9,921
Total equity		226,265							112,012							108,433
Total liabilities and stockholders’ equity	$	1,934,770						$	1,185,921						$	1,191,348
Net interest income and rate spread			$	70,001		3.88	%			$	42,518		3.70	%			$	42,677		3.75	%
Net interest margin						4.01	%						3.88	%						3.89	%

(1)	Nonaccrual loans 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 34% and adjusted for the disallowance of interest expense.

(3)	Interest income includes loan fees of $1.6 million in 2016, $0.7 million in 2015 and $0.7 million in 2014.

Table 2: Volume/Rate Variance — Taxable-Equivalent Basis
(dollars in thousands)

	2016 Compared to 2015 Increase (decrease) Due to Changes in											2015 Compared to 2014 Increase (decrease) Due to Changes in
	Volume			Rate*				Net(1)				Volume			Rate*				Net(1)
Earning assets
Loans (2)	$	24,046			$	(104	)		$	23,942		$	1,307			$	(1,768	)		$	(461	)
Investment securities:
Taxable		1,603				(34	)			1,569			(156	)			10				(146	)
Tax-exempt (2)		1,089				120				1,209			770				(150	)			620
Other interest-earning assets		665				219				884			(50	)			24				(26	)
Total interest-earning assets	$	27,403			$	201			$	27,604		$	1,871			$	(1,884	)		$	(13	)

Interest-bearing liabilities
Savings deposits	$	118			$	(202	)		$	(84	)	$	38			$	(7	)		$	31
Interest-bearing demand		786				(703	)			83			(17	)			179				162
MMA		327				(285	)			42			(39	)			(115	)			(154	)
Core time deposits		599				(590	)			9			(308	)			171				(137	)
Brokered deposits		(15	)			(81	)			(96	)		(119	)			65				(54	)
Total interest-bearing deposits		1,815				(1,861	)			(46	)		(445	)			293				(152	)
Other interest-bearing liabilities		344				(177	)			167			403				(105	)			298
Total interest-bearing liabilities		2,159				(2,038	)			121			(42	)			188				146
Net interest income	$	25,244			$	2,239			$	27,483		$	1,913			$	(2,072	)		$	(159	)

*	Nonaccrual loans are included in the daily average loan balances outstanding.

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

(2)	The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.

Table 3: Interest Rate Spread, Margin and Average Balance Mix — Taxable-Equivalent Basis
(dollars in thousands)

	Years Ended December 31,
	2016 Average								2015 Average								2014 Average
	Balance		% of Earning Assets			Yield/Rate			Balance		% of Earning Assets			Yield/Rate			Balance		% of Earning Assets			Yield/Rate
Total loans	$	1,346,304		78.1	%		5.11	%	$	883,904		81.5	%		5.12	%	$	859,256		79.2	%		5.32	%
Securities and other earning assets		377,296		21.9	%		2.03	%		200,063		18.5	%		1.99	%		225,152		20.8	%		1.57	%
Total interest-earning assets	$	1,723,600		100.0	%		4.44	%	$	1,083,967		100.0	%		4.54	%	$	1,084,408		100.0	%		4.54	%

Interest-bearing liabilities	$	1,307,471		75.9	%		0.56	%	$	851,957		78.6	%		0.84	%	$	892,872		82.3	%		0.79	%
Noninterest-bearing funds, net		416,129		24.1	%					232,010		21.4	%					191,536		17.7	%
Total funds sources	$	1,723,600		100.0	%		0.41	%	$	1,083,967		100.0	%		0.64	%	$	1,084,408		100.0	%		0.65	%
Interest rate spread							3.88	%							3.70	%							3.75	%
Contribution from net free funds							0.13	%							0.18	%							0.14	%
Net interest margin							4.01	%							3.88	%							3.89	%

Comparison of 2016 versus 2015

Taxable-equivalent net interest income was $70.0 million for 2016, up $27.5 million or 64.6%, compared to 2015. Between 2016 and 2015, volume variances were favorable, driven by the addition of Baylake net interest-earning assets, and rate variances were favorable, predominantly from lower cost of funds between the years. Net favorable volume variances added $25.2 million to net interest income (with $24.0 million due to higher average loan balances and $3.4 million due to higher average investment securities and other interest-earning assets balances combined, offset by $2.2 million less net interest income from higher average interest-bearing liability balances), while net rate variances were favorable increasing net interest income by $2.2 million (with $2.0 million from lower funding costs, predominantly deposits, and $0.2 million from improved net earning asset rates, predominantly other interest earning assets).

The taxable-equivalent net interest margin was 4.01% for 2016, up 13 bps from 2015, aided by an 18 bps increase in the interest spread offset partly by a lower contribution from net free funds. The earning asset yield was 4.44% for 2016, down from 4.54% for 2015, influenced mainly by the interest-earning asset mix, with more balances in lower-yielding assets. Loans, investments and other interest-earning assets (mostly low-earning cash) represented 78%, 17% and 5% of average earning assets, respectively for 2016, compared to 82%, 15% and 3%, respectively, for 2015. The cost of funds was 0.56% for 2016, 28 bps lower than 2015, driven by a lower cost of deposits between the years. As a result, the interest rate spread was 3.88%, 18 bps higher than 2015.

The earning asset yield was down 10 bps between 2016 and 2015, mainly due to the earning asset mix, including the acquired Baylake mix having a lower proportion of loans. Loans represented 78% of average earning assets and yielded 5.11% for 2016, compared to 82% and 5.12%, respectively, for 2015. The 1 bp decline in loan yield between the years was primarily due to the addition of lower-yielding Baylake loans in 2016 and downward pressure on rates of new and renewing loans in the 2016 competitive rate environment, partially offset by $3.9 million higher aggregate discount accretion on acquired loans between 2016 and 2015. All other interest-earning assets combined represented 22% of average earning assets and yielded 2.03% versus 18% and 1.99%, respectively, for 2015. This 4 bps increase in the non-loan yield was driven by higher yields on investments partially offset by lower returns on higher levels of earning cash between the years.

Nicolet’s cost of funds was 0.56% for 2016, 28 bps lower than 0.84% for 2015, driven primarily by lower rates on deposit funding. Average interest-bearing deposits (which represented 96% of average interest-bearing liabilities for 2016 and 95% for 2015) cost 0.41% for 2016, 23 bps lower than 2015. The cost of interest-bearing deposits decreased as a result of a higher proportion of balances carried in lower-rate transaction accounts (77.1% for 2016 compared to 71.9% for 2015), as well as rate decreases initiated on certain deposit products in December 2015, lower cost of funds on acquired balances and a favorable fair value interest mark on acquired CDs. Deposit rate changes included decreases in savings, interest bearing demand, and money market accounts of 13 bps, 28 bps, and 9 bps, respectively, as well as decreases in rates on core time deposits and brokered deposits of 27 bps and 29 bps, respectively. Other interest-bearing liabilities balances (comprised of short- and long-term borrowings) increased $6.3 million while their cost decreased to 4.44% (down 28 bps from 4.72% in 2015) as higher cost advances matured and were not renewed, certain acquired advances were paid off in the quarter acquired, and lower-cost repurchase agreements and variable-rate junior subordinated debentures were added to the funding mix with the 2016 Baylake acquisition.

Average interest-earning assets were $1.7 billion for 2016, $639.6 million, or 59% higher than 2015, consisting of a $462.4 million increase in average loans (up 52.3% to $1.3 billion and representing 78% of interest-earning assets), a $128.0 million increase in investment securities (up 78.7% to $290.7 million and representing 17% of interest-earning assets), and a $49.2 million increase, or 131.7% higher in other interest-earning assets, predominantly low-earning cash.

Average interest-bearing liabilities were $1.3 billion, up $455.5 million or 53.5% from 2015, led by interest-bearing deposits, while the mix of interest-bearing deposits and other interest-bearing liabilities remained relatively unchanged at 96% and 4% for 2016 compared to 95% and 5% for 2015. Between 2016 and 2015, average total deposits were up $620.7 million or 60.8%, with interest-bearing deposits up $449.2 million and noninterest-bearing deposits up $171.5 million. Average other interest-bearing liabilities were up $6.3 million (to $48.7 million), led by an $8.2 million increase in junior subordinated debt, a $6.1 million net increase in low-costing repurchase agreements (both acquired with the 2016 Baylake merger), and a $2.6 million increase in subordinated notes which were procured in the first half of 2015, offset by decreases in average balances of all other borrowings.

Provision for Loan Losses

The provision for loan losses in 2016 was $1.8 million, exceeding $0.3 million of net charge offs. Comparatively, 2015 provision and net charge offs were $1.8 million and $0.8 million, respectively. The consistent provision in 2016 was reflective of the continued loan portfolio quality. At December 31, 2016, the ALLL was $11.8 million or 0.75% of loans compared to $10.3 million or 1.18% of loans at December 31, 2015. The decline in this ratio was due to recording the Baylake loan portfolio at fair value with no carryover of its allowance at the time of merger.

Nonperforming loans were $20.3 million (or 1.29% of total loans) at December 31, 2016, up from $3.5 million (or 0.40% of total loans) at December 31, 2015. The increase in nonperforming loans was the result of the acquisition of the Baylake loan portfolio with higher nonperforming loans. Of the $37.5 million purchase credit impaired (“PCI”) loans initially acquired in the 2016 acquisitions ($20.8 million) and 2013 acquisitions ($16.7 million), $20.0 million remain included in the $20.3 million of nonaccruals at December 31, 2016, compared to $2.9 million included in the $3.5 million of nonaccruals at December 31, 2015.

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

Noninterest Income

Table 4: Noninterest Income
(dollars in thousands)

	Years ended December 31,						Change From Prior Year
	2016		2015		2014		$ Change 2016			% Change 2016			$ Change 2015			% Change 2015

Service charges on deposit accounts	$	3,571	$	2,348	$	2,128	$	1,223			52.1	%	$	220			10.3	%
Mortgage income, net		5,494		3,258		1,926		2,236			68.6			1,332			69.2
Trust services fee income		5,435		4,822		4,569		613			12.7			253			5.5
Brokerage fee income		3,624		670		631		2,954			440.9			39			6.2
Bank owned life insurance (“BOLI”)		1,284		996		933		288			28.9			63			6.8
Rent income		1,090		1,156		1,239		(66	)		(5.7	)		(83	)		(6.7	)
Investment advisory fees		452		408		440		44			10.8			(32	)		(7.3	)
Gain on sale or write-down of assets, net		54		1,726		539		(1,672	)		(96.9	)		1,187			220.2
Other income		5,670		2,324		1,780		3,346			144.0			544			30.6
Total noninterest income	$	26,674	$	17,708	$	14,185	$	8,966			50.6	%	$	3,523			24.8	%
Noninterest income without net gains	$	26,620	$	15,982	$	13,646	$	10,638			66.6	%	$	2,336			17.1	%
Included in Other income:
Debit and credit card interchange income		3,167		1,566		1,220		1,601			102.2			346			28.4

Comparison of 2016 versus 2015

Noninterest income for 2016 was $26.7 million (including $0.1 million of net gain on sale or write-down of assets), up $9.0 million or 50.6%, compared to $17.7 million for 2015 (including $1.7 million of net gain on sale or write-down of assets). Removing these net gains from both periods, noninterest income was up $10.6 million or 66.6%, with increases in all line items, except rental income, aided largely by the 2016 acquisitions and higher volumes over a broader geographic footprint.

Service charges on deposit accounts for 2016 were $3.6 million, up $1.2 million or 52.1% over 2015, resulting predominantly from higher overdraft activity and the higher number of transaction accounts from the Baylake merger correspondingly increasing service charges.

Mortgage income represents net gains received from the sale of residential real estate loans service-released and service-retained into the secondary market, capitalized gains on MSRs, servicing fees, offsetting MSR amortization, valuation changes if any, and to a smaller degree some related income. Residential refinancing activity and new purchase activity vary with movements in mortgage rates, changes in mortgage regulation, and the impact of economic conditions on consumers. The mortgage market continued strong in 2016, with secondary mortgage production of $254 million, up 47% from 2015’s production of $173 million. Net mortgage income was $5.5 million for 2016, up $2.2 million or 68.6%, compared to $3.3 million for 2015, largely due to gains on increased volumes and servicing fees particularly related to the acquired servicing portfolio.

Trust service fees were $5.4 million for 2016, up $0.6 million or 12.7% over 2015, benefitting from new net business on steadily increasing assets under management, while minimally impacted by the Baylake merger. Brokerage fees were $3.6 million for 2016, up $3.0 million or 440.9% over 2015. The increase in brokerage business was directly related to the 2016 financial advisor business acquisition in the beginning of the year, with more dedicated resources to that area and revenue on books of business acquired.

BOLI income was $1.3 million, up $0.3 million or 28.9% over 2015 while average BOLI balances increased 48% to $41 million for 2016. BOLI investments of $25.4 million were added at acquisition in the Baylake merger at a lower overall earning rate, followed by the surrender of $21.5 million of acquired BOLI in June 2016 and the reinvestment of $20.0 million in September 2016.

Net gain on sale or write-down of assets in 2016 was $0.1 million, down $1.6 million or 96.9% compared to $1.7 million in 2015. The 2016 activity consisted mainly of a $0.5 million other-than-temporary impairment loss on an other investment security and $0.6 million in net gains from the sale of OREO. The 2015 activity consisted of $0.6 million net gains on sales of equity securities and $1.1 million net gains on OREO sales and other assets.

Other income was $5.7 million, up $3.3 million or 144.0% over 2015, with the majority of the increase due to debit and credit card interchange fees, up $1.6 million or 102.2% on higher volume and activity, and income from equity in UFS, a data processing company acquired in the Baylake merger, up $1.0 million.

Noninterest Expense

Table 5: Noninterest Expense
(dollars in thousands)

	Years ended December 31,						Change From Prior Year
	2016		2015		2014		$ Change 2016		% Change 2016			$ Change 2015			% Change 2015

Personnel	$	34,030	$	22,523	$	21,472	$	11,507		51.1	%	$	1,051			4.9	%
Occupancy, equipment and office		10,276		6,928		7,086		3,348		48.3			(158	)		(2.2	)
Business development and marketing		3,488		2,244		2,267		1,244		55.4			(23	)		1.0
Data processing		6,370		3,565		3,178		2,805		78.7			387			12.2
FDIC assessments		911		615		715		296		48.1			(100	)		(14.0	)
Intangibles amortization		3,458		1,027		1,209		2,431		236.7			(182	)		(15.1	)
Other expense		6,409		2,746		2,782		3,663		133.4			(36	)		(1.3	)
Total noninterest expense	$	64,942	$	39,648	$	38,709	$	25,294		63.8	%	$	939			2.4	%
Non-personnel expenses	$	30,912	$	17,125	$	17,237	$	13,787		80.5	%	$	(112	)		(0.6	)%

Comparison of 2016 versus 2015

Total noninterest expense was $64.9 million for 2016 (which included $1.3 million direct merger-related expense and a non-recurring $1.7 million lease termination charge), compared to $39.6 million for 2015 (which included $0.8 million merger-related expenses). Removing these noted merger-related expenses and lease charge from both years, noninterest expense was up approximately $23.1 million or 59%, commensurate with the larger operating base and timing of the 2016 acquisitions. Additionally, the $2.4 million increase in intangibles amortization was exclusively attributable to the 2016 acquisitions and $0.2 million in other expenses was related to the in-process implementation of a customer relationship management system. Cost saves anticipated with the Baylake merger began to be realized by year end 2016, due to more efficient processes and elimination of duplicative efforts in overhead areas.

Personnel expense (including salaries, brokerage variable pay, overtime, cash and equity incentives, and employee benefit and payroll-related expenses) was $34.0 million for 2016, up $11.5 million or 51.1% over 2015. In addition to merit increases, higher overtime and higher incentives and equity award costs between the years, salaries and benefits increased largely due to the 48% increase in average full-time equivalent employees from the 2016 acquisitions (415 for 2016). The six branch closures that occurred in fourth quarter 2016 should produce some cost savings in 2017.

Occupancy, equipment and office expense was $10.3 million for 2016, up $3.3 million or 48.3% from 2015, in line with the 2016 acquisitions adding a net 21 branches, an expanded operations facility and a financial advisors location, as well as some infrastructure and set-up costs needed to integrate the new office locations, customer communications, signage and phone and data systems to consistent platforms. The six branch closures that occurred in fourth quarter 2016 should produce some cost savings in 2017.

Business development and marketing expense was $3.5 million for 2016, up $1.2 million or 55.4%, with higher spending on promotional materials, media advertising, and donations as emphasis was focused on expanded and new markets.

Data processing expenses, which are primarily volume-based, were $6.4 million for 2016, up $2.8 million or 78.7% over 2015, in line with a higher number of accounts and volumes processed due to the 2016 acquisitions, an increase in the core processing rate charged and higher integration costs ($0.4 million in 2016 versus $0.1 million in 2015).

FDIC assessments were higher between the years mostly due to an increased assessment base in 2016. The intangibles amortization increased to $3.5 million, up $2.4 million or 236.7%, fully attributable to new core deposit intangible and customer list intangible balances added from the 2016 acquisitions.

Other expense was $6.4 million for 2016, up $3.7 million or 133.4%, with 2016 including $0.7 million of direct merger-related expense (mostly legal, consultant and professional in nature) and a $1.7 million lease termination charge and 2015 including $0.6 million of direct merger-related expense. In addition to the larger operating base increasing other expense levels, other expense increased $0.2 million related to the in-process implementation of a customer relationship management system and $0.2 million related to higher foreclosure and OREO costs.

Income Taxes

Income tax expense was $9.4 million for 2016 and $6.1 million for 2015. The effective tax rates were 33.4% for 2016 and 34.5% for 2015. Impacting tax expense and the effective tax rate for both 2016 and 2015 was the non-deductibility of certain merger-related costs. The net deferred tax asset was $10.9 million at December 31, 2016 compared to $5.2 million at the end of 2015. The basic principles for accounting for income taxes require that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. At December 31, 2016 and 2015, no valuation allowance was determined to be necessary.

BALANCE SHEET ANALYSIS

Loans

Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan including the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. It continues to concentrate its efforts in originating loans in its local markets and assisting its current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration to help customers weather current economic conditions and position their businesses for the future.

Nicolet’s primary lending function is to make 1) commercial loans, consisting of commercial, industrial and business loans and lines of credit, owner-occupied CRE loans and AG production loans; 2) CRE loans, consisting of CRE investment loans, AG real estate, and construction and land development loans; 3) residential real estate loans, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and to a lesser degree residential construction loans; and 4) retail and other loans. Using these four broad categories the mix of loans at December 31, 2016 was 53% commercial, 20% CRE loans, 26% residential real estate loans, and 1% retail and other loans; and grouped further the loan mix is 73% commercial-based and 27% retail-based. Comparatively, at December 31, 2015, loans were 56% commercial, 18% CRE, 25% residential real estate, and 1% retail and other, and more broadly remained 74% commercial-based and 26% retail-based.

Total loans were $1.6 billion at December 31, 2016, an increase of $691.8 million, or 78.9%, compared to total loans of $877 million at December 31, 2015; however, excluding the $691 million loans added at acquisition in 2016, loans were essentially unchanged (up 0.1%) with underlying organic growth replacing acquired loan runoff. Combined, loans acquired in the 2013 and 2016 acquisitions at their respective acquisition dates totaled $974 million, and had a combined outstanding balance of $667 million and $137 million at December 31, 2016 and 2015, respectively, given amortization, refinances, and payoffs.

Table 6: Loan Composition
As of December 31,
(dollars in thousands)

	2016					2015					2014					2013					2012
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial & industrial	$	428,270		27.3	%	$	294,419		33.6	%	$	289,379		32.7	%	$	253,674		29.9	%	$	197,301		35.7	%
Owner-occupied CRE		360,227		23.0			185,285		21.1			182,574		20.7			187,476		22.1			106,888		19.3
AG production		34,767		2.2			15,018		1.7			14,617		1.6			14,256		1.7			215		0.1
AG real estate		45,234		2.9			43,272		4.9			42,754		4.8			37,057		4.4			11,354		2.1
CRE investment		195,879		12.5			78,711		9.0			81,873		9.3			90,295		10.7			76,618		13.9
Construction & land development		74,988		4.8			36,775		4.2			44,114		5.0			42,881		5.1			21,791		3.9
Residential construction		23,392		1.5			10,443		1.2			11,333		1.3			12,535		1.5			7,957		1.4
Residential first mortgage		300,304		19.1			154,658		17.6			158,683		18.0			154,403		18.2			85,588		15.5
Residential junior mortgage		91,331		5.8			51,967		5.9			52,104		5.9			49,363		5.8			39,352		7.1
Retail & other		14,515		0.9			6,513		0.8			5,910		0.7			5,418		0.6			5,537		1.0
Total loans	$	1,568,907		100.0	%	$	877,061		100.0	%	$	883,341		100.0	%	$	847,358		100.0	%	$	552,601		100.0	%

As noted above, year-end 2016 loans were broadly 73% commercial-based and 27% retail-based compared to 74% commercial-based and 26% retail-based at year-end 2015. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. All loan types were impacted by the loans acquired in the 2016 Baylake merger, which carried a higher mix in CRE-related loan types.

Commercial and industrial loans consist primarily of commercial loans to small businesses and, to a lesser degree, to municipalities within a diverse range of industries. The credit risk related to commercial and industrial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio but decreased to 27.3% of the portfolio at year end 2016, due to the 2016 acquired loan mix, compared to 33.6% of the total portfolio at year end 2015. This continues to be a strong growth area for Nicolet.

Owner-occupied CRE loans increased to 23.0% of loans at year end 2016 compared to 21.1% of loans at year end 2015. This category primarily consists of loans within a diverse range of industries secured by business real estate that is occupied by borrowers who operate their businesses out of the underlying collateral and who may also have commercial and industrial loans. The credit risk related to owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral.

Agricultural production and agricultural real estate loans consist of loans secured by farmland and related farming operations. The credit risk related to agricultural loans is largely influenced by the prices farmers can get for their production and/or the underlying value of the farmland. These loans decreased to 5.1% of loans at year end compared to 6.6% of loans at year end 2015.

The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. From December 31, 2015 to December 31, 2016, these loans increased $117.2 million, and grew to represent 12.5% of loans, due to the 2016 acquired loan mix, compared to 9.0% a year ago.

Loans in the construction and land development portfolio represented 4.8% of total loans at year end 2016 compared to 4.2% at year-end 2015. Construction and land development loans provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis.

On a combined basis, Nicolet’s residential real estate loans represented 26.4% of total loans at year end 2016 compared to 24.7% of total loans at year end 2015. Residential first mortgage loans include conventional first-lien home mortgages. Residential junior mortgage real estate loans consist of home equity lines and term loans secured by junior mortgage liens. Across the industry, home equities involve loans that are often in second or junior lien positions, but Nicolet has secured many of these types of loans in a first lien position, further mitigating the portfolio risks. Nicolet has not experienced significant losses in its residential real estate loans; however, if declines in market values in the residential real estate markets worsen, particularly in Nicolet’s market area, the value of collateral securing its real estate loans could decline, which could cause an increase in the provision for loan losses. 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 or without retaining the servicing rights. Nicolet’s mortgage loans have historically had low net charge off rates and typically are of high quality.

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

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

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 December 31, 2016, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks.

Table 7: Loan Maturity Distribution

The following table presents the maturity distribution of the loan portfolio at December 31, 2016:

(dollars in thousands)

		Loan Maturity
		One Year or Less			Over One Year to Five Years			Over Five Years			Totals
Commercial & industrial	$	204,858		$	195,715		$	27,697		$	428,270
Owner-occupied CRE		82,939			216,394			60,894			360,227
AG production		18,203			13,033			3,531			34,767
AG real estate		11,909			31,520			1,805			45,234
CRE investment		33,283			131,153			31,443			195,879
Construction & land development		29,259			38,298			7,431			74,988
Residential construction		23,014			378			-			23,392
Residential first mortgage		12,020			49,654			238,630			300,304
Residential junior mortgage		27,486			19,649			44,196			91,331
Retail & other		6,728			6,900			887			14,515
Total loans	$	449,699		$	702,694		$	416,514		$	1,568,907
Percent by maturity distribution		29	%		45	%		26	%		100	%
Fixed rate	$	201,722		$	602,674		$	214,519		$	1,018,915
Floating rate		247,977			100,020			201,995			549,992
Total	$	449,699		$	702,694		$	416,514		$	1,568,907

Allowance for Loan Losses

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

Credit risks within the loan portfolio are inherently different for each loan type as described under “Balance Sheet Analysis-Loans.” Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going 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.

The ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential credit losses in the existing loan portfolio. Loans are charged against the ALLL when management believes that the collection of principal is unlikely. The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the ALLL, 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 and forecasted economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses. Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.

Management allocates the ALLL by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve for the estimated shortfall is established for all loans determined to be impaired. The specific reserve in the ALLL is equal to the aggregate collateral or discounted cash flow shortfall calculated from the impairment analyses. Loans measured for impairment include nonaccrual loans, non-performing troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. Second, management allocates ALLL with historical loss rates by loan segment. The loss factors applied in the methodology are periodically re-evaluated and adjusted to reflect changes in historical loss levels on an annual basis. Lastly, management allocates ALLL to the remaining loan portfolio 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.

Management performs ongoing intensive analyses of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL.

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

At December 31, 2016, the ALLL was $11.8 million compared to $10.3 million at December 31, 2015. The increase was a result of the 2016 provision of $1.8 million exceeding 2016 net charge offs of $0.3 million. Comparatively, the 2015 provision for loan losses was $1.8 million and 2015 net charge offs were $0.8 million. Net charge offs as a percent of average loans were 0.02% in 2016 compared to 0.09% in 2015. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. The level of the provision for loan losses is directly correlated to the assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.

The ratio of the ALLL as a percentage of period-end loans was 0.75% and 1.18% at December 31, 2016 and 2015, respectively. The ALLL to loans ratio is impacted by the accounting treatment of the 2016 and 2013 acquisitions, which combined at their acquisition dates added no ALLL to the numerator and $974 million of loans into the denominator at their then estimated fair values ($691 million in 2016 and $283 million in 2013), net of applicable discounts for credit quality. Such acquired loans combined have declined since their acquisition dates to $667 million and $137 million outstanding at December 31, 2016 given amortization, refinances and payoffs. However, since their acquisition, the performance trends of acquired loans have been evolving and evaluated. As events have occurred in the acquired loan portfolio, beginning in mid-2015, an ALLL was provided directly for this portfolio (especially the 2013 acquired loans), reflecting an increase in risk as acquired credits age and several larger and other loans migrate to a watch or worse loan grades. Therefore, the provision for loan losses and net charge offs for 2016 were $1.0 million and $0.2 million, respectively, for acquired loans, and $0.8 million and $0.1 million, respectively, for originated loans. Comparatively, the provision for loan losses and net charge offs for 2015, were $1.7 million and $0.1 million, respectively, for acquired loans, and $0.1 million and $0.7 million, respectively, for originated loans. At December 31, 2016, the ALLL was $11.8 million (or 0.75% of total loans), with $2.4 million for acquired loans (0.36% of acquired loans) and $9.4 million for originated loans (1.05% of originated loans). In particular, see additional disclosures in Note 4, “Loans and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Table 8: Loan Loss Experience
For the Years Ended December 31,
(dollars in thousands)

	2016			2015			2014			2013			2012
Allowance for loan losses (ALLL):
Beginning balance	$	10,307		$	9,288		$	9,232		$	7,120		$	5,899
Loans charged off:
Commercial & industrial		279			374			1,923			574			295
Owner-occupied CRE		108			229			470			1,936			1,328
AG production		—			—			—			—			—
AG real estate		—			—			—			—			—
CRE investment		—			50			—			992			305
Construction & land development		—			—			12			319			713
Residential construction		—			—			—			—			396
Residential first mortgage		80			84			218			156			265
Residential junior mortgage		57			111			81			190			166
Retail & other		60			35			39			71			39
Total loans charged off		584			883			2,743			4,238			3,507
Recoveries of loans previously charged off:
Commercial & industrial		26			36			55			40			36
Owner-occupied CRE		5			4			17			85			300
AG production		—			—			—			—			—
AG real estate		—			—			—			—			—
CRE investment		221			17			14			—			27
Construction & land development		—			—			—			15			22
Residential construction		—			—			—			—			—
Residential first mortgage		31			20			2			8			11
Residential junior mortgage		8			12			1			1			6
Retail & other		6			13			10			1			1
Total recoveries		297			102			99			150			403
Total net charge offs		287			781			2,644			4,088			3,104
Provision for loan losses		1,800			1,800			2,700			6,200			4,325
Ending balance of ALLL	$	11,820		$	10,307		$	9,288		$	9,232		$	7,120
Ratios:
ALLL to total loans at December 31		0.75	%		1.18	%		1.05	%		1.09	%		1.29	%
ALLL to net charge offs for the year ended December 31		4,118.5	%		1,319.7	%		351.3	%		225.8	%		229.4	%
Net charge offs to average loans for the year ended December 31		0.02	%		0.09	%		0.31	%		0.54	%		0.60	%

The allocation of the ALLL for each of the past five years is based on Nicolet’s estimate of loss exposure by category of loans and is shown in Table 9.

As a commercial bank, Nicolet continues to carry the largest allocation of ALLL against commercial & industrial loans (the largest loan type at roughly 27% of loans at year-end 2016 and 34% of loans at year-end 2015) of $3.9 million (or 33.2% of ALLL) and $3.7 million (or 36.2% of ALLL) at December 31, 2016 and 2015, respectively. While the balances of construction & land development loans have been relatively steady (at 4% to 5% of loans at year-end 2016 and 2015), the category carries higher historical loss rates, which are improving with better current loan performance and granularity; hence, the allocation was $0.8 million to represent 6.5% of ALLL at December 31, 2016, compared to 14.0% at year-end 2015. With less allocated to construction & land development, allocations increased to other loan types that would be more affected by management’s growing concerns that the recent period of economic recovery is slowing in light of current economic data and events that pressure collateral values or businesses’ and consumers’ ability to perform on loans. Management allocated additional amounts in 2016 to owner-occupied CRE (up $1.0 million to $2.9 million, or 24.3% of ALLL), residential first and junior mortgages (up $0.5 million combined, and representing 19.0% of ALLL combined), and CRE investment (up $0.3 million, representing 9.5% of ALLL). The remaining allocated ALLL balances were consistent with changes in outstanding loan balances at December 31, 2016.

Table 9: Allocation of the Allowance for Loan Losses

As of December 31,

(dollars in thousands)

	2016			% of Loan Type to Total Loans			2015			% of Loan Type to Total Loans			2014			% of Loan Type to Total Loans			2013			% of Loan Type to Total Loans			2012			% of Loan Type to Total Loans
ALLL allocation
Commercial & industrial	$	3,919			27.3	%	$	3,721			33.6	%	$	3,191			32.7	%	$	1,798			29.9	%	$	1,969			35.7	%
Owner-occupied CRE		2,867			23.0			1,933			21.1			1,230			20.7			766			22.1			1,069			19.3
AG production		150			2.2			85			1.7			53			1.6			18			1.7			—			0.1
AG real estate		285			2.9			380			4.9			226			4.8			59			4.4			—			2.1
CRE investment		1,124			12.5			785			9.0			511			9.3			505			10.7			337			13.9
Construction & land development		774			4.8			1,446			4.2			2,685			5.0			4,970			5.1			2,580			3.9
Residential construction		304			1.5			147			1.2			140			1.3			229			1.5			137			1.4
Residential first mortgage		1,784			19.1			1,240			17.6			866			18.0			544			18.2			685			15.5
Residential junior mortgage		461			5.8			496			5.9			337			5.9			321			5.8			312			7.1
Retail & other		152			0.9			74			0.8			49			0.7			22			0.6			31			1.0
Total ALLL	$	11,820			100.0	%	$	10,307			100.0	%	$	9,288			100.0	%	$	9,232			100.0	%	$	7,120			100.0	%
ALLL category as a percent of total ALLL:
Commercial & industrial		33.2	%					36.2	%					34.4	%					19.5	%					27.7	%
Owner-occupied CRE		24.3						18.8						13.2						8.3						15.0
AG production		1.3						0.8						0.6						0.2						—
AG real estate		2.4						3.7						2.4						0.6						—
CRE investment		9.5						7.6						5.5						5.5						4.7
Construction & land development		6.5						14.0						28.9						53.8						36.2
Residential construction		2.6						1.4						1.5						2.5						1.9
Residential first mortgage		15.1						12.0						9.3						5.9						9.6
Residential junior mortgage		3.9						4.8						3.6						3.5						4.4
Retail & other		1.2						0.7						0.6						0.2						0.5
Total ALLL		100.0	%					100.0	%					100.0	%					100.0	%					100.0	%

Nonperforming Assets

As part of its overall credit risk management process, management has been 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.

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, 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. Nonaccrual loans were $20.3 million (consisting of $0.3 million originated loans and $20.0 million acquired loans) at December 31, 2016, up $16.8 million, compared to $3.5 million (consisting of $0.6 million originated loans and $2.9 million acquired loans) at December 31, 2015. OREO was $2.1 million at December 31, 2016, up $1.7 million, compared to $0.4 million at December 31, 2015. Consequently, nonperforming assets (i.e. nonperforming loans plus OREO) were $22.3 million at December 31, 2016, up $18.4 million, compared to $3.9 million at December 31, 2015, with the increase attributable to the 2016 acquisitions adding nonaccrual loans and OREO properties, plus the transfer into OREO of bank properties that are no longer in use. Nonperforming assets as a percent of total assets increased to 0.97% at December 31, 2016 compared to 0.32% at December 31, 2015.

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 adequacy of the ALLL. 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 totaled $12.6 million and $9.2 million, and represented 0.8% and 1.0% of total outstanding loans at December 31, 2016 and 2015, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 10: Nonperforming Assets

As of December 31,

(dollars in thousands)

	2016			2015			2014			2013			2012
Nonaccrual loans:
Commercial & industrial	$	358		$	204		$	171		$	68		$	784
Owner-occupied CRE		2,894			951			1,667			1,087			1,960
AG production		9			13			21			11			—
AG real estate		208			230			392			448			—
CRE investment		12,317			1,040			911			4,631			—
Construction & land development		1,193			280			934			1,265			2,560
Residential construction		260			—			—			—			—
Residential first mortgage		2,990			674			1,155			2,365			1,580
Residential junior mortgage		56			141			141			262			—
Retail & other		—			—			—			129			142
Total nonaccrual loans considered impaired		20,285			3,533			5,392			10,266			7,026
Accruing loans past due 90 days or more		—			—			—			—			—
Total nonperforming loans		20,285			3,533			5,392			10,266			7,026
Commercial & industrial		64			—			—			—			—
Commercial real estate owned		304			52			697			935			71
Construction & land development real estate owned		623			—			139			854			17
Residential real estate owned		29			—			630			198			105
Bank property real estate owned		1,039			315			500			—			—
OREO		2,059			367			1,966			1,987			193
Total nonperforming assets	$	22,344		$	3,900		$	7,358		$	12,253		$	7,219
Performing troubled debt restructurings		—			—			3,777			3,970			—
Ratios
Nonperforming loans to total loans		1.29	%		0.40	%		0.61	%		1.21	%		1.27	%
Nonperforming assets to total loans plus OREO		1.42	%		0.44	%		0.83	%		1.44	%		1.31	%
Nonperforming assets to total assets		0.97	%		0.32	%		0.61	%		1.02	%		0.97	%
ALLL to nonperforming loans		58.3	%		291.7	%		172.3	%		89.9	%		101.3	%
ALLL to total loans		0.75	%		1.18	%		1.05	%		1.09	%		1.29	%

Table 11 shows the approximate gross interest that would have been recorded if the loans accounted for on a nonaccrual basis at the end of each year shown had performed in accordance with their original terms, in contrast to the amount of interest income that was included in interest income on such loans for the period. The interest income recognized generally includes cash interest received and potentially includes prior nonaccrual interest on acquired loans which existed at acquisition and was subsequently collected.

Table 11: Foregone Loan Interest

For the Years Ended December 31,

(dollars in thousands)

	2016			2015			2014
Interest income in accordance with original terms	$	1,979		$	429		$	709
Interest income recognized		(1,789	)		(416	)		(667	)
Reduction in interest income	$	190		$	13		$	42

Investment Securities Portfolio

The investment securities portfolio is intended to provide Nicolet with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All securities are classified as available for sale (“AFS”) and are carried at fair value.

Table 12: Investment Securities Portfolio

As of December 31,

(dollars in thousands)

	2016							2015							2014
	Amortized Cost		Fair Value		% of Total			Amortized Cost		Fair Value		% of Total			Amortized Cost		Fair Value		% of Total
U.S. Government sponsored enterprises	$	1,981	$	1,963		1	%	$	287	$	294		-	%	$	1,025	$	1,039		1	%
State, county and municipals		191,721		187,243		51	%		104,768		105,021		61	%		102,472		102,776		61	%
Mortgage-backed securities		161,309		159,129		44	%		61,600		61,464		36	%		61,497		61,677		37	%
Corporate debt securities		12,117		12,169		3	%		1,140		1,140		1	%		220		220		-	%
Equity securities		2,631		4,783		1	%		3,196		4,677		2	%		1,571		2,763		1	%
Total securities AFS	$	369,759	$	365,287		100	%	$	170,991	$	172,596		100	%	$	166,785	$	168,475		100	%

At December 31, 2016, the total carrying value of investment securities was $365.3 million, up from $172.6 million at December 31, 2015, and represented 15.9% and 14.2% of total assets at December 31, 2016 and 2015, respectively. The $192.7 million increase since December 31, 2015 was largely attributable to securities acquired in the 2016 acquisitions which added a higher proportion of mortgage-backed securities and corporate debt securities. At December 31, 2016, the securities portfolio did not contain securities of any single issuer, including any securities issued by a state or political subdivision that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of stockholders’ equity.

In addition to AFS securities, Nicolet had other investments of $17.5 million and $8.1 million at December 31, 2016 and 2015, respectively, consisting of capital stock in the Federal Reserve, Federal Agricultural Mortgage Corporation, and the FHLB (required as members of the Federal Reserve Bank System and the FHLB System), and to a lesser degree equity investments in other private companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus not liquid, have no ready market or quoted market value, and are carried at cost. The remaining investments have no quoted market prices, and are carried at cost less other than temporarily impaired (“OTTI”) charges, if any. These other investments are evaluated periodically for impairment, considering financial condition and other available relevant information. A $0.5 million OTTI charge was recorded in fourth quarter 2016 related to a private company equity investment based on circumstances arising at year end which management determined would likely impact the future earning capacity of the underlying operating company. There were no OTTI charges recorded in 2015 or 2014.

Table 13: Investment Securities Portfolio Maturity Distribution

As of December 31, 2016

(dollars in thousands)

	Within One Year						After One but Within Five Years						After Five but Within Ten Years						After Ten Years						Mortgage- related and Equity Securities						Total Amortized Cost					Total Fair Value
	Amount			Yield			Amount			Yield			Amount			Yield			Amount			Yield			Amount			Yield			Amount		Yield			Amount

U.S. Government sponsored enterprises	$	—			—	%	$	1,981			2.9	%	$	—			—	%	$	—			—	%	$	—			—	%	$	1,981		2.9	%	$	1,963
State and county municipals		9,833			2.4		$	74,168			2.7	%		106,416			2.7			1,304			3.2			—			—			191,721		2.7			187,243
Mortgage-backed securities		—			—			—			—			—			—			—			—			161,309			3.1			161,309		3.1			159,129
Corporate debt securities		—			—			5,139			6.5			—			—			6,978			5.4			—			—			12,117		5.9			12,169
Equity securities		—			—			—			—			—			—			—			—			2,631			3.7			2,631		3.7			4,783
Total amortized cost	$	9,833			2.4	%	$	81,288			2.9	%	$	106,416			2.7	%	$	8,282			5.1	%	$	163,940			3.1	%	$	369,759		3.0	%	$	365,287
Total fair value and carrying value	$	9,835					$	80,847					$	102,401					$	8,292					$	163,912										$	365,287
		3	%					22	%					28	%					2	%					45	%										100	%

(1)

The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.

Deposits

Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include competitive deposit product features, price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Included in total deposits in Table 14 are brokered deposits of $21 million, $27 million and $29 million at year end 2016, 2015 and 2014, respectively.

Table 14: Deposits

At December 31,

(dollars in thousands)

	2016					2015					2014
	Amount		% of Total			Amount		% of Total			Amount		% of Total
Demand	$	482,300		24.5	%	$	226,554		21.5	%	$	203,502		19.2	%
Money market and NOW accounts		964,509		49.0			486,677		46.1			494,945		46.7
Savings		221,282		11.2			136,733		12.9			120,258		11.3
Time		301,895		15.3			206,453		19.5			241,198		22.8
Total	$	1,969,986		100.0	%	$	1,056,417		100.0	%	$	1,059,903		100.0	%

Total deposits were $2.0 billion at December 31, 2016, an increase of $914 million or 86.5% over December 31, 2015; however, excluding the impact of $822 million deposits added at acquisition in 2016, deposits grew 8.7%. As brokered deposits are not significant, customer-based deposits continue to grow organically from stable customer relationships. Total average deposits for 2016 were $1.6 billion, an increase of $621 million or 60.8% over 2015. On average, the mix of deposits changed between 2016 and 2015, with 2016 carrying more demand (i.e. non-interest bearing) deposits, money market and NOW accounts, and less in savings and time deposits.

Table 15: Average Deposits

For the Years Ended December 31,

(dollars in thousands)

	2016 Average					2015 Average					2014 Average
	Amount		% of Total			Amount		% of Total			Amount		% of Total
Demand	$	383,146		23.4	%	$	211,624		20.7	%	$	180,122		17.5	%
Money market and NOW accounts		776,756		47.3			455,344		44.6			472,814		46.0
Savings		193,933		11.8			126,894		12.4			110,969		10.8
Time		288,059		17.5			227,293		22.3			264,431		25.7
Total	$	1,641,894		100.0	%	$	1,021,155		100.0	%	$	1,028,336		100.0	%

Table 16: Maturity Distribution of Certificates of Deposit of $100,000 or More

At December 31,

(dollars in thousands)

	2016		2015		2014
3 months or less	$	19,058	$	6,856	$	11,134
Over 3 months through 6 months		11,428		5,733		7,632
Over 6 months through 12 months		31,569		19,319		15,783
Over 12 months		59,208		58,934		41,855
Total	$	121,263	$	90,842	$	76,404

Other Funding Sources

Other funding sources include short-term borrowings (zero at December 31, 2016 and 2015) and long-term borrowings (totaling $37.6 million and $39.8 million at December 31, 2016 and 2015, respectively). Short-term borrowings consist mainly of customer repurchase agreements maturing in less than nine months or federal funds purchased. Long-term borrowings include notes payable (consisting of FHLB advances and a joint venture note, prior to its refinance in 2016 from an outside lender to the Bank subsequently requiring elimination in consolidation), junior subordinated debentures (largely qualifying as Tier 1 capital for regulatory purposes given their long maturity dates, even though they are redeemable in whole or in part at par), and subordinated debt (issued in 2015 with 10-year maturities, callable on or after the fifth anniversary date of their respective issuance dates, and qualifying as Tier 2 capital for regulatory purposes). Notes payable declined $14.4 million to $1.0 million at December 31, 2016, given the elimination of the joint venture note and repayments of FHLB advances during 2016. Junior subordinated debentures increased $12.2 million to $24.7 million at year end 2016, attributable to acquired Baylake debentures at fair value. Subordinated debt increased $0.1 million to $11.9 million at December 31, 2016, given amortization of capitalized issuance costs. The interest on all long-term borrowings is current, and while the various junior subordinated debentures are callable at par plus any accrued but unpaid interest, there are no current plans to redeem these debentures early. See Note 9, “Notes Payable,” Note 10, “Junior Subordinated Debentures”, and Note 11, “Subordinated Notes” of the Notes to Consolidated Financial Statements under Part II, Item 8 for additional details.

Additional funding sources consist of a $10 million available and unused line of credit at the holding company, $143 million of available and unused Federal funds purchased lines, available total borrowing capacity at the FHLB of $181 million of which $9.0 million was used at December 31, 2016 (consisting of $1 million in outstanding advances and $8 million related to outstanding letters of credit), and borrowing capacity in the brokered deposit market.

Off-Balance Sheet Obligations

As of December 31, 2016, 2015 and 2014, Nicolet had the following lending-related commitments that did not appear on its balance sheet:

Table 17: Commitments

At December 31,

(dollars in thousands)

	2016		2015		2014
Commitments to extend credit — fixed and variable rate	$	554,980	$	302,591	$	269,648
Financial letters of credit — fixed rate		12,444		2,610		2,996
Standby letters of credit — fixed rate		4,898		4,314		3,629

These commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Further discussion of these commitments is included in Note 16, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, under Part II, Item 8.

Contractual Obligations

Nicolet is party to various contractual obligations requiring the use of funds as part of its normal operations. The table below outlines principal amounts and timing of these obligations, excluding amounts due for interest, if applicable. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on the ability to procure competitive interest rates, liquidity needs, availability of collateral for pledging purposes supporting the long-term advances, or other borrowing alternatives.

Table 18: Contractual Obligations
As of December 31, 2016
(dollars in thousands)

	Maturity by Years
	Total		1 or less		1-3		3-5		Over 5
Junior subordinated debentures	$	24,732	$	—	$	—	$	—	$	24,732
Subordinated notes		11,885		—		—		—		11,885
Notes payable		1,000		—		1,000		—		—
Operating leases		3,781		685		1,329		1,085		682
Total long-term contractual obligations	$	41,398	$	685	$	2,329	$	1,085	$	37,299

Liquidity

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 pay dividends to shareholders, service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements.

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; amortization, repayment and maturity of loans; maturing investments and investments sales; and procurement of brokered deposits. All investment securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. At December 31, 2016, approximately 8.3% of the $365.3 million investment securities carrying value was pledged to secure public deposits and short-term borrowings, as applicable, and for other purposes as required by law. Other funding sources available include the ability to procure short-term borrowings, federal funds purchased, and long-term borrowings (such as FHLB advances).

Dividends from the Bank represent a significant source of cash flow for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds, as more fully described in “Business—Regulation of the Bank – Payment of Dividends” and in Note 19, “Regulatory Capital Requirements and Restrictions on Dividends,” in the Notes to the Consolidated Financial Statements under Part II, Item 8. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

Cash and cash equivalents at December 31, 2016 and 2015 were approximately $129.1 million and $83.6 million, respectively. The increased cash and cash equivalents for 2016 when compared to historical levels was predominantly due to strong customer deposit growth. The $45.5 million increase in cash and cash equivalents since year end 2015 included $24.7 million net cash provided by operating activities and $51.5 million from investing activities (mostly due to the net cash acquired with the 2016 acquisitions, offset partly by net investment purchase activity), exceeding the $30.7 million net cash used in financing activities (primarily from reductions in short-term and long-term borrowings, common stock repurchases and preferred stock redemption exceeding cash inflow from strong deposit growth). Nicolet’s liquidity resources were sufficient as of December 31, 2016 to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary.

Interest Rate Sensitivity Management

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 depend, 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.

The following analysis 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 interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at December 31, 2016, the projected changes in net interest income over a one-year time horizon, versus the baseline, was -1.7%, -0.8%, -0.6% and -1.1% for the -200, -100, +100 and +200 bps scenarios, respectively; such results are within Nicolet’s guidelines of not greater than -15% for +/- 100 bps and not greater than -20% for +/- 200 bps.

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.

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 for shareholder return.

Capital balances and changes in capital are presented in the Consolidated Statements of Changes in Stockholders’ Equity in Part II, Item 8 and are described in Note 14, “Stockholders’ Equity,” and a summary of regulatory capital amounts and ratios for Nicolet and the Bank are presented in Note 19, “Regulatory Capital Requirements and Restrictions of Dividends” of the Notes to Consolidated Financial Statements under Part II, Item 8.

The most notable capital-related actions in 2016 were: 1) on February 24, 2016, Nicolet’s common stock moved off the OTCBB and began trading on the Nasdaq Capital Market under the trading symbol “NCBS”, 2) the April 2016 issuance of common stock in connection with the Baylake merger and acquisition of a financial advisor business, 3) the September 2016 redemption of the final $12.2 million of its preferred stock, 4) common stock repurchases, and 5) the closure of 7 branches during 2016. The most notable capital-related actions in 2015 were: 1) the issuance of $12 million in 5% fixed rate, 10-year subordinated debt during the first half of 2015 (which qualifies as Tier 2 regulatory capital), 2) the September 2015 partial redemption of $12.2 million, or half, of its preferred stock at par, 3) common stock repurchases, and 3) the August 2015 sale of two outlying branches and accompanying loans and deposits.

On April 29, 2016, in connection with its acquisition of Baylake, Nicolet issued 4,344,243 shares of its common stock for consideration of $163.3 million, and recorded $1.2 million consideration for assumed stock options. Approximately $0.3 million of common stock issuance expenses related to the transaction were incurred and charged against additional paid in capital. In connection with the financial advisor business acquisition that completed April 1, 2016, Nicolet issued $2.6 million in common stock consideration.

Nicolet participated in the Small Business Lending Fund (“SBLF”) beginning in September 2011. The Company received $24.4 million for the issuance of 24,400 shares of Non-cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. The preferred stock qualified as Tier 1 capital for regulatory purposes and provided capital and liquidity for Nicolet’s small business lending, potential acquisition opportunities and defensive capital for the uncertain economic environment. Nicolet paid an annual dividend rate of 5% from initial funding through September 30, 2013, paid 1% thereafter through February 29, 2016, and paid 9% from March 1, 2016 through the date of redemption in September 2016. Nicolet redeemed $12.2 million (half) of its preferred stock in September 2015 and the remaining half in September 2016, as part of its capital plan and partially motivated by the adjustment of the preferred stock dividend rate to 9%.

As a result of the foregoing, Nicolet’s total capital was $275.9 million (100% common equity) at December 31, 2016, compared to $109.5 million at year-end 2015 (comprised of $12.2 million or 11% preferred equity and $97.3 million or 89% common equity). The $166.4 million increase in total equity since year end 2015 was dominated by the equity issued in relation to the 2016 acquisitions as noted above and $18.5 million of net income, exceeding the preferred stock redemption, common stock repurchases, a $3.7 million other comprehensive loss (related to market value declines in the investment portfolio given rate movements at year end 2016), $0.6 million of preferred stock dividends and other net activity in stock compensation and equity award activity in 2016.

Common equity to total assets at December 31, 2016 was 12.0%, up from 8.0% at December 31, 2015, and continues to reflect capacity to capitalize on opportunities. Book value per common share increased to $32.26 at year end 2016, up 37.7% over $23.42 at year end 2015. Common shares outstanding more than doubled from a year ago, to 8.55 million at December 31, 2016 from 4.15 million at December 31, 2015, predominantly attributable to the 2016 acquisitions.

Nicolet’s regulatory capital ratios remain strong and well above minimum regulatory ratios. At December 31, 2016, Nicolet’s Total, Tier 1, Common Equity Tier 1 (“CET1”) risk-based ratios and its leverage ratio were 13.9%, 12.6%, 11.3% and 10.3%, respectively, compared to the minimum regulatory requirements of 8.0%, 6.0%, 4.5% and 4.0%, respectively. Also, at December 31, 2016, the Bank’s Total, Tier 1, CETI and leverage ratios were 12.2%, 11.5%, 11.5% and 9.4%, respectively, and qualify the Bank as well-capitalized under the prompt-corrective action framework with hurdles of 10.0%, 8.0%, 6.5% and 5.0%, respectively. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth.

Nicolet has demonstrated the ability to raise capital efficiently directly related to acquisition transactions. Further, Nicolet’s investors have demonstrated a strong commitment to capital, providing common capital when needed, with the two examples being a December 2008 private placement raising $9.5 million in common capital as we entered the economic crisis and the April 2013 private placement raising $2.9 million in common capital alongside the predominately stock-for-stock Mid-Wisconsin merger which added $9.7 million in common capital. In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. In early 2014, a common stock repurchase program was authorized and with subsequent modifications (the latest being January 17, 2017 for an additional $12 million to repurchase up to 250,000 more shares of common stock), the Board has authorized the use of up to $30 million to repurchase up to 1,050,000 shares of Nicolet common stock as an alternative use of capital. During 2016, $4.4 million was used to repurchase and cancel 114,914 shares at a weighted average price per share of $37.98 including commissions, bringing the life-to-date totals through December 31, 2016, to $14.2 million used to repurchase and cancel 518,609 shares at a weighted average price per share of $27.31 including commissions.

A source of income and funds for Nicolet as the parent company of the Bank are dividends from the Bank. Dividends declared by the Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by federal regulatory agencies. During the third quarter of 2016, the Bank requested approval from the regulatory agencies to a pay a $15 million special dividend out of Bank surplus and it was approved. The Bank paid dividends to the parent company of $35.5 million (which includes the special dividend) in 2016 and $11.0 million in 2015. At December 31, 2016, the Bank could pay dividends of approximately $1.1 million more without seeking regulatory approval.

In July 2013, the Federal Reserve Board and the OCC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes. The final rules took effect for Nicolet and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules. See Part I, Item 1, “Business”, “- Supervision and Regulation”, for additional information. The rules permitted certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Nicolet and the Bank made the election in 2015 to retain the existing treatment for accumulated other comprehensive income.

Effects of Inflation

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

Fourth Quarter 2016 Results

Nicolet recorded net income of $6.1 million for the fourth quarter of 2016, compared to net income of $2.8 million for the fourth quarter of 2015. Net income available to common equity for the fourth quarter of 2016 was $6.1 million, or $0.68 for diluted earnings per common share, compared to $2.8 million, or $0.64, respectively for the fourth quarter of 2015. Between the comparable quarters, net income available to common was up 118%, while diluted weighted average shares were up 105%, resulting in a 6% increase in diluted earnings per share. See Table 19 for selected quarterly information.

Taxable equivalent net interest income for the fourth quarter of 2016 was $20.6 million, compared to $11.0 million for the same quarter of 2015. Positive changes from balance sheet volume added $9.3 million to net interest income and were predominantly due to the Baylake merger, while favorable changes in rates added $0.3 million to net interest income (the net of $0.4 million less interest income from lower earning asset yields and $0.7 million less interest expense on lower cost of funds). The net interest margin between the comparable quarters was up 4 bps to 4.05% in the fourth quarter of 2016, comprised of a 10 bps higher interest rate spread (to 3.93%, as the yield on earning assets decreased by 25 bps and the rate on interest-bearing liabilities decreased by 35 bps) and a 2 bps higher contribution from net free funds (mainly from higher noninterest-bearing deposits).

Average earning assets were $2.0 billion for the fourth quarter of 2016 compared to $1.1 billion for the fourth quarter of 2015, with average loans (up $676 million) and nonloan earning assets (up $250 million) representing 78% and 22% of average earning assets (including low-earning cash at 3% of earning assets), respectively, compared to fourth quarter 2015’s mix of 82% loans and 18% nonloan earning assets (with cash at 1%). On the funding side, average interest-bearing deposits were up $643 million, average demand deposits increased $252 million and average short and long-term funding balances decreased (down $3 million combined).

The provision for loan losses was $0.5 million for both fourth quarter periods, while net charge offs were $0.1 million for both periods.

Noninterest income for the fourth quarter of 2016 increased $3.3 million (73%) to $7.9 million versus the fourth quarter of 2015. Net loss on sale and write-down of assets was $0.5 million for fourth quarter 2016 due to an OTTI charge on a private company equity investment, compared to net gains of $0.7 million for fourth quarter 2015 attributable to OREO (with a large gain on sale of an OREO property partly offset by a write-down on a bank premise OREO), for a $1.2 million unfavorable variance between quarters. Other increases across line items were primarily commensurate with the larger volumes due to the 2016 acquisitions, but notably brokerage fee income increased $1.4 million, mortgage income, net increased $1.2 million, service charges on deposits increased $0.5 million, trust fees increased $0.2 million and other noninterest income increased $1.2 million (of which interchange income and UFS income account for $0.4 million and $0.5 million, respectively).

On a comparable quarter basis, noninterest expense increased $8.1 million (79%) to $18.4 million in the fourth quarter of 2016 (which included $0.4 million merger-based expenses) over the fourth quarter of 2015 (including $0.7 million merger based expenses). Personnel expense of $9.3 million, increased $3.8 million (68%) over the fourth quarter of 2015, primarily due to merit increases and the larger workforce after the 2016 acquisitions (with full-time equivalent employees up 71% between December 31, 2016 and 2015). All nonpersonnel expense categories combined were up $4.3 million, primarily commensurate with the larger operating base after the 2016 acquisitions, but most notably intangibles amortization up $1.0 million fully attributable to the acquisitions, data processing up $1.0 million on larger volumes and a rate increase, and occupancy, equipment and office costs combined up $1.3 million given the expanded footprint, additional integration and communication costs to customers and shareholders.

For the fourth quarter of 2016, Nicolet recognized income tax expense of $2.9 million, compared to income tax expense of $1.6 million for the fourth quarter of 2015. The change in income tax was primarily due to the level of pretax income between the comparable quarters. The effective tax rate was 32.4% for the fourth quarter of 2016 (including higher levels of non-taxable income from BOLI, investment securities, and other equity investment holdings), compared to an effective tax rate of 36.5% for the fourth quarter of 2015.

Selected Quarterly Financial Data

The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 2016 and 2015.

Table 19: Selected Quarterly Financial Data
(dollars in thousands, except per share data)

	2016 Quarter Ended
	December 31,		September 30,		June 30,		March 31,
Interest income	$	21,892	$	22,795	$	18,351	$	12,429
Interest expense		1,868		1,891		1,885		1,690
Net interest income		20,024		20,904		16,466		10,739
Provision for loan losses		450		450		450		450
Noninterest income		7,894		8,532		6,370		3,878
Noninterest expense		18,386		19,019		17,519		10,018
Net income attributable to Nicolet Bankshares, Inc.		6,087		6,464		3,257		2,654
Net income available to common shareholders		6,087		6,217		2,983		2,542
Basic earnings per common share*		0.71		0.72		0.41		0.61
Diluted earnings per common share*		0.68		0.69		0.39		0.57

	2015 Quarter Ended
	December 31,		September 30,		June 30,		March 31,
Interest income	$	12,463	$	11,859	$	11,531	$	12,744
Interest expense		1,812		1,842		1,818		1,741
Net interest income		10,651		10,017		9,713		11,003
Provision for loan losses		450		450		450		450
Noninterest income		4,559		4,185		4,894		4,070
Noninterest expense		10,273		9,849		9,724		9,802
Net income attributable to Nicolet Bankshares, Inc.		2,819		2,594		2,935		3,080
Net income available to common shareholders		2,789		2,534		2,874		3,019
Basic earnings per common share*		0.70		0.64		0.72		0.75
Diluted earnings per common share*		0.64		0.58		0.66		0.70

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

2015 Compared to 2014

2015 was a year for balance sheet and capital management, with continued focus on financial performance and acquisitions. At December 31, 2015, Nicolet had assets of $1.2 billion, loans of $877 million and deposits of $1.1 billion. Net income attributed to Nicolet was $11.4 million for 2015, 15% higher than 2014, and after preferred stock dividends, diluted earnings per common share was $2.57, 14% higher than 2014. Earnings for 2015 were especially characterized by steady return over an improved mix of average interest-earning assets with slightly lower aggregate discount accretion on acquired loans between the years, strong secondary mortgage income, net gains on sales of investments and other real estate owned (“OREO”), and expense management, while also accommodating costs related to the pending Baylake merger. Strong asset quality metrics resulted in a lower 2015 loan loss provision than for 2014. As part of its active capital management, Nicolet sold two outlying branches in August 2015, issued $12 million of subordinated debt in the first half of 2015, redeemed $12.2 million of its preferred stock in September 2015 at par, and continued to repurchase its common stock until September 2015. As a result, total equity was $110 million at December 31, 2015, with preferred equity down $12 million and common equity up $11 million net (from retained earnings and issued common equity exceeding common stock repurchases for the year) compared to year end 2014. Return on average assets of 0.96% and return on average common equity of 12.35% indicates solid performance traction in 2015.

Net income attributable to Nicolet was $11.4 million for 2015, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $11.2 million, or $2.57 per diluted common share. Comparatively, 2014 net income attributable to Nicolet was $9.9 million, and after $0.2 million of preferred stock dividends, net income available to common shareholders was $9.7 million or $2.25 per diluted common share. Between the years, net income increased 14.9% and diluted earnings per common share increased 14.2%. Return on average assets improved to 0.96% for 2015, compared to 0.84% for 2014. Return on average common equity was 12.35% for 2015, compared to 11.55% for 2014. Book value per common share was $23.42 at December 31, 2015, up 9.7% over $21.34 at December 31, 2014.

As part of its capital management, Nicolet sold two outlying branches in August 2015 (at that time reducing deposits by $34 million, loans by $13 million, fixed assets by $1 million and cash by $20 million), issued $12 million of 5% fixed-rate, 10-year subordinated debt in the first half of 2015 (increasing its regulatory Tier 2 capital), redeemed $12.2 million or half of its then outstanding SBLF Series C Preferred Stock in September 2015 at par (reducing total capital, regulatory Tier 1 capital, and the future cost of capital), and used $4.2 million to repurchase 146,404 common shares at a weighted average per share price of $28.35 including commissions.

Other key factors behind the results were:

•

Net interest income was $41.4 million for 2015, a decrease of $0.5 million or 1% compared to 2014. The earning asset yield was unchanged at 4.54% for both 2015 and 2014, influenced mainly by the earning asset mix, with more balances in higher-yielding assets. Loans, investments and other interest-earning assets (mostly low-earning cash) represented 82%, 15% and 3% of average earning assets, respectively for 2015, compared to 79%, 13% and 8%, respectively, for 2014. The cost of funds was 0.84% for 2015, 5 bps higher than 2014, impacted by the new 5% subordinated debt and a 1 bp increase in the cost of interest-bearing deposits. As a result, the interest rate spread was 3.70% for 2015, 5 bps lower than 2014. The net interest margin was 3.88% for 2015 compared to 3.89% for 2014, with a higher contribution from net free funds partly offsetting the decline in interest rate spread.

•

Loans were $877 million at December 31, 2015, essentially unchanged (down only $6 million or 0.7%) from December 31, 2014; however, excluding the impact of the August 2015 branch sale noted earlier, loans grew 0.8%. Average loans were $884 million in 2015 yielding 5.12%, compared to $859 million in 2014 yielding 5.32%, a 3% increase in average balances. The 20 bps decline in loan yield was due to continued downward pressure on rates of new and renewing loans in the 2015 rate environment and $0.5 million lower aggregate discount accretion on acquired loans between 2015 and 2014.

•

Total deposits were $1.1 billion at December 31, 2015, essentially unchanged (down only $3 million or 0.3%) from December 31, 2014; however, excluding the impact of the August 2015 branch sale noted earlier, deposits grew 2.9%. Between 2015 and 2014, average deposits were down $7 million or 0.7%, with interest-bearing deposits down $39 million and noninterest-bearing deposits up $32 million, driving the improvement in net free funds. Interest-bearing deposits cost 0.64% for 2015 and 0.63% for 2014.

•

Asset quality measures remained strong. Nonperforming assets fell 47% to $3.9 million (or 0.32% of total assets) at December 31, 2015, compared to $7.4 million (or 0.61% of assets) at December 31, 2014. For 2015, the provision for loan losses was $1.8 million, exceeding net charge offs of $0.8 million, versus provision of $2.7 million and net charge offs of $2.6 million for 2014. The allowance for loan losses (“ALLL”) was $10.3 million (representing 1.18% of loans) at December 31, 2015, compared to $9.3 million (representing 1.05% of loans) at December 31, 2014.

•

Noninterest income was $17.7 million (including $1.7 million of net gain on sale or write-down of assets), compared to $14.2 million for 2014 (including $0.5 million of net gain on sale or write-down of assets). Removing these net gains, noninterest income was up $2.3 million or 17.1%, with increases in all line items, except rental income and investment advisory fees, but driven by the $1.3 million increase in net mortgage income largely due to increased volumes. Increases in service charges on deposit accounts (up 10%, trust revenues (up 6%) and brokerage income (up 6%) collectively accounted for another $0.5 million increase between 2015 and 2014.

•

Noninterest expense was $39.6 million, compared to $38.7 million for 2014. The increase between the years was modest (up $0.9 million or 2.4%, with approximately $0.8 million in 2015 attributable to non-recurring merger-based expenses such as the fairness opinion, legal and conversion costs related to the in-process merger with Baylake), exhibiting expense management. Most notably, salaries and employee benefits were up 4.9% over 2014 (including a base salary increase of 3%, and higher equity and cash incentive awards between the years) while average full-time equivalent employees were minimally changed. All other non-personnel expenses combined were down by less than 1%, and after excluding the 2015 merger-related expenses, were down 5% from 2014.

Critical Accounting Policies

The consolidated financial statements of Nicolet are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loans acquired in the 2013 and 2016 acquisitions, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies. The critical accounting policies are discussed directly with Nicolet’s Audit Committee.

Business Combinations and Valuation of Loans Acquired in Business Combinations

We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management currently considers such values to be the Day 1 Fair Values for the 2016 acquisitions, but management may revise the Day 1 Fair Values for the 2016 acquisitions through April 2017. This was completed for the Mid-Wisconsin transaction during the second quarter of 2013 and was completed for the Bank of Wausau transaction in the third quarter of 2013.

In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

In determining the Day 1 Fair Values of acquired loans, management calculates a nonaccretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The nonaccretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, and nonaccretable difference which would have a positive impact on interest income.

The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.

Allowance for Loan Losses

The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the ALLL is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the ALLL could change significantly.

The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ALLL and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ALLL is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate at December 31, 2016. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the ALLL. These agencies may require Nicolet to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination.

Income taxes

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

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

Future Accounting Pronouncements

Recent accounting pronouncements adopted are included in Note 1, “Nature of Business and Significant Accounting Policies” of the Notes to Consolidated Financial Statements.

In December 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance to Accounting Standards Update (“ASU”) 2016-19 Technical Corrections and Improvements intended to make changes to clarify the Accounting Standards Codification or correct unintended application of guidance that is not expected to have a significant effect on current accounting practice. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. The impact of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued updated guidance to ASU 2015-09: Stock Compensation Improvements to Employee Share-Based Payment Activity intended to simplify and improve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of such awards as either equity or liabilities and classification on the statement of cash flows. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments intended to improve the financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Entities should apply the amendment by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on specific cash flow issues, including: debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, and distributions received from equity method investees. The amendments are effective for public business entities for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently assessing the impact of the new guidance on its consolidated financial statements. Since a significant number of business transactions are not subject to the guidance, it is not expected to have a significant impact on our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of the guidance is a lessee should recognize the assets and liabilities that arise from leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new standard will require both types of leases to be recognized on the balances sheet. The updated guidance is effective for annual reporting periods beginning after December 15, 2018. Early application is permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For additional disclosure, see section, “Interest Rate Sensitivity Management,” of the Management’s Discussion and Analysis of Financial Condition and Results of Operation under Part II, Item 7.

ITEM 8. FINANCIAL STATEMENTS

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2016 and 2015

(In thousands, except share and per share data)	2016			2015
Assets
Cash and due from banks	$	68,056		$	11,947
Interest-earning deposits		60,320			70,755
Federal funds sold		727			917
Cash and cash equivalents		129,103			83,619
Certificates of deposit in other banks		3,984			3,416
Securities available for sale (“AFS”)		365,287			172,596
Other investments		17,499			8,135
Loans held for sale		6,913			4,680
Loans		1,568,907			877,061
Allowance for loan losses		(11,820	)		(10,307	)
Loans, net		1,557,087			866,754
Premises and equipment, net		45,862			29,613
Bank owned life insurance (“BOLI”)		54,134			28,475
Goodwill and other intangibles		87,938			3,793
Accrued interest receivable and other assets		33,072			13,358
Total assets	$	2,300,879		$	1,214,439

Liabilities and Stockholders’ Equity
Liabilities:
Demand	$	482,300		$	226,554
Money market and NOW accounts		964,509			486,677
Savings		221,282			136,733
Time		301,895			206,453
Total deposits		1,969,986			1,056,417
Notes payable		1,000			15,412
Junior subordinated debentures		24,732			12,527
Subordinated notes		11,885			11,849
Accrued interest payable and other liabilities		16,911			8,547
Total liabilities		2,024,514			1,104,752

Stockholders’ Equity:
Preferred equity		-			12,200
Common stock		86			42
Additional paid-in capital		209,700			45,220
Retained earnings		68,888			51,059
Accumulated other comprehensive income (loss)		(2,727	)		980
Total Nicolet Bankshares, Inc. stockholders’ equity		275,947			109,501
Noncontrolling interest		418			186
Total stockholders’ equity and noncontrolling interest		276,365			109,687
Total liabilities, noncontrolling interest and stockholders’ equity	$	2,300,879		$	1,214,439

Preferred shares authorized (no par value)		10,000,000			10,000,000
Preferred shares issued and outstanding		-			12,200
Common shares authorized (par value $0.01 per share)		30,000,000			30,000,000
Common shares outstanding		8,553,292			4,154,377
Common shares issued		8,596,241			4,191,067

See Notes to Consolidated Financial Statements.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended December 31,

(In thousands, except share and per share data)	2016		2015		2014
Interest income:
Loans, including loan fees	$	69,425	$	45,638	$	46,081
Investment securities:
Taxable		3,029		1,460		1,606
Non-taxable		1,686		1,056		793
Other interest income		1,327		443		469
Total interest income		75,467		48,597		48,949
Interest expense:
Money market and NOW accounts		2,385		2,260		2,275
Savings and time deposits		2,759		2,930		3,067
Notes payable		239		648		850
Junior subordinated debentures		1,315		881		875
Subordinated notes		636		494		-
Total interest expense		7,334		7,213		7,067
Net interest income		68,133		41,384		41,882
Provision for loan losses		1,800		1,800		2,700
Net interest income after provision for loan losses		66,333		39,584		39,182
Noninterest income:
Service charges on deposit accounts		3,571		2,348		2,128
Mortgage income, net		5,494		3,258		1,926
Trust services fee income		5,435		4,822		4,569
Brokerage fee income		3,624		670		631
Bank owned life insurance		1,284		996		933
Rent income		1,090		1,156		1,239
Investment advisory fees		452		408		440
Gain on sale or write-down of assets, net		54		1,726		539
Other income		5,670		2,324		1,780
Total noninterest income		26,674		17,708		14,185
Noninterest expense:
Personnel		34,030		22,523		21,472
Occupancy, equipment and office		10,276		6,928		7,086
Business development and marketing		3,488		2,244		2,267
Data processing		6,370		3,565		3,178
FDIC assessments		911		615		715
Intangibles amortization		3,458		1,027		1,209
Other expense		6,409		2,746		2,782
Total noninterest expense		64,942		39,648		38,709
Income before income tax expense		28,065		17,644		14,658
Income tax expense		9,371		6,089		4,607
Net income		18,694		11,555		10,051
Less: Net income attributable to noncontrolling interest		232		127		102
Net income attributable to Nicolet Bankshares, Inc.		18,462		11,428		9,949
Less: Preferred stock dividends and discount accretion		633		212		244
Net income available to common shareholders	$	17,829	$	11,216	$	9,705

Basic earnings per common share	$	2.49	$	2.80	$	2.33
Diluted earnings per common share	$	2.37	$	2.57	$	2.25
Weighted average common shares outstanding:
Basic		7,158,367		4,003,988		4,165,254
Diluted		7,513,971		4,362,213		4,311,347

See Notes to Consolidated Financial Statements.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

Years Ended December 31,

(In thousands)	2016			2015			2014
Net income	$	18,694		$	11,555		$	10,051
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses) arising during the period		(5,999	)		540			939
Reclassification adjustment for net gains included in net income		(78	)		(625	)		(341	)
Income tax benefit (expense)		2,370			34			(233	)
Total other comprehensive income (loss)		(3,707	)		(51	)		365
Comprehensive income	$	14,987		$	11,504		$	10,416

See Notes to Consolidated Financial Statements.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2016, 2015 and 2014

		Nicolet Bankshares, Inc. Stockholders’ Equity
(In thousands)		Preferred Equity			Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income(Loss)			Non- controlling Interest			Total
Balance, December 31, 2013	$	24,400		$	42		$	49,616		$	30,138		$	666		$	17		$	104,879
Comprehensive income:
Net income		-			-			-			9,949			-			102			10,051
Other comprehensive income		-			-			-			-			365			-			365
Stock compensation expense		-			-			959			-			-			-			959
Exercise of stock options, net, including income tax benefit of $42		-			-			633			-			-			-			633
Issuance of common stock		-			-			254			-			-			-			254
Purchase and retirement of common stock		-			(1	)		(5,769	)		-			-			-			(5,770	)
Preferred stock dividends		-			-			-			(244	)		-			-			(244	)
Repayment from non-controlling interest		-			-			-			-			-			(60	)		(60	)
Balance, December 31, 2014	$	24,400		$	41		$	45,693		$	39,843		$	1,031		$	59		$	111,067
Comprehensive income:
Net income		-			-			-			11,428			-			127			11,555
Other comprehensive loss		-			-			-			-			(51	)		-			(51	)
Stock compensation expense		-			-			1,202			-			-			-			1,202
Exercise of stock options, net, including income tax benefit of $175		-			4			1,543			-			-			-			1,547
Tax impact of stock-based compensation		-			-			986			-			-			-			986
Issuance of common stock		-			-			174			-			-			-			174
Purchase and retirement of common stock		-			(3	)		(4,378	)		-			-			-			(4,381	)
Redemption of preferred stock		(12,200	)		-			-			-			-			-			(12,200	)
Preferred stock dividends		-			-			-			(212	)		-			-			(212	)
Balance, December 31, 2015	$	12,200		$	42		$	45,220		$	51,059		$	980		$	186		$	109,687
Comprehensive income:
Net income		-			-			-			18,462			-			232			18,694
Other comprehensive loss		-			-			-			-			(3,707	)		-			(3,707	)
Stock compensation expense		-			-			1,608			-			-			-			1,608
Exercise of stock options, net, including income tax benefit of $335		-			-			1,760			-			-			-			1,760
Issuance of common stock in acquisitions, net of capitalized issuance costs of $260		-			44			164,991			-			-			-			165,035
Equity awards assumed in acquisition		-			-			1,182			-			-			-			1,182
Issuance of common stock		-			1			139			-			-			-			140
Purchase and retirement of common stock		-			(1	)		(5,200	)		-			-			-			(5,201	)
Redemption of preferred stock		(12,200	)		-			-			-			-			-			(12,200	)
Preferred stock dividends		-			-			-			(633	)		-			-			(633	)
Balance, December 31, 2016	$	-		$	86		$	209,700		$	68,888		$	(2,727	)	$	418		$	276,365

See Notes to Consolidated Financial Statements.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended December 31,

(In thousands)	2016			2015			2014
Cash Flows From Operating Activities:
Net income	$	18,694		$	11,555		$	10,051
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		5,132			3,322			3,848
Provision for loan losses		1,800			1,800			2,700
Provision for deferred taxes		2,966			1,589			68
Increase in cash surrender value of life insurance		(1,284	)		(996	)		(933	)
Stock compensation expense		1,608			1,202			959
Gain on sale or write-down of assets, net		(54	)		(1,726	)		(539	)
Gain on sale of loans held for sale, net		(5,248	)		(3,046	)		(1,926	)
Proceeds from sale of loans held for sale		255,704			178,295			87,912
Origination of loans held for sale		(252,771	)		(172,657	)		(91,772	)
Income from branch sale, net		-			(122	)		-
Net change in:
Accrued interest receivable and other assets		301			(1,995	)		528
Accrued interest payable and other liabilities		(2,042	)		(2,170	)		144
Net cash provided by operating activities		24,806			15,051			11,040

Cash Flows From Investing Activities:
Net (increase) decrease in certificates of deposit in other banks		1,432			6,969			(8,425	)
Purchases of securities AFS		(82,448	)		(41,419	)		(60,046	)
Proceeds from sales of securities AFS		31,442			13,929			4,821
Proceeds from calls and maturities of securities AFS		35,641			22,175			16,988
Net (increase) decrease in loans		2,805			(6,179	)		(39,699	)
Purchases of other investments		(3,447	)		(70	)		(83	)
Net increases in premises and equipment		(4,051	)		(1,181	)		(5,765	)
Proceeds from sales of premises and equipment		3			376			10
Proceeds from sales of other real estate and other assets		1,999			3,632			3,990
Purchase of BOLI		(20,000	)		-			(2,750	)
Proceeds from redemption of BOLI		21,549			-			-
Net cash used in branch sale		-			(19,865	)		-
Net cash received in business combinations		66,517			-			-
Net cash provided (used) by investing activities		51,442			(21,633	)		(90,959	)

Cash Flows From Financing Activities:
Net increase in deposits		91,236			30,508			25,199
Net decrease in short-term borrowings		(49,087	)		-			(7,116	)
Repayments of notes payable – other		(56,519	)		(5,763	)		(11,247	)
Proceeds from issuance of subordinated notes, net		-			11,820			-
Capitalized issuance costs, net		(260	)		-			-
Purchase and retirement of common stock		(5,201	)		(4,381	)		(5,770	)
Proceeds from issuance of common stock, net		1,900			1,721			887
Redemption of preferred stock		(12,200	)		(12,200	)		-
Noncontrolling interest in joint venture		-			-			(60	)
Cash dividends paid on preferred stock		(633	)		(212	)		(244	)
Net cash provided (used) by financing activities		(30,764	)		21,493			1,649
Net increase (decrease) in cash and cash equivalents		45,484			14,911			(78,270	)
Cash and cash equivalents:
Beginning		83,619			68,708			146,978
Ending	$	129,103		$	83,619		$	68,708

(continued)

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows - continued

Years Ended December 31,

	2016		2015		2014
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	7,508	$	7,290	$	7,324
Cash paid for taxes		7,150		2,890		3,535
Transfer of loans and bank premises to other real estate owned		237		986		3,127
Capitalized mortgage servicing rights		1,023		201		-
Acquisitions:
Fair value of assets acquired		1,039,000		-		-
Fair value of liabilities assumed		939,000		-		-
Net assets acquired		100,000		-		-
Common stock issued in acquisitions		165,295		-		-

See Notes to Consolidated Financial Statements.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies

Nature of Banking Activities and Subsidiaries : Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) was incorporated on April 5, 2000. Effective June 6, 2002, Nicolet Bankshares, Inc. received approval to become a one-bank holding company owning 100% of the common stock of Nicolet National Bank (the “Bank”). The Bank opened for business on November 1, 2000.

During 2004, the Company entered into a joint venture, Nicolet Joint Ventures, LLC (the “JV”), with a real estate development and investment firm (the “Firm”) in connection with the selection and development of a site for a new headquarters facility. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. The JV involves a 50% ownership by the Company. See Note 17 for additional disclosures.

During 2008, the Company purchased 100% of Brookfield Investment Partners, LLC (“Brookfield Investments”), an investment advisory firm that provides investment strategy and transactional services to financial institutions. Goodwill of $0.8 million was recorded in conjunction with this purchase.

In 2013, the Company consummated its acquisition of Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), whereby Mid-Wisconsin was merged with and into the Company, and Mid-Wisconsin Bank, Mid-Wisconsin’s wholly owned commercial bank subsidiary serving central Wisconsin, was merged with and into the Bank.

In 2013, the Company acquired selected assets and assumed selected liabilities of Bank of Wausau through a Federal Deposit Insurance Corporation (“FDIC”) assisted transaction. There was no loss sharing agreement as part of this acquisition. Collectively, the Mid-Wisconsin and Bank of Wausau transactions are referred to as “the 2013 acquisitions.”

During late 2016, the Company capitalized Nicolet Advisory Services, LLC (“Nicolet Advisory”), a wholly owned registered investment advisor subsidiary to provide brokerage and investment advisory services to customers.

In 2016, the Company consummated its acquisition of Baylake Corp. (“Baylake”), whereby Baylake was merged with and into the Company, and Baylake Bank, Baylake’s wholly owned commercial bank subsidiary serving northeast Wisconsin, was merged with and into the Bank. Goodwill of $65.5 million was recorded in conjunction with this purchase.

In 2016, the Company in a private transaction hired a select group of financial advisors and purchased their respective books of business and their operating platform. Goodwill of $0.4 million was recorded in conjunction with this purchase. Collectively, the Baylake and financial advisory transactions are referred to as “the 2016 acquisitions.” See Note 2 for additional disclosures.

Through its acquisition of Baylake, the Bank owns a 49.8% indirect interest in United Financial Services, LLC (“UFS, LLC”), a data processing service and e-banking entity, through its 99.2% ownership of United Financial Services, Inc. (“UFS, Inc.”). Collectively, UFS, Inc. and UFS, LLC are referred to as “UFS”. The investment in UFS is carried in other assets under the equity method of accounting, and the Bank’s pro rata share of UFS income is included in noninterest income. Income in equity of UFS recognized by the Bank was $1.0 million for the year ended December 31, 2016. Amounts paid to UFS for data processing services by the Bank were $1.6 million and $0.9 million in 2016 and 2015, respectively. Loans to UFS were $0.2 million at December 31, 2016 compared to none at the end of 2015. The carrying value of the Bank’s investment in UFS was $8.3million at December 31, 2016.

Principles of Consolidation : The consolidated financial statements of the Company include the accounts of the Bank, Brookfield Investments, Nicolet Advisory and the JV. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Results of operations of companies purchased, if any, are included from the date of acquisition.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

Operating Segment: The consolidated income of the Company is derived principally from the Bank, which conducts lending (primarily commercial-based loans, as well as residential and consumer loans) and deposit gathering (including other banking- and deposit-related products and services, such as ATMs, safe deposit boxes, check-cashing, wires, and debit cards) to businesses, consumers and governmental units principally in its trade area of northeastern and central Wisconsin, and Menominee, Michigan, trust services, brokerage services (delivered through the Bank and Nicolet Advisory), and the support to deliver, fund and manage all such banking and wealth management services to its customer base. The contribution of the JV, Brookfield Investments and Nicolet Advisory were not significant to the consolidated balance sheet or net income for 2016. While the chief decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

Use of Estimates : Preparation of 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, determination of the allowance for loan losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment of investments, 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 loan losses, determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in the 2013 and 2016 acquisitions; therefore, these are critical accounting policies. Management does not anticipate any material changes to estimates in the near term. 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, and changes in applicable banking or tax regulations.

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.

Business Combinations: The Company accounts for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The Company recognizes the full fair value of the assets acquired and liabilities assumed and immediately expenses transaction costs. There is no separate recognition of the acquired allowance for loan losses on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the net tangible and intangible assets acquired. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (“bargain purchase gain”) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statement of income from the effective date of the acquisition. Additional information regarding acquisitions is provided in Note 2.

Cash and Cash Equivalents : For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest-earning deposits in other banks with original maturities of less than 90 days, if any. The Bank maintains amounts in due from banks which, at times, may exceed federally insured limits. Management monitors these correspondent relationships. The Bank has not experienced any losses in such accounts. The Bank may have restrictions on cash and due from banks as it is required to maintain certain vault cash and reserve balances with the Federal Reserve Bank to meet specific reserve requirements. There was no reserve balance required with the Federal Reserve Bank at December 31, 2016 or 2015.

Securities Available for Sale (“AFS”) : Securities classified as AFS are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities classified as AFS are carried at fair value, with unrealized gains or losses, net of related deferred income taxes, reported as increases or decreases in accumulated other comprehensive income.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

Securities Available For Sale (“AFS”) (Continued)

Realized gains or losses on securities sales (using the specific identification method) and declines in value judged to be other-than-temporary are included in the consolidated statements of income under gain on sale and write-down of assets, net. Premiums and discounts are amortized or accreted into interest income over the life of the related securities using the effective interest method.

Management evaluates investment securities for other-than-temporary impairment on at least an annual basis. A decline in the market value of any investment below amortized cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors considered temporary in nature is recognized in other comprehensive income. In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than cost, and the financial condition and near-term prospects of the issuer for a period sufficient to allow for any anticipated recovery in fair value in the near term.

Other Investments : As a member of the Federal Reserve Bank System, Federal Agricultural Mortgage Corporation, and the FHLB System, the Bank is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other tradable AFS securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are Company investments in other private companies that do not have quoted market prices, carried at cost less other-than-temporary impairment charges, if any. Management’s evaluation of these other investments for impairment includes consideration of the financial condition and other available relevant information of the issuer.

Loans Held for Sale : Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value as determined on an aggregate basis and generally consist of current production of certain fixed-rate residential first mortgages. The amount by which cost exceeds market value is recorded as a valuation allowance and charged to earnings. Changes, if any, in the valuation allowance are also included in earnings in the period in which the change occurs. As of December 31, 2016 and 2015, no valuation allowance was necessary. Loans held for sale may be sold servicing retained or servicing released, and are generally sold without recourse. The carrying value of mortgage loans sold with servicing retained is reduced by the amount allocated to the servicing right at the time of sale. Gains and losses on sales of mortgage loans held for sale are included in earnings in mortgage income, net.

Mortgage Servicing Rights (“MSRs”): If the Company sells originated residential mortgages into the secondary market and retains the right to service the loans sold, then a mortgage servicing right asset (liability) is capitalized upon sale with the offsetting effect recorded as a gain (loss) on sale of loans in earnings (included in mortgage income, net), representing the then-current estimated fair value of future net cash flows expected to be realized for performing the servicing activities. MSRs when purchased (as in the case of the 2016 Baylake merger) are initially recorded at their then-estimated fair value. As the Company has not elected to measure any class of servicing assets under the fair value measurement method, the Company utilizes the amortization method. MSRs are amortized in proportion to and over the period of estimated net servicing income, with the amortization charged to earnings (included in mortgage income, net). MSRs are carried at the lower of initial capitalized amount, net of accumulated amortization, or fair value, and are included in other assets in the consolidated balance sheets. The Company periodically evaluates its MSRs 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 stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). The value of MSRs is adversely affected when mortgage interest rates decline and mortgage loan prepayments increase. A valuation allowance is established through a charge to earnings (included in mortgage income, net) to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings, though not beyond the net amortized cost carried. An other-than-temporary impairment (i.e. recoverability is considered remote when considering interest rates and loan payoff activity) is recognized as a write-down of the MSRs and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings. A direct write-down permanently reduces the carrying value of the MSRs and valuation allowance, precluding subsequent recoveries. Loan servicing fee income for servicing loans is typically based on a contractual percentage of the outstanding principal. Loan servicing fee income (as well as less material late fees and ancillary fees related to loan servicing) are recorded as income when earned (included in mortgage income, net).

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

Loans and Allowance for Loan Losses (“ALLL”) – Originated Loans : Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the unpaid principal balance using the simple interest method. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower’s ability to meet payment of interest or principal when due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal, though may be placed in such status earlier based on the circumstances. Loans past due 90 days or more may continue on accrual only when they are well secured and/or in process of collection or renewal. When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income. Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is paid in full. Accrual of interest may be resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a period of time.

Management considers a loan to be impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. For determining the adequacy of the ALLL, all material loans in nonaccrual status are evaluated for impairment, together with additional loans having impairment risk characteristics. For this purpose, management has defined “material” to be a credit relationship of more than $250,000. At the time an individual loan goes into nonaccrual status however, management evaluates the loan for impairment and possible charge-off regardless of loan size. Typically, impairment amounts for loans under the scope criteria are charged off when the impairment amount is determined.

The ALLL is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio.

The allocation methodology applied by the Company is designed to assess the appropriateness of the ALLL and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. Impaired loans are individually assessed and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Loans that are determined not to be impaired are collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments are also provided for certain current environmental and qualitative factors. An internal loan review function rates loans using a grading system based on nine different categories. Loans with grades of seven or higher (“classified loans”) represent loans with a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits if classified as impaired. Classified loans are constantly monitored by the loan review function to ensure early identification of any deterioration.

The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate at December 31, 2016. The allowance analysis is reviewed by the Board on a quarterly basis in compliance with regulatory requirements.

In addition, various regulatory agencies periodically review the ALLL. These agencies may require the Company to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

Loans and ALLL – Acquired Loans: The loans purchased in the 2013 and 2016 acquisitions were acquired loans. Acquired loans are recorded at their estimated fair value at the acquisition date, and are initially classified as either purchase credit impaired (“PCI”) loans (i.e. loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans (i.e. “performing acquired loans”).

PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality . The Company estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted. These credit discounts (“nonaccretable marks”) are included in the determination of the initial fair value for acquired loans; therefore, an allowance for loan losses is not recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that are not credit-based (“accretable marks”) are subsequently accreted to interest income over the estimated life of the loans using a method that approximates a level yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date result in a move of the discount from nonaccretable to accretable. Decreases in expected cash flows after the acquisition date are recognized through the provision for loan losses. All fair value discounts initially recorded in 2013 and 2016 on PCI loans were deemed to be credit related.

Performing acquired loans are accounted for under FASB ASC Topic 310-20, Receivables—Nonrefundable Fees and Other Costs . Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate. The Company’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans described above.

An ALLL is calculated using a methodology similar to that described for originated loans. Performing acquired loans are subsequently evaluated for any required allowance at each reporting date. Such required allowance for each loan pool is compared to the remaining fair value discount for that pool. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan pool and once the discount is depleted, losses are applied against the allowance established for that pool.

For PCI loans after acquisition, cash flows expected to be collected are recast for each loan periodically as determined appropriate by management. If the present value of expected cash flows for a loan is less than its carrying value, impairment is reflected by an increase in the ALLL and a charge to the provision for loan losses. If the present value of the expected cash flows for a loan is greater than its carrying value, any previously established ALLL is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. Loans which were considered troubled debt restructurings by Mid-Wisconsin and Baylake prior to the acquisitions are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless or until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

Credit-Related Financial Instruments : In the ordinary course of business the Company has entered into financial instruments consisting of commitments to extend credit, financial letters of credit, and standby letters of credit. Financial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Such financial instruments are recorded in the consolidated financial statements when they are funded.

Transfers of Financial Assets : Transfers of financial assets, primarily in loan participation activities, are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return assets.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

Premises and Equipment : Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment acquired in the 2013 and 2016 acquisitions were recorded at estimated fair value on the respective dates of acquisition. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Maintenance and repairs are expensed as incurred.

Estimated useful lives of new premises and equipment generally range as follows:

Building and improvements	25 – 39 years
Leasehold improvements	5 – 15 years
Furniture and equipment	3 – 10 years

Other Real Estate Owned (“OREO”) : OREO acquired through partial or total satisfaction of loans or bank facilities no longer in use are carried at fair value less estimated costs to sell. Any write-down in the carrying value of loans or vacated bank premises at the time of transfer to OREO is charged to the ALLL or to write-down of assets, respectively. OREO properties acquired in conjunction with the 2013 and 2016 acquisitions were recorded at fair value on the date of acquisition. Any subsequent write-downs to reflect current fair market value, as well as gains or losses on disposition and revenues and expenses incurred to hold and maintain such properties, are treated as period costs.

Goodwill and Other Intangibles : Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. Goodwill is not amortized but is subject to impairment tests on at least an annual basis. Other intangibles include core deposit intangibles and customer list intangibles. Core deposit base premiums represent the value of acquired customer core deposit bases. The core deposit intangibles have an estimated finite life, are amortized on an accelerated basis over a 10-year period, and are subject to periodic impairment evaluation. Customer relationships were acquired in the financial advisor business acquisition in 2016. The customer list intangibles have finite lives and are amortized on a straight-line basis to expense over their initial weighted average life of approximately 12 years as of acquisition.

Management periodically reviews the carrying value of its long-lived and intangible assets to determine if any impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life, in which case an impairment charge would be recorded as an expense in the period of impairment. 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. The Company’s annual assessments indicated no impairment charge on goodwill or other intangibles was required for 2016 or 2015.

Bank-owned Life Insurance (“BOLI”): The Company owns BOLI on certain executives and employees. BOLI balances are recorded at their cash surrender values. Changes in the cash surrender values are included in noninterest income.

Short-term Borrowings : Short-term borrowings consist primarily of overnight Federal funds purchased and securities sold under agreements to repurchase (“repos”), or other short-term borrowing arrangements. Repos are with commercial deposit customers, and are treated as financing activities carried at the amounts that will be subsequently repurchased as specified in the respective agreements. Repos generally mature within one to four days from the transaction date. The Company may be required to provide additional collateral based on the fair value of the underlying securities. There were no outstanding agreements at December 31, 2016 and 2015. The weighted average rate for repo agreements transacted during 2016 was 0.08% for the year based on average balances of $6.1 million. There were no repo agreements transacted during 2015.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

Stock-based Compensation Plans: Share-based payments to employees, including grants of restricted stock or stock options, are valued at fair value of the award on the date of grant and expensed on a straight-line basis as compensation expense over the applicable vesting period. A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the Company’s stock at the date of grant is used to estimate the value of restricted stock awards. The weighted average assumptions used in the model for valuing option grants in 2016 and 2015 were as follows:

	2016			2015
Dividend yield		0	%		0	%
Expected volatility		25	%		25	%
Risk-free interest rate		1.52	%		1.68	%
Expected average life		7 years			7 years
Weighted average per share fair value of options	$	11.04		$	8.11

Income Taxes : The Company files a consolidated federal income tax return and a combined state income tax return (both of which include the Company and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities.

Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies.

At acquisition, deferred taxes were evaluated in respect to the acquired assets and assumed liabilities (including the acquired net operating losses), and a net deferred tax asset was recorded. Certain limitations within the provisions of the tax code are placed on the amount of net operating losses which can be utilized as part of acquisition accounting rules and were incorporated into the calculation of the deferred tax asset. In addition, a portion of the fair market value discounts on PCI loans which resolved in the first twelve months after the acquisition were disallowed under provisions of the tax code.

The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. At December 31, 2016, the Company determined it had no significant uncertain tax positions. Interest and penalties related to unrecognized tax benefits are classified as income tax expense.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1.

Nature of Business and Significant Accounting Policies (CONTINUED)

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 common shares adjusted for the dilutive effect of outstanding common stock awards, if any.

Earnings per common share and related information are summarized as follows:

	Years ended December 31,
(in thousands, except per share data)	2016		2015		2014
Net income, net of noncontrolling interest	$	18,462	$	11,428	$	9,949
Less preferred stock dividends		633		212		244
Net income available to common shareholders	$	17,829	$	11,216	$	9,705

Weighted average common shares outstanding		7,158		4,004		4,165
Effect of dilutive stock instruments		356		358		146
Diluted weighted average common shares outstanding		7,514		4,362		4,311

Basic earnings per common share	$	2.49	$	2.80	$	2.33
Diluted earnings per common share	$	2.37	$	2.57	$	2.25

There were no options to purchase shares that were excluded from the calculation of diluted earnings per share at December 31, 2016. Options to purchase approximately 0.2 million shares were outstanding at the year ending December 31, 2015 but are excluded from the calculation of diluted earnings per common share as the effect would have been anti-dilutive.

Treasury Stock : Treasury stock is accounted for at cost on a first-in-first-out basis. It is the Company’s general practice to cancel treasury stock shares in the same year as purchased, and thus, not carry a treasury stock balance.

Comprehensive Income : Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on AFS securities, bypass the statement of income and instead are reported in accumulated other comprehensive income, as a separate component of the equity section of the balance sheet. Realized gains or losses are reclassified to current period income. Changes in these items, along with net income, are components of comprehensive income. The Company presents comprehensive income in a separate consolidated statement of comprehensive income.

Reclassifications : Certain amounts in the 2015 and 2014 consolidated financial statements have been reclassified to conform to the 2016 presentation.

Recent Accounting Developments Adopted : The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements or results of operations.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 2.

ACQUISITIONS

On April 29, 2016, the Company consummated its merger with Baylake, pursuant to the Agreement and Plan of Merger by and between the Company and Baylake dated September 8, 2015, (the “Merger Agreement”), whereby Baylake was merged with and into the Company, and Baylake Bank, Baylake’s wholly owned commercial bank subsidiary serving northeastern Wisconsin, was merged with and into the Bank. The system integration was completed, and 21 branches of Baylake opened, on May 2, 2016, as branches of the Bank, expanding its presence into Door, Kewaunee, and Manitowoc Counties, Wisconsin. Concurrently, Nicolet closed one of its Brown County locations at the time of the merger, and closed an additional six branches in the fourth quarter of 2016, bringing the Bank’s footprint to 36 branches as of December 31, 2016.

The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its plan to drive growth and efficiency through increased scale, leverage the strengths of each bank across the combined customer base, enhance profitability, and add liquidity and shareholder value.

Pursuant to the terms of the Merger Agreement, Baylake shareholders received 0.4517 shares of the Company’s common stock for each outstanding share of Baylake common stock (except for Baylake shares owned by the Company at the time of the merger), and cash in lieu of any fractional share. Pre-existing Baylake equity awards (restricted stock units and stock options) immediately vested upon consummation of the merger. The Company issued 0.4517 shares of its common stock for each vesting Baylake restricted stock unit, and Nicolet assumed, after appropriate adjustment by the 0.4517 exchange ratio, all pre-existing Baylake stock options. As a result, the Company issued 4,344,243 shares of the Company’s common stock, for common stock consideration of $163.3 million (based on $37.58 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period, and recorded an additional $1.2 million consideration for the assumed stock options. Approximately $0.3 million in direct stock issuance costs for the merger were incurred and charged against additional paid in capital, bringing the total purchase price to $164.2 million.

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Baylake prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, OREO, BOLI and other assets, deposits, debt and deferred taxes with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.

The fair value of the assets acquired and liabilities assumed on April 29, 2016 was as follows:

(in millions)	As recorded by Baylake Corp		Fair Value Adjustments			As Recorded by Nicolet
Cash, cash equivalents and securities available for sale	$	262	$	1		$	263
Loans		710		(19	)		691
Other real estate owned		3		(2	)		1
Core deposit intangible		1		16			17
Fixed assets and other assets		71		(8	)		63
Total assets acquired	$	1,047	$	(12	)	$	1,035

Deposits	$	822	$	-		$	822
Junior subordinated debentures, borrowings and other liabilities		116		(1	)		115
Total liabilities acquired	$	938	$	(1	)	$	937

Excess of assets acquired over liabilities acquired	$	109	$	(11	)	$	98
Less: purchase price							164
Goodwill						$	66

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 2.

ACQUISITIONS (CONTINUED)

The following unaudited pro forma information presents the results of operations for the year ended December 31, 2016 and 2015, as if the acquisition had occurred January 1 of each period. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

	Year Ended
	December 31,
	2016		2015
(in thousands, except per share data)
Total revenues, net of interest expense	$	110,788	$	105,288
Net income		23,263		21,267
Diluted earnings per share		2.55		2.38

During the first quarter of 2016, Nicolet agreed in a private transaction to hire a select group of financial advisors and purchase their respective books of business, as well as their operating platform, to enhance the leadership and future growth of the Company’s wealth management business. The transaction was effected in phases and completed April 1, 2016. The Company paid $4.9 million total initial consideration, including $0.8 million cash, $2.6 million of Nicolet common stock, and recorded a $1.5 million earn-out liability payable to one principal in the future (which may require adjustment based on change in initial business purchased over a period, but not contingent upon the principal’s employment). The Company initially recorded $0.4 million of goodwill, $0.2 million of fixed assets, and $4.3 million of customer relationship intangibles (a portion amortizing straight-line over 10 years and a portion over 15 years). The transaction will impact the income statement primarily within brokerage income, personnel expense, and intangibles amortization.

NOTE 3. SECURITIES AVAILABLE FOR SALE

Amortized costs and fair values of securities AFS are summarized as follows:

	December 31, 2016
	Amortized		Gross		Gross		Fair
(in thousands)	Cost		Unrealized Gains		Unrealized Losses		Value
U.S. government sponsored enterprises	$	1,981	$	-	$	18	$	1,963
State, county and municipals		191,721		160		4,638		187,243
Mortgage-backed securities		161,309		242		2,422		159,129
Corporate debt securities		12,117		52		-		12,169
Equity securities		2,631		2,152		-		4,783
	$	369,759	$	2,606	$	7,078	$	365,287

	December 31, 2015
	Amortized		Gross		Gross		Fair
(in thousands)	Cost		Unrealized Gains		Unrealized Losses		Value
U.S. government sponsored enterprises	$	287	$	7	$	-	$	294
State, county and municipals		104,768		497		244		105,021
Mortgage-backed securities		61,600		418		554		61,464
Corporate debt securities		1,140		-		-		1,140
Equity securities		3,196		1,504		23		4,677
	$	170,991	$	2,426	$	821	$	172,596

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 3.

SECURITIES AVAILABLE FOR SALE (CONTINUED)

The current fair value and associated unrealized losses on investments in debt and equity securities with unrealized losses at December 31, 2016 and 2015 are summarized in the following table, with the length of time the individual securities have been in a continuous loss position.

	December 31, 2016
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government sponsored enterprises	$	1,963	$	18	$	-	$	-	$	1,963	$	18
State, county and municipals		167,457		4,629		1,300		9		168,757		4,638
Mortgage-backed securities		134,770		2,311		3,653		111		138,423		2,422
	$	304,190	$	6,958	$	4,953	$	120	$	309,143	$	7,078

	December 31, 2015
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State, county and municipals	$	34,283	$	112	$	12,702	$	132	$	46,985	$	244
Mortgage-backed securities		22,228		167		13,750		387		35,978		554
Equity securities		408		23		-		-		408		23
	$	56,919	$	302	$	26,452	$	519	$	83,371	$	821

At December 31, 2016 there were $7.1 million of gross unrealized losses related to 581 securities, or 1.9% of total securities. As of December 31, 2016, the Company does not consider its AFS securities with unrealized losses to be other-than-temporarily impaired. The unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The Company has the ability and intent to hold its securities to maturity. There was a $0.5 million other-than-temporary impairment (related to one private company stock carried in other investments in the consolidated balance sheets) charged to earnings during the fourth quarter of 2016 compared to none in 2015 and 2014.

The amortized cost and fair value of AFS securities by contractual maturity at December 31, 2016 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties; therefore, these securities are not included in the maturity categories in the following summary.

	December 31, 2016
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	9,833	$	9,835
Due in one year through five years		81,288		80,847
Due after five years through ten years		106,416		102,401
Due after ten years		8,282		8,292
		205,819		201,375
Mortgage-backed securities		161,309		159,129
Equity securities		2,631		4,783
Securities AFS	$	369,759	$	365,287

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 3.

SECURITIES AVAILABLE FOR SALE (CONTINUED)

AFS securities with a carrying value of $30.3 million and $24.3 million as of December 31, 2016 and 2015, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

Proceeds from sales of AFS securities available for sale during 2016, 2015 and 2014 were $31.4 million, $13.9 million and $4.8 million, respectively. Gross gains of $91,000 and gross losses of $13,000 were realized on sales in 2016, gross gains of $0.6 million were realized on sales in 2015, and gross gains of $0.3 million in 2014.

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES

The loan composition as of December 31 is summarized as follows:

	2016						2015
(in thousands)	Amount			% of Total			Amount			% of Total
Commercial & industrial	$	428,270			27.3	%	$	294,419			33.6	%
Owner-occupied commercial real estate (“CRE”)		360,227			23.0			185,285			21.1
Agricultural (“AG”) production		34,767			2.2			15,018			1.7
AG real estate		45,234			2.9			43,272			4.9
CRE investment		195,879			12.5			78,711			9.0
Construction & land development		74,988			4.8			36,775			4.2
Residential construction		23,392			1.5			10,443			1.2
Residential first mortgage		300,304			19.1			154,658			17.6
Residential junior mortgage		91,331			5.8			51,967			5.9
Retail & other		14,515			0.9			6,513			0.8
Loans		1,568,907			100.0	%		877,061			100.0	%
Less ALLL		11,820						10,307
Loans, net	$	1,557,087					$	866,754
ALLL to loans		0.75	%					1.18	%

As a further breakdown, loans as of December 31 are summarized by originated and acquired as follows:

	2016												2015
(in thousands)	Originated Amount			% of Total			Acquired Amount			% of Total			Originated Amount			% of Total			Acquired Amount			% of Total
Commercial & industrial	$	330,073			36.6	%	$	98,197			14.7	%	$	284,023			38.4	%	$	10,396			7.6	%
Owner-occupied CRE		182,776			20.3			177,451			26.6			153,563			20.7			31,722			23.2
AG production		9,192			1.0			25,575			3.8			6,849			0.9			8,169			6.0
AG real estate		18,858			2.1			26,376			4.0			25,464			3.4			17,808			13.0
CRE investment		72,930			8.1			122,949			18.4			58,949			8.0			19,762			14.4
Construction & land development		44,147			4.9			30,841			4.6			27,231			3.7			9,544			7.0
Residential construction		20,768			2.3			2,624			0.4			10,443			1.4			-			-
Residential first mortgage		164,949			18.3			135,355			20.3			122,373			16.5			32,285			23.5
Residential junior mortgage		48,199			5.3			43,132			6.5			44,889			6.1			7,078			5.2
Retail & other		10,095			1.1			4,420			0.7			6,351			0.9			162			0.1
Loans		901,987			100.0	%		666,920			100.0	%		740,135			100.0	%		136,926			100.0	%
Less ALLL		9,449						2,371						8,714						1,593
Loans, net		892,538						664,549						731,421						135,333
ALLL to loans		1.05	%					0.36	%					1.18	%					1.16	%

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Practically all of the Company’s loans, commitments, financial letters of credit, and standby 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.

The ALLL represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors. Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category. Management allocates the ALLL by pools of risk within each loan portfolio.

The following tables present the balance and summary of activity in the ALLL in total as of December 31:

(in thousands)
ALLL:	2016			2015			2014
Beginning balance	$	10,307		$	9,288		$	9,232
Provision		1,800			1,800			2,700
Charge-offs		(584	)		(883	)		(2,743	)
Recoveries		297			102			99
Net charge-offs		(287	)		(781	)		(2,644	)
Ending balance	$	11,820		$	10,307		$	9,288

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method as of December 31, 2016:

	TOTAL – 2016
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307
Provision		451			1,037			65			(95	)		118			(672	)		157			593			14			132			1,800
Charge-offs		(279	)		(108	)		-			-			-			-			-			(80	)		(57	)		(60	)		(584	)
Recoveries		26			5			-			-			221			-			-			31			8			6			297
Net charge-offs		(253	)		(103	)		-			-			221			-			-			(49	)		(49	)		(54	)		(287	)
Ending balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820
As percent of ALLL		33.2	%		24.3	%		1.3	%		2.4	%		9.5	%		6.5	%		2.6	%		15.1	%		3.9	%		1.2	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,919			2,867			150			285			1,124			774			304			1,784			461			152			11,820
Ending balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820

Loans:
Individually evaluated	$	338		$	2,588		$	41		$	240		$	12,552		$	694		$	261		$	2,204		$	299		$	-		$	19,217
Collectively evaluated		427,932			357,639			34,726			44,994			183,327			74,294			23,131			298,100			91,032			14,515			1,549,690
Total loans	$	428,270		$	360,227		$	34,767		$	45,234		$	195,879		$	74,988		$	23,392		$	300,304		$	91,331		$	14,515		$	1,568,907

Less ALLL	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820
Net loans	$	424,351		$	357,360		$	34,617		$	44,949		$	194,755		$	74,214		$	23,088		$	298,520		$	90,870		$	14,363		$	1,557,087

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

As a further breakdown, the December 31, 2016 ALLL is summarized by originated and acquired as follows:

	Originated – 2016
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714
Provision		268			695			51			(77	)		26			(725	)		119			360			1			123			841
Charge-offs		(262	)		(3	)		-			-			-			-			-			-			(53	)		(59	)		(377	)
Recoveries		9			4			-			-			221			-			-			25			7			5			271
Net charge-offs		(253	)		1			-			-			221			-			-			25			(46	)		(54	)		(106	)
Ending balance	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449
As percent of ALLL		33.4	%		23.9	%		1.3	%		2.3	%		9.5	%		6.9	%		2.8	%		14.5	%		3.9	%		1.5	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,150			2,263			122			222			893			656			266			1,372			373			132			9,449
Ending balance	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449

Loans:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		330,073			182,776			9,192			18,858			72,930			44,147			20,768			164,949			48,199			10,095			901,987
Total loans	$	330,073		$	182,776		$	9,192		$	18,858		$	72,930		$	44,147		$	20,768		$	164,949		$	48,199		$	10,095		$	901,987

Less ALLL	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449
Net loans	$	326,923		$	180,513		$	9,070		$	18,636		$	72,037		$	43,491		$	20,502		$	163,577		$	47,826		$	9,963		$	892,538

	Acquired - 2016
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	586		$	366		$	14		$	81		$	139		$	65		$	-		$	253		$	78		$	11		$	1,593
Provision		183			342			14			(18	)		92			53			38			233			13			9			959
Charge-offs		(17	)		(105	)		-			-			-			-			-			(80	)		(4	)		(1	)		(207	)
Recoveries		17			1			-			-			-			-			-			6			1			1			26
Net charge-offs		-			(104	)		-			-			-			-			-			(74	)		(3	)		-			(181	)
Ending balance	$	769		$	604		$	28		$	63		$	231		$	118		$	38		$	412		$	88		$	20		$	2,371
As percent of ALLL		32.4	%		25.5	%		1.2	%		2.7	%		9.7	%		5.0	%		1.6	%		17.4	%		3.7	%		0.8	%		100.0	%

Loans:
Individually evaluated	$	338		$	2,588		$	41		$	240		$	12,552		$	694		$	261		$	2,204		$	299		$	-		$	19,217
Collectively evaluated		97,859			174,863			25,534			26,136			110,397			30,147			2,363			133,151			42,833			4,420			647,703
Total loans	$	98,197		$	177,451		$	25,575		$	26,376		$	122,949		$	30,841		$	2,624		$	135,355		$	43,132		$	4,420		$	666,920

Less ALLL	$	769		$	604		$	28		$	63		$	231		$	118		$	38		$	412		$	88		$	20		$	2,371
Net loans	$	97,428		$	176,847		$	25,547		$	26,313		$	122,718		$	30,723		$	2,586		$	134,943		$	43,044		$	4,400		$	664,549

There was no ALLL allocated to individually evaluated loans at December 31, 2016, therefore the table reflecting the ALLL between individually evaluated loans and collectively evaluated loans was omitted.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

	TOTAL – 2015
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	3,191		$	1,230		$	53		$	226		$	511		$	2,685		$	140		$	866		$	337		$	49		$	9,288
Provision		868			928			32			154			307			(1,239	)		7			438			258			47			1,800
Charge-offs		(374	)		(229	)		-			-			(50	)		-			-			(84	)		(111	)		(35	)		(883	)
Recoveries		36			4			-			-			17			-			-			20			12			13			102
Net charge-offs		(338	)		(225	)		-			-			(33	)		-			-			(64	)		(99	)		(22	)		(781	)
Ending balance	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307
As percent of ALLL		36.2	%		18.8	%		0.8	%		3.7	%		7.6	%		14.0	%		1.4	%		12.0	%		4.8	%		0.7	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,721			1,933			85			380			785			1,446			147			1,240			496			74			10,307
Ending balance	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307

Loans:
Individually evaluated	$	142		$	950		$	39		$	252		$	1,301		$	280		$	-		$	460		$	142		$	-		$	3,566
Collectively evaluated		294,277			184,335			14,979			43,020			77,410			36,495			10,443			154,198			51,825			6,513			873,495
Total loans	$	294,419		$	185,285		$	15,018		$	43,272		$	78,711		$	36,775		$	10,443		$	154,658		$	51,967		$	6,513		$	877,061

Less ALLL	$	3,721		$	1,933		$	85		$	380		$	785		$	1,446		$	147		$	1,240		$	496		$	74		$	10,307
Net loans	$	290,698		$	183,352		$	14,933		$	42,892		$	77,926		$	35,329		$	10,296		$	153,418		$	51,471		$	6,439		$	866,754

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

As a further breakdown, the December 31, 2015 ALLL is summarized by originated and acquired as follows:

	Originated – 2015
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	3,191		$	1,230		$	53		$	226		$	511		$	2,685		$	140		$	866		$	337		$	49		$	9,288
Provision		282			490			18			73			118			(1,304	)		7			189			171			36			80
Charge-offs		(374	)		(157	)		-			-			-			-			-			(84	)		(91	)		(35	)		(741	)
Recoveries		36			4			-			-			17			-			-			16			1			13			87
Net charge-offs		(338	)		(153	)		-			-			17			-			-			(68	)		(90	)		(22	)		(654	)
Ending balance	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714
As percent of ALLL		36.1	%		18.0	%		0.8	%		3.4	%		7.4	%		15.8	%		1.7	%		11.3	%		4.8	%		0.7	%		100.0	%

ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		3,135			1,567			71			299			646			1,381			147			987			418			63			8,714
Ending balance	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714

Loans:
Individually evaluated	$	-		$	-		$	-		$	-		$	387		$	-		$	-		$	-		$	-		$	-		$	387
Collectively evaluated		284,023			153,563			6,849			25,464			58,562			27,231			10,443			122,373			44,889			6,351			739,748
Total loans	$	284,023		$	153,563		$	6,849		$	25,464		$	58,949		$	27,231		$	10,443		$	122,373		$	44,889		$	6,351		$	740,135

Less ALLL	$	3,135		$	1,567		$	71		$	299		$	646		$	1,381		$	147		$	987		$	418		$	63		$	8,714
Net loans	$	280,888		$	151,996		$	6,778		$	25,165		$	58,303		$	25,850		$	10,296		$	121,386		$	44,471		$	6,288		$	731,421

	Acquired - 2015
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Provision		586			438			14			81			189			65			-			249			87			11			1,720
Charge-offs		-			(72	)		-			-			(50	)		-			-			-			(20	)		-			(142	)
Recoveries		-			-			-			-			-			-			-			4			11			-			15
Net charge-offs		-			(72	)		-			-			(50	)		-			-			4			(9	)		-			(127	)
Ending balance	$	586		$	366		$	14		$	81		$	139		$	65		$	-		$	253		$	78		$	11		$	1,593
As percent of ALLL		36.7	%		23.0	%		0.9	%		5.1	%		8.7	%		4.1	%		-	%		15.9	%		4.9	%		0.7	%		100.0	%

Loans:
Individually evaluated	$	142		$	950		$	39		$	252		$	914		$	280		$	-		$	460		$	142		$	-		$	3,179
Collectively evaluated		10,254			30,772			8,130			17,556			18,848			9,264			-			31,825			6,936			162			133,747
Total loans	$	10,396		$	31,722		$	8,169		$	17,808		$	19,762		$	9,544		$	-		$	32,285		$	7,078		$	162		$	136,926

Less ALLL	$	586		$	366		$	14		$	81		$	139		$	65		$	-		$	253		$	78		$	11		$	1,593
Net loans	$	9,810		$	31,356		$	8,155		$	17,727		$	19,623		$	9,479		$	-		$	32,032		$	7,000		$	151		$	135,333

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following table presents nonaccrual loans by portfolio segment as of December 31, 2016 and 2015. Acquired impaired loans that are performing to their contractual terms are not included in the below table and are accruing interest based on their performance and management’s determination.

		Total Nonaccrual Loans
(in thousands)		2016	% to Total			2015	% to Total
Commercial & industrial	$	358	1.8	%	$	204	5.8	%
Owner-occupied CRE		2,894	14.3			951	26.9
AG production		9	0.1			13	0.4
AG real estate		208	1.0			230	6.5
CRE investment		12,317	60.6			1,040	29.4
Construction & land development		1,193	5.9			280	7.9
Residential construction		260	1.3			-	-
Residential first mortgage		2,990	14.7			674	19.1
Residential junior mortgage		56	0.3			141	4.0
Retail & other		-	-			-	-
Nonaccrual loans	$	20,285	100.0	%	$	3,533	100.0	%

As a further breakdown, nonaccrual loans as of December 31, 2016 and 2015 are summarized by originated and acquired as follows:

	2016
(in thousands)	Originated		% to Total			Acquired		% to Total
Commercial & industrial	$	4		1.6	%	$	354		1.8	%
Owner-occupied CRE		42		16.3			2,852		14.2
AG production		7		2.7			2		0.1
AG real estate		-		-			208		1.0
CRE investment		-		-			12,317		61.4
Construction & land development		-		-			1,193		6.0
Residential construction		-		-			260		1.3
Residential first mortgage		204		79.4			2,786		13.9
Residential junior mortgage		-		-			56		0.3
Retail & other		-		-			-		-
Nonaccrual loans	$	257		100.0	%	$	20,028		100.0	%

	2015
(in thousands)	Originated		% to Total			Acquired		% to Total
Commercial & industrial	$	49		8.4	%	$	155		5.3	%
Owner-occupied CRE		-		-			951		32.1
AG production		13		2.2			-		-
AG real estate		-		-			230		7.8
CRE investment		387		66.7			653		22.1
Construction & land development		-		-			280		9.5
Residential construction		-		-			-		-
Residential first mortgage		132		22.7			542		18.4
Residential junior mortgage		-		-			141		4.8
Retail & other		-		-			-		-
Nonaccrual loans	$	581		100.0	%	$	2,952		100.0	%

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following tables present past due loans by portfolio segment as of December 31, 2016:

	Total Past Due Loans - 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	22		$	358		$	427,890		$	428,270
Owner-occupied CRE		268			2,894			357,065			360,227
AG production		-			9			34,758			34,767
AG real estate		-			208			45,026			45,234
CRE investment		-			12,317			183,562			195,879
Construction & land development		-			1,193			73,795			74,988
Residential construction		-			260			23,132			23,392
Residential first mortgage		486			2,990			296,828			300,304
Residential junior mortgage		200			56			91,075			91,331
Retail & other		15			-			14,500			14,515
Total loans	$	991		$	20,285		$	1,547,631		$	1,568,907
As a percent of total loans		0.1	%		1.3	%		98.6	%		100.0	%

As a further breakdown, past due loans as of December 31, 2016 are summarized by originated and acquired as follows:

	Originated – 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non-accrual			Current			Total
Commercial & industrial	$	-		$	4		$	330,069		$	330,073
Owner-occupied CRE		-			42			182,734			182,776
AG production		-			7			9,185			9,192
AG real estate		-			-			18,858			18,858
CRE investment		-			-			72,930			72,930
Construction & land development		-			-			44,147			44,147
Residential construction		-			-			20,768			20,768
Residential first mortgage		81			204			164,664			164,949
Residential junior mortgage		13			-			48,186			48,199
Retail & other		3			-			10,092			10,095
Total loans	$	97		$	257		$	901,633		$	901,987
As a percent of total loans		0.1	%		0.1	%		99.8	%		100.0	%

	Acquired – 2016
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	22		$	354		$	97,821		$	98,197
Owner-occupied CRE		268			2,852			174,331			177,451
AG production		-			2			25,573			25,575
AG real estate		-			208			26,168			26,376
CRE investment		-			12,317			110,632			122,949
Construction & land development		-			1,193			29,648			30,841
Residential construction		-			260			2,364			2,624
Residential first mortgage		405			2,786			132,164			135,355
Residential junior mortgage		187			56			42,889			43,132
Retail & other		12			-			4,408			4,420
Total loans	$	894		$	20,028		$	645,998		$	666,920
As a percent of total loans		0.1	%		3.0	%		96.9	%		100.0	%

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following table presents past due loans by portfolio segment as of December 31, 2015:

	Total Past Due Loans - 2015
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	50		$	204		$	294,165		$	294,419
Owner-occupied CRE		-			951			184,334			185,285
AG production		16			13			14,989			15,018
AG real estate		-			230			43,042			43,272
CRE investment		-			1,040			77,671			78,711
Construction & land development		-			280			36,495			36,775
Residential construction		-			-			10,443			10,443
Residential first mortgage		150			674			153,834			154,658
Residential junior mortgage		10			141			51,816			51,967
Retail & other		12			-			6,501			6,513
Total loans	$	238		$	3,533		$	873,290		$	877,061
As a percent of total loans		0.1	%		0.4	%		99.5	%		100.0	%

As a further breakdown, past due loans as of December 31, 2015 are summarized by originated and acquired as follows:

	Originated – 2015
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	50		$	49		$	283,924		$	284,023
Owner-occupied CRE		-			-			153,563			153,563
AG production		-			13			6,836			6,849
AG real estate		-			-			25,464			25,464
CRE investment		-			387			58,562			58,949
Construction & land development		-			-			27,231			27,231
Residential construction		-			-			10,443			10,443
Residential first mortgage		-			132			122,241			122,373
Residential junior mortgage		10			-			44,879			44,889
Retail & other		12			-			6,339			6,351
Total loans	$	72		$	581		$	739,482		$	740,135
As a percent of total loans		0.1	%		0.1	%		99.8	%		100.0	%

	Acquired – 2015
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non- accrual			Current			Total
Commercial & industrial	$	-		$	155		$	10,241		$	10,396
Owner-occupied CRE		-			951			30,771			31,722
AG production		16			-			8,153			8,169
AG real estate		-			230			17,578			17,808
CRE investment		-			653			19,109			19,762
Construction & land development		-			280			9,264			9,544
Residential construction		-			-			-			-
Residential first mortgage		150			542			31,593			32,285
Residential junior mortgage		-			141			6,937			7,078
Retail & other		-			-			162			162
Total loans	$	166		$	2,952		$	133,808		$	136,926
As a percent of total loans		0.1	%		2.2	%		97.7	%		100.0	%

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

A description of the loan risk categories used by the Company follows:

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.

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.

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.

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 non-accrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

8 Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.

9 Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following tables present loans by loan grade as of December 31:

	2016
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	401,954		$	16,633		$	2,133		$	7,550		$	-	$	-	$	428,270
Owner-occupied CRE		340,846			14,758			193			4,430			-		-		360,227
AG production		31,026			3,191			70			480			-		-		34,767
AG real estate		41,747			2,727			-			760			-		-		45,234
CRE investment		173,652			8,137			-			14,090			-		-		195,879
Construction & land development		69,097			4,318			-			1,573			-		-		74,988
Residential construction		22,030			1,102			-			260			-		-		23,392
Residential first mortgage		295,109			1,348			192			3,655			-		-		300,304
Residential junior mortgage		91,123			-			114			94			-		-		91,331
Retail & other		14,515			-			-			-			-		-		14,515
Total loans	$	1,481,099		$	52,214		$	2,702		$	32,892		$	-	$	-	$	1,568,907
Percent of total		94.4	%		3.3	%		0.2	%		2.1	%		-		-		100.0	%

	2015
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	278,118		$	9,267		$	2,490		$	4,544		$	-	$	-	$	294,419
Owner-occupied CRE		176,371			5,072			253			3,589			-		-		185,285
AG production		13,238			1,765			-			15			-		-		15,018
AG real estate		39,958			2,600			-			714			-		-		43,272
CRE investment		74,778			2,020			-			1,913			-		-		78,711
Construction & land development		31,897			4,598			-			280			-		-		36,775
Residential construction		9,792			651			-			-			-		-		10,443
Residential first mortgage		151,835			860			457			1,506			-		-		154,658
Residential junior mortgage		51,736			68			-			163			-		-		51,967
Retail & other		6,513			-			-			-			-		-		6,513
Total loans	$	834,236		$	26,901		$	3,200		$	12,724		$	-	$	-	$	877,061
Percent of total		95.0	%		3.1	%		0.4	%		1.5	%		-		-		100.0	%

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The following table presents impaired loans as of December 31, 2016. For purposes of these impaired loan tables, all PCI loans and all originated nonaccrual loans over $250,000 are included below for December 31, 2016 and 2015. No loans had a related allowance at December 31, 2016, and therefore, the below disclosures were not expanded to include loans with and without a related allowance.

	Total Impaired Loans - 2016
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	338	$	720	$	-	$	348	$	34
Owner-occupied CRE		2,588		4,661		-		2,700		271
AG production		41		163		-		48		6
AG real estate		240		332		-		245		26
CRE investment		12,552		19,695		-		12,982		1,051
Construction & land development		694		2,122		-		752		112
Residential construction		261		1,348		-		287		82
Residential first mortgage		2,204		3,706		-		2,312		190
Residential junior mortgage		299		639		-		209		17
Retail & Other		-		36		-		-		-
Total	$	19,217	$	33,422	$	-	$	19,883	$	1,789

There were no originated impaired loans as of December 31, 2016. All loans in the table above were acquired loans.

The following table presents impaired loans as of December 31, 2015:

	Total Impaired Loans - 2015
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	142	$	142	$	-	$	144	$	10
Owner-occupied CRE		950		1,688		-		1,111		135
AG production		39		53		-		38		4
AG real estate		252		348		-		260		27
CRE investment		1,301		3,109		-		1,432		175
Construction & land development		280		822		-		301		18
Residential construction		-		-		-		-		-
Residential first mortgage		460		1,150		-		515		79
Residential junior mortgage		142		471		-		147		26
Retail & Other		-		12		-		-		1
Total	$	3,566	$	7,795	$	-	$	3,948	$	475

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

As a further breakdown, impaired loans as of December 31, 2015 are summarized by originated and acquired as follows:

	Originated - 2015
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance*		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	-	$	-	$	-	$	-	$	-
Owner-occupied CRE		-		-		-		-		-
AG production		-		-		-		-		-
AG real estate		-		-		-		-		-
CRE investment		387		387		-		387		29
Construction & land development		-		-		-		-		-
Residential construction		-		-		-		-		-
Residential first mortgage		-		-		-		-		-
Residential junior mortgage		-		-		-		-		-
Retail & Other		-		-		-		-		-
Total	$	387	$	387	$	-	$	387	$	29

	Acquired – 2015
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	142	$	142	$	-	$	144	$	10
Owner-occupied CRE		950		1,688		-		1,111		135
AG production		39		53		-		38		4
AG real estate		252		348		-		260		27
CRE investment		914		2,722		-		1,045		146
Construction & land development		280		822		-		301		18
Residential construction		-		-		-		-		-
Residential first mortgage		460		1,150		-		515		79
Residential junior mortgage		142		471		-		147		26
Retail & other		-		12		-		-		1
Total	$	3,179	$	7,408	$	-	$	3,561	$	446

Interest income of $2.0 million, $0.4 million and $0.7 million would have been earned on the year-end nonaccrual loans had they been performing in accordance with their original terms during the years ended December 31, 2016, 2015 and 2014, respectively. Interest of approximately $1.8 million, $0.4 million, and $0.7 million was earned on year-end nonaccrual loans and included in income for each of the years ended December 31, 2016, 2015 and 2014, respectively.

In April 2016, the Baylake merger added PCI loans at a fair value of $20.8 million, net of an initial $13.9 million non-accretable mark. Combining the 2013 and 2016 acquisitions, total PCI loans acquired in aggregate were initially recorded at a fair value of $37.5 million on their respective acquisition dates, net of an initial $26.1 million non-accretable mark and a zero accretable mark. At December 31, 2016, $18.8 million of the $37.5 million remain in impaired loans and $0.4 million of acquired loans have subsequently become impaired, bringing acquired impaired loans to $19.2 million, net of a $14.3 million non-accretable mark and a zero accretable mark.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Non-accretable discount on PCI loans :	Years Ended December 31,
(in thousands)	2016			2015
Balance at beginning of period	$	4,229		$	6,596
Acquired balance, net		13,923			-
Reclassifications from (to) non-accretable		-			-
Accretion to loan interest income		(3,458	)		(1,737	)
Disposals of loans		(367	)		(630	)
Balance at end of period	$	14,327		$	4,229

Troubled Debt Restructurings

At December 31, 2016, there were five loans classified as troubled debt restructurings and nine loans at December 31, 2015. These five loans had a pre-modification balance of $1.3 million and at December 31, 2016, had a balance of $0.8 million. There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during 2016. As of December 31, 2016 there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings. Loans which were considered troubled debt restructurings prior to the acquisitions are not required to be classified as troubled debt restructurings in the Company’s consolidated financial statements unless or until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

NOTE 5.

PREMISES AND EQUIPMENT

Premises and equipment, less accumulated depreciation and amortization, is summarized as follows as of December 31:

(in thousands)	2016		2015
Land	$	5,466	$	3,098
Land improvements		2,656		1,693
Building and improvements		39,598		27,515
Leasehold improvements		4,437		4,331
Furniture and equipment		13,753		10,443
		65,910		47,080
Less accumulated depreciation and amortization		20,048		17,467
Premises and equipment, net	$	45,862	$	29,613

Depreciation and amortization expense amounted to $3.2 million in 2016, $2.4 million in 2015, and $2.3 million in 2014. The Company and certain of its subsidiaries are obligated under non-cancelable operating leases for facilities, certain of which provide for increased rentals based upon increases in cost of living adjustments and other indices.

At December 31, 2016, the approximate minimum annual rentals under these non-cancelable agreements with remaining terms in excess of one year are as follows:

Years Ending December 31,	(in thousands)
2017	$	685
2018		673
2019		656
2020		648
2021		437
Thereafter		682
Total	$	3,781

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 5.

PREMISES AND EQUIPMENT (CONTINUED)

During the second quarter of 2016, a $1.7 million lease termination liability and charge to other expense was recorded due to the closure of a branch, concurrent with the consummation date of the Baylake merger. Payments are expected to continue to the lessor for the remainder of the lease term. Since the remaining lease payments have been recognized against earnings, the remaining lease payments were excluded from the above table.

Total rent expense under leases totaled $0.8 million in 2016, $0.8 million in 2015, and $0.9 million in 2014.

NOTE 6.

GOODWILL AND INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS

A summary of goodwill and other intangibles, as well as the MSR asset, which is included in other assets in the consolidated balance sheets, at December 31 is as follows:

(in thousands)	2016		2015
Goodwill	$	66,743	$	762
Core deposit intangibles		17,101		3,031
Customer list intangibles		4,094		-
Other intangibles		21,195		3,031
Goodwill and other intangibles	$	87,938	$	3,793
MSR asset	$	1,922	$	193

Management periodically reviews the carrying value of its long-lived and 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. The Company’s annual assessments indicated no impairment charge on goodwill or other intangibles was required for 2016 or 2015.

Goodwill : Goodwill was $66.7 million at December 31, 2016 and $0.8 million at December 31, 2015. There were additions to the carrying amount of goodwill in 2016 of $0.4 million related to the financial advisor business acquisition and of approximately $65.5 million related to the Baylake acquisition. See Note 2 for additional information on the 2016 acquisitions.

Other intangible assets : Other intangible assets, consisting of core deposit intangibles (related to branch or bank acquisitions) and customer list intangibles (related to the customer relationships acquired in the 2016 financial advisor business acquisition), are amortized over their estimated finite lives. Due to the 2016 acquisitions, there was an addition to the core deposit intangibles and to customer list intangibles. See Note 2 for additional information on the 2016 acquisitions.

(in thousands)	December 31, 2016			December 31, 2015
Core deposit intangibles:
Gross carrying amount	$	25,345		$	8,086
Accumulated amortization		(8,244	)		(5,055	)
Net book value	$	17,101		$	3,031
Additions during the period	$	17,259		$	-
Amortization during the period	$	3,189		$	1,027

Customer list intangibles:
Gross carrying amount	$	4,363		$	-
Accumulated amortization		(269	)		-
Net book value	$	4,094		$	-
Additions during the period	$	4,363		$	-
Amortization during the period	$	269		$	-

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 6.

GOODWILL AND INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS (CONTINUED)

Mortgage servicing rights : A summary of the MSR asset, which is included in other assets in the consolidated balance sheets, for the periods indicated is as follows:

	Years Ended December 31,
(in thousands)	2016			2015
Balance at beginning of period	$	193		$	-
Additions during the period*		1,908			201
Sale proceeds		(179	)		(8	)
Valuation allowance at end of period		-			-
Net book value at end of period	$	1,922		$	193
*Purchased MSR asset included in period	$	885		$	-
Fair value of MSR asset at end of period	$	2,013			249
Residential mortgage loans serviced for others	$	295,353			34,940
Net book value of MSR asset to loans serviced for others		0.65	%		0.55	%

The Company periodically evaluates its mortgage servicing rights asset for impairment. As of December 31, 2016, the Company’s assessment does not indicate an impairment on the MSR asset carrying value.

The following table shows the estimated future amortization expense for amortizing intangible assets. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of the December 31, 2016. 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,
2017		3,805		385		316
2018		3,254		385		316
2019		2,762		385		316
2020		2,156		385		300
2021		1,763		385		176
Thereafter		3,361		2,169		498
Total	$	17,101	$	4,094	$	1,922

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 7.

OTHER REAL ESTATE OWNED

A summary of OREO, which is included in other assets in the consolidated balance sheets, for the periods indicated is as follows:

	Years Ended December 31,
(in thousands)	2016			2015
Balance at beginning of period	$	367		$	1,966
Transfer of loans at net realizable value to OREO		237			986
Sale proceeds		(1,999	)		(3,632	)
Net gain from sale of OREO		666			1,471
Write-down of OREO		-			(424	)
Acquired balance, net		2,788			-
Balance at end of period	$	2,059		$	367

NOTE 8.

dEPOSITS

Brokered deposits were $20.9 million and $26.7 million at December 31, 2016 and 2015, respectively. The weighted average rate of brokered deposits was 1.39% and 1.27% at December 31, 2016 and 2015, respectively.

At December 31, 2016, the scheduled maturities of time deposits were as follows:

Years Ending December 31,	(in thousands)
2017	$	160,144
2018		76,738
2019		35,913
2020		22,530
2021		6,570
Thereafter		-
	$	301,895

The aggregate amount of time deposits, each with a minimum denomination of $250,000, was $33.0 million and $18.0 million at December 31, 2016 and 2015, respectively.

NOTE 9.

NOTES PAYABLE

The Company had the following notes payable as of December 31:

(in thousands)	2016		2015
Joint Venture note	$	-	$	9,412
FHLB advances		1,000		6,000
Notes Payable	$	1,000	$	15,412

At the completion of the construction of the Company’s headquarters building in 2005 and as part of a joint venture investment related to the building, the Company and the other joint venture partners guaranteed a joint venture note to finance certain costs of the building. The joint venture note was secured by the building, bore a fixed rate of 5.81% and required monthly principal and interest payments until its maturity on June 1, 2016. In April of 2016, this note was refinanced with the Bank and is therefore eliminated through the consolidation process.

The FHLB advances bear fixed rates, require interest-only monthly payments, and mature in February 2018. The weighted average rate of the FHLB advances was 1.17% and 0.83% at December 31, 2016 and 2015, respectively. The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which had a pledged balance of $283.8 million and $154.3 million at December 31, 2016 and 2015, respectively.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 9.

NOTES PAYABLE (CONTINUED)

The following table shows the maturity schedule of the notes payable as of December 31, 2016.

Maturing in:	(in thousands)
2017	$	-
2018		1,000
	$	1,000

The Company has a $10 million line of credit with a third party bank, bearing a variable rate of interest based on one-month LIBOR plus a margin, but subject to a floor rate, with quarterly payments of interest only. At December 31, 2016, the available line was $10 million, the rate was one-month LIBOR plus 2.25% with a 3.25% floor. The outstanding balance was zero at December 31, 2016 and 2015, and the line was not used during 2016 or 2015.

NOTE 10.

JUNIOR SUBORDINATED DEBENTURES

At December 31, 2016 and 2015, the Company’s carrying value of junior subordinated debentures was $24.7 million and $12.5 million, respectively. At December 31, 2016 and 2015, $23.7 million and $12.0 million, respectively, of trust preferred securities qualify as Tier 1 capital.

In July 2004, Nicolet Bankshares Statutory Trust I (the “Nicolet Trust”) issued $6.0 million of guaranteed preferred beneficial interests (“trust preferred securities”) in the Company’s junior subordinated deferrable interest debentures that qualify as Tier 1 capital under Federal Reserve Board guidelines. All of the common securities of the Nicolet Trust are owned by the Company. The proceeds from the common securities and trust preferred securities were used by the Nicolet Trust to purchase $6.2 million of junior subordinated debentures (the “debentures”) of the Company. The trust preferred securities and debentures pay an 8% fixed rate. The proceeds received by the Company from the sale of the debentures were used for general purposes, primarily to provide capital to the Bank. The Company has the right to redeem the debentures, in whole or in part, on or after July 15, 2009. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. The maturity date of the debentures, if not redeemed, is July 15, 2034. Interest on the debentures is current.

In April 2013, as part of the Mid-Wisconsin acquisition, the Company assumed $10.3 million of junior subordinated debentures issued in December 2005 by Mid-Wisconsin, related to $10.0 million of trust preferred securities issued by a statutory trust, whose common securities were wholly owned by Mid-Wisconsin. These trust preferred securities and debentures mature on December 15, 2035 and have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 2.39% and 1.94% as of December 31, 2016 and 2015, respectively. The debentures may be called at par plus any accrued but unpaid interest, in part or in full, on or after December 15, 2010 or within 120 days of certain events. At acquisition the debentures were recorded at an initial fair market value of $5.8 million, with the initial $4.5 million discount being accreted to interest expense over the remaining life of the debentures. The discount accreted during 2016, 2015 and 2014 was approximately $0.2 million each year, bringing the carrying value of the debentures to $6.5 million, $6.3 million and $6.1 million at December 31, 2016, 2015 and 2014, respectively. Interest on the debentures is current.

As part of the 2016 acquisition of Baylake, the Company assumed $16.6 million of junior subordinated debentures related to $16.1 million of issued trust preferred securities. The trust preferred securities and the debentures mature on September 30, 2036 and have a floating rate of three-month LIBOR plus 1.35% adjusted quarterly. Interest on these debentures is current. The interest rate was 2.35% as of December 31, 2016. The debentures may be redeemed on any interest payment date at par in part or in full, on or after June 30, 2011. At acquisition in April 2016 the debentures were recorded at fair value of $11.8 million, with the discount being accreted to interest expense over the remaining life of the debentures. At December 31, 2016, the carrying value of these junior debentures was $12.0 million.

The debentures represent the sole asset of the respective statutory trusts. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with the trust preferred securities is that the Company, through payment on its debentures, is liable for the distributions and other payments required on the trust preferred securities.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 11.

SUBORDINATED NOTES

On February 17, April 28, and June 29, 2015, the Company placed an aggregate of $12 million in subordinated Notes in private placements with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable quarterly, are callable on or after the fifth anniversary of their respective issuances dates, and qualify for Tier 2 capital for regulatory purposes.

The Company elected to early adopt ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The $180,000 debt issuance costs associated with the $12 million Notes are being amortized on a straight line basis over the first five years, representing the no-call periods, as additional interest expense. As of December 31, 2016 and 2015, $115,000 and $151,000, respectively, of unamortized debt issuance costs remain and are reflected as a deduction to the carrying value of the outstanding debt, respectively.

NOTE 12.

EMPLOYEE AND DIRECTOR BENEFIT PLANS

The Company sponsors two deferred compensation plans, one for certain key management employees and another for directors. Under the management plan, which was amended in 2016, employees designated by the Board of Directors may defer compensation and receive the deferred amounts plus earnings thereon upon termination of employment or at their election. The liability for the cumulative employee contributions and earnings thereon at December 31, 2016 and 2015 totaled approximately $272,000 and $359,000, respectively, and is included in other liabilities in the consolidated balance sheets. Under the director plan participating directors may defer up to 100% of their Board compensation towards the purchase of Company common stock at market prices on a quarterly basis that is held in a Rabbi Trust. During 2016 and 2015, the plan purchased 3,796 and 4,820 shares of Company common stock valued at approximately $138,000 and $143,000, respectively. There were no distributions in 2016. In 2015, common stock valued at approximately $49,000 (and representing 2,670 shares) was distributed. The common stock outstanding and the related director deferred compensation liability are offsetting components of the Company’s equity in the amount of $641,000 at year end 2016 and $502,000 at year end 2015 representing 28,510 shares and 24,561 shares, respectively.

The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 100% of salary compensation on either a pre-tax or after-tax basis, subject to certain IRS limits. Under the plan, the Company matches 100% of participating employee contributions up to 6% of the participant’s gross compensation. The Company contribution vests over five years. The Company can make additional annual discretionary profit sharing contributions, as determined by the Board of Directors. During 2016, 2015 and 2014, the Company’s 401(k) expense was approximately $1.2 million, $0.9 million and $0.8 million, respectively. During 2016, the plan was amended and participants can no longer elect to buy Company common stock within their 401(k) portfolio. During 2015 participants purchased in the aggregate a net 963 shares of Company common stock valued at approximately $31,000.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 13.

STOCK-BASED COMPENSATION

At December 31, 2016, the Company had three stock-based plans. These plans are administered by a committee of the Board of Directors and provide for the granting of various equity awards in accordance with the plan documents to certain officers, employees and directors of the Company.

The Company’s 2002 Stock Incentive Plan initially covered 125,000 shares of the Company’s common stock. The Company, with subsequent shareholder approval, revised this plan to allow for 450,000 additional shares in 2005 and 600,000 additional shares in 2008. A total of 1,175,000 shares have been reserved for potential stock options under the 2002 Plan.

The Company also adopted, with subsequent shareholder approval, the 2011 Long Term Incentive Plan covering up to 500,000 shares of the Company’s common stock. The Company, with subsequent shareholder approval, revised this plan to allow for 1,000,000 additional shares in 2016. A total of 1,500,000 shares have been reserved for potential stock-based awards. This plan provides for certain stock-based awards such as, but not limited to, stock options, stock appreciation rights and restricted common stock, as well as cash performance awards.

As part of the 2016 Baylake acquisition, the Company assumed sponsorship of the Baylake Corp. 2010 Equity Incentive Plan and also assumed 91,701 stock options issued under such plan. The Company amended the plan to rename it the Nicolet Bankshares, Inc. 2010 Equity Incentive Plan and to provide that no further awards may be granted under this plan.

In general, for stock options granted the exercise price will not be less than the fair market value of the Company’s common stock on the date of grant, the options will become exercisable based upon vesting terms determined by the committee, and the options will expire ten years after the date of grant. In general, for restricted stock granted the shares are issued at the fair market value of the Company’s common stock on the date of grant, are restricted as to transfer, but are not restricted as to dividend payments or voting rights, and the transfer restrictions lapse over time, depending upon vesting terms provided for in the grant and contingent upon continued employment.

As of December 31, 2016, approximately 1,100,000 shares were available for grant under these plans (collectively the “Stock Incentive Plans”).

Activity of the Stock Incentive Plans is summarized in the following tables:

Stock Options	Option Shares Outstanding			Weighted Average Exercise Price		Exercisable Shares		Weighted Average Exercise Price
Balance – December 31, 2013		793,157		$	17.86		600,846	$	18.25
Granted		221,000			23.80
Exercise of stock options		(39,548	)		16.01
Forfeited		(6,750	)		16.80
Balance – December 31, 2014		967,859		$	19.30		630,121	$	18.24
Granted		162,000			26.66
Exercise of stock options*		(381,505	)		18.00
Forfeited		(2,350	)		19.61
Balance – December 31, 2015		746,004		$	21.56		325,979	$	19.09
Granted		170,500			36.86
Options assumed in acquisition		91,701			21.03
Exercise of stock options*		(84,723	)		20.98
Forfeited		(1,456	)		21.71
Balance – December 31, 2016		922,026		$	24.39		439,639	$	19.97

* 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, and accordingly 10,244 shares and 167,779 shares were surrendered in 2016 and 2015, respectively, and no shares surrendered in 2014.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 13.

STOCK-BASED COMPENSATION (CONTINUED)

Options outstanding at December 31, 2016 are exercisable at option prices ranging from $16.00 – 38.10. There are 301,953 options outstanding in the range from $16.00 - $20.00, 252,989 options outstanding in the range from $20.01 - $25.00, 160,211 options outstanding in the range from $25.01 - $30.00, and 206,873 options outstanding in the range from $30.01 - $38.10. At December 31, 2016, the exercisable options have a weighted average remaining contractual life of approximately five years and a weighted average exercise price of $19.97.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The total intrinsic value of options exercised in 2016, 2015 and 2014 was approximately $1.3 million, $5.2 million, and $0.2 million, respectively. The total intrinsic value of exercisable shares at December 31, 2016 was approximately $12.2 million.

Restricted Stock	Restricted Shares Outstanding			Weighted Average Grant Date Fair Value
Balance – December 31, 2013		62,363		$	16.50
Granted		33,136			23.80
Vested*		(29,268	)		19.26
Forfeited		-			-
Balance – December 31, 2014		66,231		$	18.62
Granted		-			-
Vested*		(29,261	)		19.26
Forfeited		(280	)		16.50
Balance – December 31, 2015		36,690		$	18.70
Granted		31,466			33.68
Vested*		(25,207	)		23.58
Forfeited		-			-
Balance – December 31, 2016		42,949		$	26.80

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding at the minimum statutory withholding rate, and accordingly 7,851 shares, 7,715 shares and 5,821 shares were surrendered during 2016, 2015 and 2014, respectively.

The Company recognized $1.6 million, $1.2 million and $1.0 million of stock-based employee compensation expense during the years ended December 31, 2016, 2015 and 2014, respectively, associated with its stock equity awards. As of December 31, 2016, there was approximately $4.5 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately four years.

NOTE 14.

STOCKHOLDERS’ EQUITY

During 2014, a common stock repurchase program was authorized to use up to $12 million to repurchase up to 625,000 shares of Nicolet common stock as an alternative use of capital. On July 21, 2015, a modification to the current stock repurchase program was approved, adding $6 million more to repurchase up to 175,000 more shares of its common stock. On January 17, 2017, the stock repurchase program was modified again, adding $12 million more to repurchase up to 250,000 more shares of its common stock. This brings the total authorization to $30 million to repurchase up to 1,050,000 shares of outstanding common stock. Through December 31, 2016, $14.2 million was used to repurchase and cancel 518,609 shares at a weighted average price of $27.31 per share including commissions.

On April 29, 2016, in connection with its acquisition of Baylake, the Company issued 4,344,243 shares of its common stock for consideration of $163.3 million, and recorded $1.2 million consideration for assumed stock options. Approximately $0.3 million of common stock issuance expenses related to the transaction were incurred and charged against additional paid in capital. In connection with the financial advisor business acquisition that completed April 1, 2016, the Company issued $2.6 million in common stock consideration. On February 24, 2016, Nicolet’s common stock moved off the OTCBB and began trading on the Nasdaq Capital Market, also under the trading symbol of “NCBS.”

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 15.

INCOME TAXES

The current and deferred amounts of income tax expense were as follows:

(in thousands)	2016		2015		2014
Current	$	6,033	$	5,486	$	4,675
Deferred		3,338		603		(68	)
Income tax expense	$	9,371	$	6,089	$	4,607

The differences between the income tax expense recognized and the amount computed by applying the statutory federal income tax rate to the income before income taxes, less noncontrolling interest, for the years ended December 31, 2016, 2015 and 2014 are included in the following table.

(in thousands)	2016			2015			2014
Tax on pretax income, less noncontrolling interest, at statutory rates	$	9,742		$	5,956		$	4,949
State income taxes, net of federal effect		1,339			980			594
Tax-exempt interest income		(769	)		(430	)		(317	)
Non-deductible interest disallowance		18			15			18
Increase in cash surrender value life insurance		(452	)		(338	)		(289	)
Non-deductible business entertainment		106			94			81
Non-deductible merger expenses		18			106			-
Stock-based employee compensation		(35	)		20			62
Other, net		(596	)		(314	)		(491	)
Income tax expense	$	9,371		$	6,089		$	4,607

The net deferred tax asset includes the following amounts of deferred tax assets and liabilities at December 31:

(in thousands)	2016			2015
Deferred tax assets:
ALLL	$	13,975		$	6,360
Net operating loss carryforwards		3,058			2,603
Credit carryforwards		981			13
Other real estate		1,350			112
Compensation		3,727			804
Other		949			190
Unrealized loss on securities AFS		1,743			-
Total deferred tax asset		25,783			10,082
Deferred tax liabilities:
Premises and equipment		(681	)		(830	)
Prepaid expenses		(808	)		(327	)
Investment securities		(2,856	)		(148	)
Core deposit and other intangibles		(6,125	)		(378	)
Estimated section 382 limitation		(561	)		(980	)
Purchase accounting adjustments to liabilities		(3,192	)		(1,561	)
Other		(621	)		-
Unrealized gain on securities AFS		-			(626	)
Total deferred tax liability		(14,844	)		(4,850	)
Net deferred tax asset	$	10,939		$	5,232

A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. At December 31, 2016 and 2015, no valuation allowance was determined to be necessary.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 15.

INCOME TAXES (CONTINUED)

At December 31, 2016, the Company had a federal and state net operating loss carryforward of $5.3 million and $23.4 million, respectively. Of these amounts, the entire $5.3 million of federal net operating loss carryover and $21.0 million of the state net operating loss carryover were the result of the Company’s mergers with Mid-Wisconsin and Baylake. Both the federal and state net operating loss carryovers resulting from the mergers have been included in the IRC section 382 limitation calculation and are being limited to the overall amount expected to be realized. The full $2.4 million state net operating loss carried over from the Company’s regular operations is expected to be utilized over the next 17 years and will not expire. The Company’s federal income tax returns are open and subject to examination from the 2013 tax return year and forward. The years open to examination by state and local government authorities varies by jurisdiction.

NOTE 16.

COMMITMENTS AND CONTINGENCIES

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments.

A summary of the contract or notional amount of the Company’s exposure to off-balance-sheet risk as of December 31 is as follows:

(in thousands)	2016		2015
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	554,980	$	302,591
Financial letters of credit		12,444		2,610
Standby letters of credit		4,898		4,314

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are generally unsecured.

Financial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Financial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Both of these guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. For standby letters of credit, in the event the customer does not perform in accordance with the terms of the agreement with the third-party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount. If the commitment is funded, the Company would be entitled to seek recovery from the customer. At December 31, 2016 and 2015, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.

The Company has federal funds accommodations with other financial institutions where funds may be borrowed on a short-term basis at the market rate in effect at the time of the borrowing. The total federal funds accommodations as of December 31, 2016 and 2015 were $75 million. At December 31, 2016 and 2015, the Company had no outstanding balance on these lines.

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 17.

RELATED PARTY TRANSACTIONS

The Company conducts transactions, in the normal course of business, with its directors and officers, including companies in which they have a beneficial interest. It is the Company’s policy to comply with federal regulations that require that these transactions with directors and executive officers be made on substantially the same terms as those prevailing at the time made for comparable transactions to other persons. Related party loans totaled approximately $54.0 million and $25.4 million at December 31, 2016 and 2015, respectively.

During 2004, the Company entered into a joint venture (50% ownership by the Company) with the Firm in connection with the building of the Company’s new headquarters facility. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. During 2016, 2015 and 2014, the Bank incurred approximately $1.1 million, $1.2 million and $1.2 million, respectively, in rent expense to the joint venture. In August 2011, the Company opened a new branch location in a facility which is leased from an entity owned by the Firm on terms considered by management to be arms-length and incurred less than $120,000 annually of rent expense on this facility during 2016, 2015, and 2014. In October 2013, the Company entered into a lease for a new branch location in a facility owned by a different member of the Company’s Board on terms considered by management to be arms-length and incurred less than $120,000 annually of rent expense on this facility during 2016, 2015, and 2014. In February 2016, the Company entered into a lease agreement for a location owned by a relative of a management team member. The building is to be used by a subsidiary of the Company on terms considered to be arms-length and incurred less than $120,000 of lease expense for the partial year. This amount is expected to exceed $120,000 in future years based on a full year of lease expense. This same individual received approximately $420,000 for his services to the Company during 2016. In addition, a payment of approximately $400,000 was made to another relative of the management team member for his services to the Company.

NOTE 18.

GAIN ON SALE OR WRITE-DOWN OF ASSETS, NET

Components of the net gain on sale or write-down of assets are as follows for the years ended December 31:

(in thousands)	2016			2015			2014
Gain on sale of securities, net	$	78		$	625		$	341
Gain on sale of OREO, net		666			1,471			842
Write-down of OREO		-			(424	)		-
Write-down of other investment		(500	)		-			-
Gain (loss) on sale or disposition of other assets, net		(190	)		54			(644	)
Gain on sale or write-down of assets, net	$	54		$	1,726		$	539

NOTE 19.

REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 19.

REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS (CONTINUED)

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total, Tier 1 and common equity Tier 1 (“CET1”) capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2016 and 2015, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2016 and 2015, the most recent notifications from the regulatory agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, an institution must maintain minimum Total risk-based, Tier 1 risk-based, CET1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since these notifications that management believes have changed the Bank’s category.

The Company’s and the Bank’s actual regulatory capital amounts and ratios as of December 31, 2016 and 2015 are presented in the following table.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions (2)
(dollars in thousands)	Amount		Ratio (1)			Amount		Ratio (1)			Amount		Ratio (1)
As of December 31, 2016:
Company
Total risk-based capital	$	249,723		13.9	%	$	144,195		8.0	%
Tier 1 risk-based capital		226,018		12.5			108,146		6.0
Common equity Tier 1 capital		202,313		11.2			81,110		4.5
Leverage		226,018		10.3			87,566		4.0

Bank
Total risk-based capital	$	217,682		12.1	%	$	144,322		8.0	%	$	180,403		10.0	%
Tier 1 risk-based capital		205,862		11.4			108,242		6.0			144,322		8.0
Common equity Tier 1 capital		205,862		11.4			81,181		4.5			117,262		6.5
Leverage		205,862		9.4			87,329		4.0			109,161		5.0

As of December 31, 2015:
Company
Total risk-based capital	$	140,691		14.8	%	$	75,972		8.0	%
Tier 1 risk-based capital		118,535		12.5			56,979		6.0
Common equity Tier 1 capital		94,346		9.9			42,697		4.5
Leverage		118,535		10.0			47,627		4.0

Bank
Total risk-based capital	$	122,206		13.1	%	$	74,903		8.0	%	$	93,629		10.0	%
Tier 1 risk-based capital		111,899		12.0			56,178		6.0			74,903		8.0
Common equity Tier 1 capital		111,899		12.0			42,133		4.5			60,859		6.5
Leverage		111,899		9.5			47,036		4.0			58,794		5.0

(1)

The Total risk-based capital ratio is defined as Tier 1 capital plus tier 2 capital divided by total risk-weighted assets. The Tier 1 risk-based capital ratio is defined as Tier 1 capital divided by total risk-weighted assets. CET1 risk-based capital ratio is defined as Tier 1 capital, with deductions for goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities, and limitations on the inclusion of deferred tax assets, mortgage servicing assets and investments in other financial institutions, in each case as provided further in the rules, divided by total risk-weighted assets. The Leverage ratio is defined as Tier 1 capital divided by the most recent quarter’s average total assets as adjusted.

(2)

Prompt corrective action provisions are not applicable at the bank holding company level.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 19.

REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS OF DIVIDENDS (CONTINUED)

A source of income and funds for the Company are dividends from the Bank. Dividends declared by the Bank that exceed the retained net income for the most current year plus retained net income for the preceding two years must be approved by Federal regulatory agencies. During the third quarter of 2016, the Bank requested approval from the regulatory agencies to pay a $15 million special dividend from Bank surplus and it was approved. At December 31, 2016, the Bank could pay dividends of approximately $1.1 million without seeking regulatory approval.

NOTE 20.

FAIR VALUE OF FINANCIAL INFORMATION

As provided for by accounting standards, 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.

Disclosure of the fair value of financial instruments, whether recognized or not recognized in the consolidated balance sheet, is required for those instruments for which it is practicable to estimate that value, with the exception of certain financial instruments and all nonfinancial instruments as provided for by the accounting standards. For financial instruments recognized at fair value in the consolidated balance sheets, the fair value disclosure requirements also apply.

Fair value (i.e. the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement versus an entity-specific measurement.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented:

		Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:		Total		Level 1		Level 2		Level 3
(in thousands)
U.S. government sponsored enterprises	$	1,963	$	-	$	1,963	$	-
State, county and municipals		187,243		-		186,717		526
Mortgage-backed securities		159,129		-		159,076		53
Corporate debt securities		12,169		-		3,640		8,529
Equity securities		4,783		4,783		-		-
Securities AFS, December 31, 2016	$	365,287	$	4,783	$	351,396	$	9,108


U.S. government sponsored enterprises	$	294	$	-	$	294	$	-
State, county and municipals		105,021		-		104,495		526
Mortgage-backed securities		61,464		-		61,464		-
Corporate debt securities		1,140		-		-		1,140
Equity securities		4,677		4,677		-		-
Securities AFS, December 31, 2015	$	172,596	$	4,677	$	166,253	$	1,666

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 20.

FAIR VALUE OF FINANCIAL INFORMATION (CONTINUED)

The following table presents the changes in Level 3 assets measured at fair value on a recurring basis during the years ended December 31:

		Securities AFS
Level 3 Fair Value Measurements ($ in thousands):		2016		2015
(in thousands)
Balance at beginning of year	$	1,666	$	796
Purchases		2,250		920
Acquired balance		5,192		-
Sales/settlements		-		(50	)
Balance at end of year	$	9,108	$	1,666

The following is a description of the valuation methodologies used by the Company for the items noted in the tables above. Where quoted market prices on securities exchanges are available, the investment is classified as Level 1. Level 1 investments primarily include exchange-traded equity securities available for sale. 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 mortgage-related securities and obligations of state, county and municipals. 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 corporate debt securities. At December 31, 2016 and 2015, 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 the corporate debt securities.

The following table presents the Company’s collateral-dependent impaired loans and OREO measured at fair value on a nonrecurring basis as of December 31, 2016 and 2015, aggregated by the level in the fair value hierarchy within which those measurements fall.

				Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:		Total		Level 1		Level 2		Level 3
(in thousands)
December 31, 2016:
Impaired loans	$	19,217	$	-	$	-	$	19,217
OREO		2,059		-		-		2,059

December 31, 2015:
Impaired loans	$	3,566	$	-	$	-	$	3,566
OREO		367		-		-		367

The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 20.

FAIR VALUE OF FINANCIAL INFORMATION (CONTINUED)

The Company is required under accounting guidance to report the fair value of all financial instruments in the consolidated balance sheets, including those financial instruments carried at cost. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2016 and 2015 are shown below.

December 31, 2016
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	129,103	$	129,103	$	129,103	$	-	$	-
Certificates of deposit in other banks		3,984		3,992		-		3,992		-
Securities AFS		365,287		365,287		4,783		351,396		9,108
Other investments		17,499		17,499		-		15,779		1,720
Loans held for sale		6,913		6,968		-		6,968		-
Loans, net		1,557,087		1,568,676		-		-		1,568,676
BOLI		54,134		54,134		54,134		-		-
MSR asset		1,922		2,013		-		-		2,013

Financial liabilities:
Deposits	$	1,969,986	$	1,969,973	$	-	$	-	$	1,969,973
Notes payable		1,000		1,002		-		1,002		-
Junior subordinated debentures		24,732		24,095		-		-		24,095
Subordinated notes		11,885		11,459		-		-		11,459

December 31, 2015
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	83,619	$	83,619	$	83,619	$	-	$	-
Certificates of deposit in other banks		3,416		3,416		-		3,416		-
Securities AFS		172,596		172,596		4,677		166,253		1,666
Other investments		8,135		8,135		-		5,995		2,140
Loans held for sale		4,680		4,755		-		4,755		-
Loans, net		866,754		865,027		-		-		865,027
BOLI		28,475		28,475		28,475		-		-
MSR asset		193		249		-		-		249

Financial liabilities:
Deposits	$	1,056,417	$	1,057,614	$	-	$	-	$	1,057,614
Notes payable		15,412		18,354		-		18,354		-
Junior subordinated debentures		12,527		11,900		-		-		11,900
Subordinated notes		11,849		11,414		-		-		11,414

Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, BOLI, and nonmaturing deposits. For those financial instruments not previously disclosed the following is a description of the evaluation methodologies used.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 20.

FAIR VALUE OF FINANCIAL INFORMATION (CONTINUED)

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.

Securities AFS and other investments : Fair values for securities are based on quoted market prices on securities exchanges, when available, which is considered a Level 1 measurement. If quoted market prices are not available, fair value is generally determined using pricing models widely used in the industry, quoted market prices of securities with similar characteristics, or discounted cash flows, which is considered a Level 2 measurement, and Level 3 was deemed appropriate for auction rate securities (for which there has been no liquid market since 2008) and corporate debt securities which include trust preferred security instruments. The corporate debt securities were acquired in the Mid-Wisconsin acquisition and valued based on a discounted cash flow analysis and the underlying credit quality of the issuer. The fair value approximates the cost at acquisition. For other investments, the carrying amount of Federal Reserve Bank, Bankers Bank, Farmer Mac, 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.

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.

MSR asset: To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of the MSR asset related to a stratum exceeds its fair value, the stratum is recorded at fair value, generally through a valuation allowance. 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. As a result, the fair value measurement of mortgage servicing rights is considered a Level 3 measurement and represents an income approach to fair value.

Deposits : The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and non-interest 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.

Notes payable : 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 values of remaining notes payable are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality which represents a Level 2 measurement.

Junior subordinated debentures : The fair values of junior subordinated debentures are estimated based on an evaluation 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.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 20.

FAIR VALUE OF FINANCIAL INFORMATION (CONTINUED)

Subordinated notes : The fair values of subordinated notes are estimated based on an evaluation 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.

Off-balance-sheet instruments : The estimated fair value of letters of credit at December 31, 2016 and 2015 was insignificant. Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at December 31, 2016 and 2015.

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.

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 21.

PARENT COMPANY ONLY FINANCIAL INFORMATION

Condensed parent company only financial statements of Nicolet Bankshares, Inc. follow:

Balance Sheets	December 31,
(in thousands)	2016			2015
Assets
Cash and due from subsidiary	$	28,265		$	13,632
Investments		6,361			6,754
Investments in subsidiaries		284,416			115,504
Goodwill		(2,850	)		-
Other assets		398			342
Total assets	$	316,590		$	136,232

Liabilities and Stockholders’ Equity
Junior subordinated debentures	$	24,732		$	12,527
Subordinated debt		11,885			11,849
Other liabilities		4,026			2,355
Stockholders’ equity		275,947			109,501
Total liabilities and stockholders’ equity	$	316,590		$	136,232

Statements of Income	Years ended December 31,
(in thousands)	2016			2015			2014
Interest income	$	58		$	90		$	68
Interest expense		1,951			1,375			875
Net interest expense		(1,893	)		(1,285	)		(807	)
Dividend income from subsidiaries		35,500			11,000			9,060
Operating expense		(202	)		(258	)		(164	)
Gain (loss) on investments, net		(500	)		228			341
Bargain purchase gain		-			-			-
Income tax benefit		833			375			135
Earnings before equity in undistributed income of subsidiaries		33,738			10,060			8,565
Equity in undistributed income (loss) of subsidiaries		(15,276	)		1,368			1,384
Net income	$	18,462		$	11,428		$	9,949

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 21.

PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)

Statements of Cash Flows	Years ended December 31,
(in thousands)	2016			2015			2014
Cash Flows From Operating Activities:
Net Income attributable to Nicolet Bankshares, Inc.	$	18,462		$	11,428		$	9,949
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discounts		353			228			199
Gain (loss) on investments, net		500			(228	)		(341	)
Change in other assets and liabilities, net		395			(160	)		506
Equity in undistributed earnings of subsidiaries, net of dividends received		15,276			(1,368	)		(1,444	)
Net cash provided by operating activities		34,986			9,900			8,869
Cash Flows from Investing Activities:
Proceeds from sale of investments		565			378			531
Purchases of investments		-			(1,774	)		(791	)
Capital infusion to subsidiary		-			-			(1,200	)
Net cash from business combinations		(608	)		-			-
Net cash used by investing activities		(43	)		(1,396	)		(1,460	)
Cash Flows From Financing Activities:
Purchase and cancellation of treasury stock		(5,201	)		(4,381	)		(5,770	)
Proceeds from issuance of common stock, net		1,900			1,721			887
Capitalized issuance costs, net		(260	)		-			-
Proceeds from issuance of subordinated debt, net		-			11,820			-
Redemption of preferred stock (SBLF)		(12,200	)		(12,200	)		-
Repayment of long-term debt		(3,916	)
Noncontrolling interest in joint venture		-			-			60
Cash dividends paid on preferred stock		(633	)		(212	)		(244	)
Net cash used by financing activities		(20,310	)		(3,252	)		(5,067	)
Net increase in cash		14,633			5,252			2,342
Beginning cash		13,632			8,380			6,038
Ending cash	$	28,265		$	13,632		$	8,380

NOTE 22.

SALE OF BRANCHES

On August 7, 2015, the Company completed the sale of its Neillsville and Fairchild, WI branches, which reduced deposits by $34 million, loans by $13 million, fixed assets by $1 million and cash by $20 million, and resulted in $0.1 million recorded in miscellaneous income.

NOTE 23.

PENDING MERGER TRANSACTION

On November 4, 2016 Nicolet announced the signing of a definitive merger agreement (“Merger Agreement”) with First Menasha Bancshares, Inc. (“First Menasha”) under which First Menasha will merge with and into Nicolet to create the largest community bank in the Fox Valley area of Wisconsin. Based upon the financial results as of December 31, 2016, the combined company would have total assets of approximately $2.8 billion, deposits of $2.4 billion and loans of $1.9 billion. The merger transaction is expected to close in April 2017 and is subject to customary closing conditions, including approval by shareholders of First Menasha and regulatory approvals.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Nicolet Bankshares, Inc.

Green Bay, Wisconsin

We have audited the accompanying consolidated balance sheets of Nicolet Bankshares, Inc . and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management . Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

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.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nicolet Bankshares, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Atlanta, Georgia

March 10, 2017

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, under the supervision, and with the participation, of our Chief Executive Officer and President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date of such evaluation, the Chief Executive Officer and President and the Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to Nicolet that is required to be included in Nicolet’s periodic filings with the SEC. During the fourth quarter of 2016 there were no significant changes in the Company’s internal controls that materially affected, or are reasonably likely to materially affect, the Company’s internal control 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

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

As of December 31, 2016, management assessed the effectiveness of the Company’s internal control over financial reporting based on criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in 2013. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2016, was effective.

Porter Keadle Moore, LLC, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, is included under the heading “Report of Independent Registered Public Accounting Firm.”

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Code of Ethics

The Company has adopted a Code of Ethics that applies to its senior financial officers. A copy is available, without charge, upon telephonic or written request addressed to Ann K. Lawson, Chief Financial Officer, Nicolet Bankshares, Inc., 111 North Washington Street, Green Bay, Wisconsin 54301, telephone (920) 430-1400.

The remaining information required in Part III, Item 10 is incorporated by reference to the registrant’s definitive proxy statement for the 2017 Annual Meeting of Shareholders.

ITEM 11.

EXECUTIVE COMPENSATION

The information required in Part III, Item 11 is incorporated by reference to the registrant’s definitive proxy statement for the 2017 Annual Meeting of Shareholders.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) (a)		Weighted average exercise price of outstanding options, warrants and rights (2) (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Plan Category
Equity compensation plans approved by security holders		964,975	$	24.39		1,104,498
Total at December 31, 2016		964,975	$	24.39		1,104,498

(1) Includes 42,949 shares potentially issuable upon the vesting of outstanding restricted stock.

(2) The weighted average exercise price relates only to the exercise of outstanding options included in column (a).

The remaining information required in Part III, Item 12 is incorporated by reference to the registrant’s definitive proxy statement for the 2017 Annual Meeting of Shareholders.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required in Part III, Item 13 is incorporated by reference to the registrant’s definitive proxy statement for the 2017 Annual Meeting of Shareholders.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required in Part III, Item 14 is incorporated by reference to the registrant’s definitive proxy statement for the 2017 Annual Meeting of Shareholders.

100

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

EXHIBIT INDEX
Exhibit		Description of Exhibit
2.1		Agreement and Plan of Merger Agreement by and between Nicolet Bankshares, Inc. and Baylake Corp., dated September 8, 2015. (1)
2.2		Agreement and Plan of Merger Agreement by and between Nicolet Bankshares, Inc. and First Menasha Bancshares, Inc., dated November 3, 2016. (2)
3.1		Amended and Restated Articles of Incorporation of Nicolet Bankshares, Inc. (3)
3.2		Amended and Restated Bylaws of Nicolet Bankshares, Inc. (4)
4.1		Form of Common Stock Certificate of Nicolet Bankshares, Inc. (5)
4.7		Form of Subordinated Note. (6)
4.8		First Supplemental Indenture, dated April 29, 2016, by and among Nicolet, Baylake Corp. and Wilmington Trust Company. (7)
10.1		[Reserved]
10.2		[Reserved]
10.3		[Reserved]
10.4†		Nicolet Bankshares, Inc. 2002 Stock Incentive Plan, as amended, and forms of award documents. (8)
10.5†		Nicolet Bankshares, Inc. 2011 Long Term Incentive Plan, as amended and restated effective April 29, 2016 and approved by the shareholders of Nicolet Bankshares, Inc. on August 10, 2016 and forms of award documents. (9)
10.6†		Nicolet National Bank 2002 Deferred Compensation Plan, as amended.
10.7†		Nicolet National Bank 2009 Deferred Compensation Plan for Non-Employee Directors. (5)
10.8†		Employment Agreement, dated April 29, 2016, by and among the Registrant, Nicolet National Bank and Michael E. Daniels. (10)
10.9†		Employment Agreement, dated April 29, 2016, by and among the Registrant, Nicolet National Bank and Robert B. Atwell. (11)
10.10		Lease, dated May 31, 2000, between Washington Square Green Bay, LLC and Green Bay Financial Corporation D/B/A/ Nicolet National Bank, as amended. (5)
10.11†		Employment Agreement, dated April 29, 2016, by and among the Registrant, Nicolet National Bank and Robert J. Cera. (12)
10.12†		Employment Agreement, dated February 4, 2016, by and among the Registrant, Nicolet National Bank and Patrick J. Madson
10.13†		Nicolet Bankshares, Inc. 2010 Equity Incentive Plan (formerly the Baylake Corp. 2010 Equity Incentive Plan), and forms of award documents. (13)
10.14†		Agreement for Separation of Employment, dated May 24, 2016, by and among the Registrant, Nicolet National Bank and Robert J. Cera (14)
21.1		Subsidiaries of Nicolet Bankshares, Inc.
23.1		Consent of Porter Keadle Moore, LLC.
31.1		Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of CEO Pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2		Certification of CFO Pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101*		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text.

* Indicates information that is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

† Denotes a management compensatory agreement.

101

(1) Incorporated by reference to the exhibit of the same number in the Registrant’s Registration Statement on Form S-4, filed on November 24, 2015 (Regis. No. 333-208192).

(2) Incorporated by reference to Exhibit 2.1 in the Registrant’s Registration Statement on Form S-4, filed on December 13, 2016 (Regis. No. 333-215057).

(3) Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed on March 12, 2014 (File No. 333-90052).

(4) Incorporated by reference to Exhibit 3.1 in the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).

(5) Incorporated by reference to the exhibit of the same number in the Registrant’s Registration Statement on Form S-4, filed on February 1, 2013 (Regis. No. 333-186401).

(6) Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 17, 2015 (File No. 333-90052).

(7) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).

(8) Incorporated by reference to the Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed on March 9, 2015 (File No. 333-90052).

(9) Incorporated by reference to Appendix A of the Registrant’s Proxy Statement filed June 30, 2016.

(10) Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).

(11) Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).

(12) Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).

(13) Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on May 2, 2016 (File No. 001-37700).

(14) Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 26, 2016 (File No. 001-37700).

102

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

March 10, 2017	By:	/s/ Robert B. Atwell
		Robert B. Atwell, Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

March 10, 2017

/s/ Robert B. Atwell		/s/ Susan L. Merkatoris
Robert B. Atwell		Susan L. Merkatoris
Chairman and Chief Executive Officer		Director
(Principal Executive Officer)

/s/ Ann K. Lawson		/s/ William D. Murphy
Ann K. Lawson		William D. Murphy
Chief Financial Officer		Director
(Principal Financial and Accounting Officer)

/s/ Robert W. Agnew		/s/ Randy J. Rose
Robert W. Agnew		Randy J. Rose
Director		Director

/s/ Michael E. Daniels		/s/ Elyse Mollner Stackhouse
Michael E. Daniels		Elyse Mollner Stackhouse
President and Chief Operating Officer, Director		Director

/s/ John N. Dykema		/s/ Robert J. Weyers
John N. Dykema		Robert J. Weyers
Director		Director

/s/ Terrence R. Fulwiler
Terrence R. Fulwiler
Director

/s/ Christopher J. Ghidorzi
Christopher J. Ghidorzi
Director

/s/ Thomas L. Herlache
Thomas L. Herlache
Director

/s/ Louis J. “Rick” Jeanquart
Louis J. “Rick” Jeanquart
Director

/s/ Donald J. Long, Jr.
Donald J. Long, Jr.
Director

103

Exhibit 10.6

NICOLET NATIONAL BANK

DEFERRED COMPENSATION PLAN

(As Amended and Restated)

NICOLET NATIONAL BANK

DEFERRED COMPENSATION PLAN

(As Amended and Restated)

TABLE OF CONTENTS

		PAGE

SECTION 1	DEFINITIONS	1

SECTION 2	ELIGIBILITY	6

SECTION 3	CONTRIBUTIONS	8

SECTION 4	CREDITING ACCOUNTS	8

SECTION 5	VESTING	9

SECTION 6	DISTRIBUTION OF ACCOUNTS	10

SECTION 7	ADMINISTRATION OF THE PLAN	14

SECTION 8	CLAIM REVIEW PROCEDURE	16

SECTION 9	LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS	18

SECTION 10	LIMITATION OF RIGHTS	18

SECTION 11	AMENDMENT TO OR TERMINATION OF THE PLAN	19

SECTION 12	ADOPTION OF PLAN BY AFFILIATES	19

SECTION 13	MISCELLANEOUS	19

NICOLET NATIONAL BANK

DEFERRED COMPENSATION PLAN

(As Amended and Restated)

THIS INDENTURE is made on the 20 ^th day of September, 2016 (the “Restatement Effective Date”) by Nicolet National Bank, a national banking association organized under the laws of the United States (the “Primary Sponsor”).

W I T N E S S E T H :

WHEREAS, the Primary Sponsor established by indenture the Nicolet National Bank Deferred Compensation Plan, effective as of January 1, 2002, which instrument was amended by the First Amendment thereto dated December 21, 2010 (as so amended, the “Original Plan”).

WHEREAS, the Primary Sponsor now desires to amend and restate the Original Plan to provide eligible employees with enhanced deferral opportunities and for a variety of other reasons (as so amended and restated, the “Plan”).

WHEREAS, the Plan is designed as a “nonqualified deferred compensation plan,” within the meaning of Section 409A(d) of the Internal Revenue Code, which provides deferred compensation opportunities for a select group of management or highly compensated employees through both elective deferrals of pay by participants and discretionary employer contributions under the Plan.

WHEREAS, the Primary Sponsor intends that the Plan, as amended and restated, continue to qualify as a nonqualified deferred compensation plan that is compliant with the requirements of Section 409A of the Internal Revenue Code and continue as a plan which is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974.

NOW, THEREFORE, the Primary Sponsor does hereby amend and restate the Plan, effective as of the Restatement Effective Date, to read as follows:

SECTION 1

DEFINITIONS

Whenever used herein, the masculine pronoun shall be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise, and the following words and phrases shall, when used herein, have the meanings set forth below:

1.1 “ Account ” means the bookkeeping accounts established and maintained by the Plan Administrator to reflect the interest of each Participant under the Plan in contributions credited to a Participant pursuant to Section 3, as adjusted to reflect credits or charges pursuant

to Sections 4 and Section 13.3. Each Account may include one or more of the following subaccounts:

(a) Retirement Account . Each Retirement Account reflects credits to a Participant’s Account (i) made on his or her behalf as Deferral Contributions pursuant to Sections 3.1 from and after January 1, 2017, to the extent Deferral Contributions are not designated for allocation to a Fixed Period Account and (ii) made on his or her behalf as Nonelective Contributions pursuant to Section 3.2 from and after the Restatement Effective Date, as adjusted to reflect designated rates of return and other credits or charges. Each Retirement Account may consist of a Deferral Contributions Retirement Subaccount and a Nonelective Contributions Retirement Subaccount to the extent both Deferral Contributions and Nonelective Contributions are credited to a Retirement Account.

(b) Fixed Period Account . Each Fixed Period Account reflects credits to a Participant’s Account made on his or her behalf as Deferral Contributions pursuant to Sections 3.1 from and after January 1, 2017, to the extent Deferral Contributions are designated for allocation to the Fixed Period Account, as adjusted to reflect designated rates of return and other credits or charges.

(c) Pre-2017 Deferral Contributions Account . All Deferral Contributions credited to Accounts under the Plan for periods prior to January 1, 2017 shall be credited to the Pre-2017 Deferral Contributions Account, as adjusted to reflect designated rates of return and other credits or charges for all periods both before and after January 1, 2017.

1.2 “ Affiliate ” means (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as is a Plan Sponsor, and (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with a Plan Sponsor.

1.3 Annual Bonus means an amount paid to a Participant as bonus compensation for the performance period to which a Deferral Election applies, which is specifically classified as an annual bonus payment by the Plan Sponsor relating to services performed during one or more performance periods of at least twelve (12) months’ duration.

1.4 Annual Installments means a series of amounts to be paid annually over a predetermined period of years in substantially equal periodic payments, except to the extent any increase in the amount reflects reasonable earnings through the date the amount is paid. Annual Installments shall be treated as a single payment for the purpose of Section 409A.

1.5 Base Salary means a Participant’s regular base salary as reflected on the payroll records from time to time during the Plan Year.

1.6 “ Beneficiary ” means the person or trust that a Participant designated most recently in writing to the Plan Administrator; provided, however, that if the Participant has failed to make a designation, no person designated is alive, no trust has been established, or no successor Beneficiary has been designated who is alive, the “Beneficiary” means (a) the

Participant’s spouse; or (b) if no spouse is alive, the legal representative of the deceased Participant’s estate.

1.7 “ Code ” means the Internal Revenue Code of 1986, as amended, and all relevant regulations and rulings pertaining to the particular provision(s) of the Code referenced herein.

1.8 “ Compensation ” means Base Salary, Annual Bonus, or both, as the context requires.

1.9 “ Deferral Contribution ” means a contribution of a Plan Sponsor on behalf of a Participant pursuant to Section 3.1 equal to a percentage (or, alternatively, if permitted by the Plan Administrator, a flat dollar amount) of a Participant’s Base Salary and/or Annual Bonus that is not yet payable and otherwise effected pursuant to a valid Deferral Election.

1.10 “ Deferral Election ” means a Participant’s election under Section 2.2 that is made during an Election Period to have Deferral Contributions made to his or her Account.

1.11 “ Effective Date ” means, as to the Primary Sponsor, January 1, 2002, and as to each other Plan Sponsor which adopts the Plan, the effective date as of which such Plan Sponsor first adopts the Plan.

1.12 “ Eligible Employee ” shall mean any Employee who is (a) employed by a Plan Sponsor, (b) determined by the Plan Administrator in its sole discretion to be a member of a select group of management or highly compensated employees of that Plan Sponsor within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, and any regulations relating thereto, and (c) designated by the Plan Administrator, in its sole discretion, to be eligible to participate in the Plan. No person who is initially classified by a Plan Sponsor as an independent contractor for federal income tax purposes shall be regarded as an Eligible Employee for that period, regardless of any subsequent determination that any such person should have been characterized as a common law employee of the Plan Sponsor for the period in question.

1.13 “ Employee ” means any individual who is treated as a common law employee of the Primary Sponsor or an Affiliate in accordance with its usual employment policies and procedures.

1.14 “ Election Period ” means the elections periods described in Section 2.2.

1.15 “ Employer Group ” means the Primary Sponsor and each Affiliate, except that in applying Code Section 1563(a)(1), (2) and (3), “at least 50 percent” is used instead of “at least 80 percent.”

1.16 “ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and all relevant regulations and rulings pertaining to the particular provision(s) of the Code referenced herein.

1.17 “ Governing Body ” means the Board of Directors of the Primary Sponsor.

1.18 “ Key Employee ” shall mean a Participant who is a key employee (as defined in Code Section 416(i) without regard to Code Section 416(i)(5)) of the Plan Sponsor (or an entity which is considered to be single employer with the Plan Sponsor under Code Section 414(b) or 414(c)) at any time during the twelve (12) month period ending on December 31. Notwithstanding the foregoing, a Participant who is a key employee determined under the preceding sentence will be deemed to be a Key Employee solely for the period of April 1 through March 31 following such December 31 or as otherwise required by the Section 409A. For purposes of determining whether an individual is a key employee under Code Section 416(i), the Primary Sponsor shall calculate the applicable compensation thresholds by referring to such individual’s W-2 compensation as reported by the Plan Sponsor or any Affiliate for a particular calendar year.

1.19 “ Nonelective Contributions ” means an amount credited to a Participant’s Nonelective Contributions Retirement Subaccount by the Plan Sponsor.

1.20 “ Participant ” means any Eligible Employee or former Eligible Employee who has become a participant in the Plan pursuant to Section 2, for so long as his or her benefits hereunder have not been fully distributed.

1.21 “ Plan ” means the Nicolet National Bank Deferred Compensation Plan, as amended and/or restated from time to time.

1.22 “ Plan Administrator ” means the organization or person designated by the Primary Sponsor to administer the Plan or, in the absence of any such designation, the Compensation Committee of the Governing Body.

1.23 “ Plan Sponsor ” means individually the Primary Sponsor and each Affiliate which may adopt the Plan with the consent of the Plan Administrator.

1.24 “ Plan Year ” means each calendar year beginning with the calendar year commencing January 1, 2002.

1.25 “ Section 409A ” shall mean Section 409A of the Code.

1.26 “ Termination of Employment ” means the Participant’s separation from service with the Primary Sponsor and all affiliated companies that, together with the Primary Sponsor, constitute the “service recipient” as contemplated under Code Section 409A(a)(2)(A)(i). Whether a Termination of Employment takes place is determined based on the facts and circumstances surrounding the termination of the Participant’s employment and whether there is an intent for the Participant to provide significant services for the “service recipient” following such termination. Notwithstanding the foregoing, the following rules apply in determining whether a Termination of Employment has occurred:

(a) A termination of employment will not be considered a Termination of Employment if: the Participant continues to provide services as an employee of the

“service recipient” at an annual rate that is more than twenty percent (20%) of the services rendered, on average, during the immediately preceding three (3) full calendar years of employment (or, if employed less than three (3) years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period).

(b) The employment relationship of a Participant will be considered to remain intact while the individual is on military leave, sick leave or other bona fide leave of absence if there is a reasonable expectation that the Participant will return to perform services for the “service recipient” and the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the “service recipient” under applicable law or contract

1.27 “ Trust ” means the grantor trust that may be maintained by the Primary Sponsor as a source for the payment of benefit obligations under the Plan. The Trust shall be consistent with the “unfunded” status of the Plan and shall be subject to the claims of the general creditors of the Primary Sponsor and/or the Plan Sponsor (as appropriate).

1.28 “ Trustee ” means the trustee under the Trust that may be maintained by the Primary Sponsor as a source for the payment of benefit obligations under the Plan.

1.29 “ Unforeseeable Emergency ” means a severe hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Code Section 152 without regard to Subsections 152(b)(1), (b)(2) and (d)(1)(B) thereof) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant; provided further that such hardship can not be relieved through reimbursement or compensation from insurance or otherwise; by liquidation of assets (to the extent liquidation would not itself cause severe financial hardship) or by cessation of deferrals under the Plan.

1.30 “ Valuation Date ” means each regular business day or any other date designated as such by the Plan Administrator.

1.31 “ Vesting Service ” means the total number of years and completed whole months of service rendered by a Participant as an employee of the Plan Sponsor or any Affiliate measured from the Participant’s most recent date of hire. In applying the foregoing,

(a) periods of authorized leaves of absence from the Plan Sponsor or any Affiliate, including but not limited to leaves required to be granted pursuant to the Family and Medical Leave Act of 1993 and the Uniformed Services Employment and Reemployment Rights Act, shall not be treated as constituting a break in a Participant’s period of continuous service; and

(b) the Plan Administrator may, but is not required to, aggregate one or more past periods of service of a rehired Participant.

SECTION 2

ELIGIBILITY

2.1 Commencement of Participation . Each Eligible Employee shall become a Participant as of the date designated by the Plan Administrator. A designation of eligibility by the Plan Administrator shall be by means of a written or electronic communication to an Eligible Employee.

2.2 Deferral Elections . A Participant may elect to make deferrals of Base Salary and Annual Bonuses during each Election Period designated by the Plan Administrator with respect to a Plan Year or performance period, as provided herein. Participants may make their Deferral Elections during an Election Period established by the Plan Administrator ending no later than immediately prior to the first day of the Plan Year to which the Deferral Election is to apply; provided, however, to the extent the Plan Administrator may permit:

(a) with respect to a deferral of Annual Bonus, the Election Period established by the Plan Administrator must end prior to the earlier of (i) the first day of the Plan Year in which the performance period commences or (ii) the first day of the performance period, unless the Annual Bonus qualifies as performance-based compensation within the meaning of Treasury Regulations Section 1.409A-1(e) and satisfies the criteria under Treasury Regulations Section 1.409A-2(a)(8), in which case the Election Period may end as late as six (6) months prior to the end of the performance period; and

(b) with respect to a deferral of Base Salary only, in the case of a Participant who is first eligible to participate in the Plan as of any date other than January 1 or who is a former Participant, the 30-day period beginning as of the date the Eligible Employee first becomes or becomes again a Participant; provided any such Eligible Employee has not, for a period of at least twenty-four (24) months prior to such initial or renewed eligibility, been eligible to participate in the Plan or in any other plan of the Employer Group (other than accruing earnings under the Plan or such other plan).

Participants may elect to have Deferral Elections applied either to Base Salary or Annual bonuses, or both, subject to such rules as may be promulgated from time to time by the Plan Administrator.

Unless the Plan Administrator provides for an earlier irrevocability date, Deferral Elections shall become irrevocable as of the last day of the latest ending Election Period that could have been established by the Plan Administrator with respect to a Deferral Election as provided for in this Section 2.2.

2.3 Duration of Deferral Elections .

(a) General Rules . Deferral Elections (i) must be made during an eligible Election Period; (ii) shall be effective for the Plan Year immediately following the Election Period or, to the extent applicable, in which the Election Period ends or, with

respect to deferrals of Annual Bonus, for the performance period to which it relates; (iii) shall only apply with respect to Compensation that relates to services performed subsequent to the date of the Deferral Election; (iv) shall be irrevocable (except as provided herein); and (v) shall remain in force for the balance of the Plan Year in which the Participant's participation begins or for the performance period to which it relates, as applicable (except in the case of Deferral Elections having continuing effect). A Deferral Election shall have continuing effect for successive Plan Years and performance periods only to the extent permitted by the Plan Administrator and as expressly provided for by the terms of a Deferral Election.

(b) Suspensions of Deferral Elections . Subject to the provisions of Section 409A, in the event a Participant participates in a plan of the Employer Group intended to qualify under Code Section 401(a) and containing a tax-qualified cash or deferred arrangement qualified under Code Section 401(k), the Participant shall be suspended from continued participation under this Plan to the extent required by such other plan as a result of a hardship withdrawal made by such Participant under such other plan. Such a Participant may not again make Deferral Contributions to this Plan until the Plan Year or performance period, as applicable, following the Plan Year or performance period, as applicable, in which Deferral Contributions cease under this Section 2.3(b) in accordance with rules established by the Plan Administrator in accordance with the requirements of Section 409A.

(c) Certain Revocations of Deferral Elections . A Participant’s Deferral Election shall be revoked upon a Participant demonstrating to the Plan Administrator in such form an manner as my be specified by the Plan Administrator from time to time that the Participant is suffering from an Unforeseeable Emergency. Such Participant may not again make Deferral Contributions to this Plan until the Plan Year or performance period, as applicable, following the Plan Year or performance period, as applicable, in which Deferral Contributions cease under this Section 2.3(c) in accordance with rules established by the Plan Administrator in accordance with the requirements of Section 409A.

2.4 Cessation of Active Participation . Any Participant previously designated for membership in the Plan may be designated as ineligible for active membership in the Plan, on a prospective basis, at any time by the Plan Administrator and shall be classified as an inactive Participant. A Participant who ceases to be either an Employee or Eligible Employee shall no longer be eligible for active membership in the Plan as of the date the Participant ceases to be an Employee or Eligible Employee and shall be classified as an inactive Participant. Any Deferral Election in effect at the time that a Participant becomes inactive but remains an Employee shall continue in effect for the balance of the period to which the Deferral Election applies. The categories of inactive Participants described in this Section 2.2 are ineligible to elect further deferrals of Compensation under Section 3 and to receive further allocations of Plan Sponsor contributions under Section 3 but shall continue as Participants until their respective benefits under the Plan are distributed in full.

2.5 Inactive Participants . Inactive Participants described in Section 2.4 shall continue to be subject to all other terms of the Plan so long as he or she remains a Participant of the Plan.

2.6 Binding Terms of Plan . By accepting membership in the Plan, a Participant is deemed to be bound by the terms and conditions of this Plan.

SECTION 3

CONTRIBUTIONS

3.1 Deferral Contributions .

(a) Amount of Deferral Contributions . During any applicable Election Period, each Participant may elect, pursuant to a Deferral Election, to direct the Plan Administrator to reduce his or her Compensation, and in lieu thereof, credit to his or her Account an amount equal to such reduction, with such reduction amounts to be in whole percentages or, if permitted by the Plan Administrator, a flat dollar.

(b) Authorization for Deferral Contributions . All Deferral Elections shall be in writing or in such other form permitted by the Plan Administrator and shall be submitted to the Plan Sponsor or its designee during the applicable Election Period in accordance with the normal administrative procedures established by the Plan Administrator.

(c) Ordering . Deferral Elections shall be processed before elective deferrals or contributions made under any other deferred compensation plan of the Plan Sponsor but after all legally-required and voluntary after-tax withholdings from Compensation.

3.2 Nonelective Contributions . For each Plan Year, a Plan Sponsor may, but is not required to, contribute on behalf of one or more of its Participants an amount to one or more such Participants’ Nonelective Contributions Retirement Subaccounts, subject to such conditions and limitations as the Plan Sponsor may prescribe, with the approval of the Plan Administrator. The determination of whether, and what amount, to so award to any Participant for a Plan Year shall be determined by the Plan Sponsor, with the consent of the Plan Administrator, and need not be uniformly applied to each Participant.

SECTION 4

CREDITING ACCOUNTS

4.1 Crediting Deferral Contributions . Deferral Contributions shall be credited by the Plan Administrator to a Participant’s Account no later than as of the end of the month in which the Deferral Contributions reduce the Participant’s Compensation.

4.2 Crediting Non-elective Contributions . Nonelective Contributions shall be credited by the Plan Sponsor to a Participant’s Nonelective Contributions Retirement Subaccount as of a date determined by the Plan Administrator.

4.3 Adjustment to Accounts .

(a) As of the last day of each Plan Year and any intervening Valuation Dates as the Plan Administrator may prescribe subsequent to the initial posting of a credit to a Participant’s Account, the Participant’s Account shall be adjusted by one or more rates of return in any manner as may be designated from time to time by the Plan Administrator. In the event the Plan Administrator invests funds otherwise earmarked for the satisfaction of Plan obligations in investment vehicles, the Plan Administrator may provide for the adjustment of Accounts by the rate(s) of return experienced by such investments.

(b) The Plan Administrator may allow a Participant to select a rate or rates of return for the purpose of crediting earnings, gains and losses to his or her Account from among a menu of investment choices in any manner authorized by the Plan Administrator; provided, however, that the Plan Administrator shall not be obligated to make investments of funds otherwise earmarked for the satisfaction of Plan obligations consistent with any such investment directions.

(d) The Plan Administrator may deduct from Accounts expenses incurred in the operation of the Plan and to satisfy tax withholding obligations as contemplated by Section 13.3.

4.4 Timing of Credits . In connection with any distribution of a Participant’s Account, the Account shall be adjusted for amounts to be credited in Sections 4.1 and 4.2 and by the rate(s) of return described in Section 4.3 through the Valuation Date immediately preceding the date the distribution is processed pursuant to normal administrative procedures.

SECTION 5

VESTING

5.1 Deferral Contributions . A Participant shall always be fully vested in that portion of his or her Account attributable to Deferral Contributions and any earnings thereon.

5.2 Nonelective Contributions . A Participant shall become vested in that portion of his or her Nonelective Contributions Retirement Subaccount attributable to Nonelective Contributions, and any earnings thereon, in accordance with the vesting schedule established in writing by the Plan Administrator for that Participant. In the event the Plan Administrator has not established an individual vesting schedule for a Participant, the following default vesting schedule shall apply separately to each annual Nonelective Contribution:

Years of Vesting Service from date of

Nonelective Contribution		Vested Percentage

Less than 1		0%
1 but less than 2		20%
2 but less than 3		40%
3 but less than 4		60%
4 but less than 5		80%
5 or more		100%

5.3 Forfeitures . The portion of a Participant’s Nonelective Contributions Retirement Subaccount that is not vested upon the Participant’s Termination of Employment shall be forfeited.

SECTION 6

DISTRIBUTION OF ACCOUNTS

6.1 Types of Accounts .

(a) Retirement Accounts . A Retirement Account shall be established for each Participant to the extent Deferral Contributions for any period commencing on or after January 1, 2017 are not designated for allocation to a Fixed Period Account and/or to the extent Nonelective Contributions are made on behalf of the Participant. A Participant is eligible for only one Retirement Account.

(b) Fixed Period Accounts . Each Participant who makes Deferral Contributions for any period commencing on or after January 1, 2017 may designate such Deferral Contributions for allocation to a Fixed Period Account. A Participant may establish a second Fixed Period Account but only for Deferral Contributions attributable to Plan Years beginning on or after the Plan Year in which a payout from the first Fixed Period Account is scheduled to commence.

(c) Pre-2017 Deferral Contributions Accounts . A Pre-2017 Deferral Contributions Account shall be established for each Participant who is credited with Deferral Contributions for periods prior to January 1, 2017.

6.2 Distribution Elections .

(a) Retirement Accounts . A Participant may make an election with respect to both the timing and form in which payments are to commence from his or her Deferral Contributions Retirement Subaccount during the Election Period that the Participant first elects a portion of his or her Deferral Contributions to be allocated to the Retirement Account. A Participant may make an election with respect to both the timing and form in which payments are to commence from his or her Nonelective Contributions Retirement Subaccount during the period permitted by the Plan Administrator ending prior to the later of (i) t he first day of the Plan Year for which a Participant is credited with a Nonelective Contribution or (ii) the end of the 30-day period beginning as of the date the

Employee is first eligible to be a Participant. A Participant may elect to have the subaccounts of his or her Retirement Account distributed in either a single lump sum payment or in Annual Installments for a period of years designated by the Participant (not to exceed ten (10) years). Elections shall be made in the manner designated by the Plan Administrator. A different election may be made for each of the Deferral Contributions Retirement Subaccount and the Nonelective Contributions Retirement Subaccount.

(b) Fixed Period Accounts . A Participant shall make an election with respect to both the timing and form in which payments are to commence from his or her Fixed Period Account during the Election Period that the Participant first elects a portion of his or her Deferral Contributions are to be allocated to the Fixed Period Account. A Participant shall elect to have his or her Fixed Period Account distributed in either a single lump sum payment or in Annual Installments for a period of years designated by the Participant (not to exceed ten (10) years), with such payment to be made or commence no earlier than the second Plan Year following the close of the first Plan Year for which Deferral Contributions are allocated to the Fixed Period Account. In the event that a Participant establishes a second Fixed Period Account in accordance with Section 6.1(b), the Participant shall make an election with respect to both the timing and form in which payments are to commence from such second Fixed Period Account during the Election Period applicable to the establishment of that second Fixed Period Account. No Deferral Contributions may be credited to a Fixed Period Account that is in pay status. In no event shall more than two Fixed Period Accounts be in existence at any time with respect to a Participant, with one of those Fixed Period Accounts required to be in pay status.

6.3 Distribution Rules .

(a) General Rules .

(i) Notwithstanding the distribution rules set forth in Subsections (b), (c) and (e) below, if a Participant’s Account has a value of less than the then applicable dollar amount under Section 402(g)(1)(B) of the Code determined as of the effective date of the Participant’s Termination of Employment, the Plan Administrator shall pay the entire Account to the Participant in a single lump sum payment within ninety (90) days following the Participant’s Termination of Employment.

(ii) Notwithstanding any other provision of the Plan to the contrary, if a Participant is a Key Employee of the Employer Group any stock of which is publicly traded on an established securities market or otherwise, all within the meaning of Section 409A, at the date of his or her Termination of Employment (other than due to death), any payments otherwise due from such Participant’s Account (other than a Pre-2017 Deferral Contributions Account) by reason of such Termination of Employment during the six-month period after the date of the Termination of Employment shall be deferred and such deferred amounts will be paid during the seventh month following such six-month anniversary.

(iii) The Primary Sponsor shall cause each Plan Sponsor to make payments hereunder before such payments are otherwise due if it determines that the provisions of the Plan fail to meet the requirements of Section 409A; provided, however, that such payment(s) may not exceed the amount required to be included in income as a result of such failure to comply the requirements of Section 409A. The amount of the payment shall not exceed the lesser of (1) the Participant’s Account or (2) an amount equal to the amount of income included in taxable income as a result of such violation, plus an additional amount, to the extent permissible under related Treasury regulations and guidance, for penalties under Section 409A, other taxes and interest or other costs. Payment under this Section 6.3(a)(iii), including the amount of any taxes, penalties, interest or other costs, shall be applied against the Participant’s Account and shall constitute fulfillment of the Plan Sponsor’s payment obligation to the Participant under the Plan to the extent of any such payments.

(iv) All distributions with respect to the Accounts shall be made in cash or cash equivalents.

(b) Retirement Accounts . Except as otherwise provided in this Section 6, a Participant who experiences a Termination of Employment on or after attaining age fifty-five (55) shall have his or her distribution election made pursuant to Section 6.2(a) giving effect as to the vested portion of the Retirement Account. If such a Participant experiences a Termination of Employment without a valid distribution election in effect for one or both subaccounts of the Participant’s Retirement Account, the subaccount(s) for which no valid distribution election is in effect shall be payable to the Participant in Annual Installments over a period of five (5) years, with the first Annual Installment to be made in January of the calendar year following the calendar year in which the Termination of Employment occurs. Each periodic payment of an Annual Installment in a calendar year subsequent to the calendar year of commencement shall be made in January of such calendar year. A Participant who experiences a Termination of Employment prior to attaining age fifty-five (55) shall have the vested portion of the Participant’s Retirement Account paid to the Participant in a single lump sum payment in January of the calendar year following the calendar year in which the Termination of Employment occurs.

(c) Fixed Period Accounts . Except as otherwise provided in this Section 6, a Participant’s Fixed Period Account shall have his or her distribution election made pursuant to Section 6.2(b). The first Annual Installment shall be paid in January of the commencement calendar year specified by the Participant. Each subsequent Annual Installment shall be paid in each subsequent January for the remainder of the installment period. The amount of the first Annual Installment shall equal the value of the Participant’s Fixed Period Account as of the date the distribution is processed, multiplied by a fraction, the numerator of which is one and the denominator of which is the number of calendar years over which the Fixed Period Account is to be paid, as elected by the Participant pursuant to Section 6.2(b) above. The amount of each subsequent calendar

year’s Annual Installment shall be the value of the Participant’s Fixed Period Account determined as of the date the distribution is processed, multiplied by a fraction, the numerator of which is one, and the denominator of which is the number of calendar years remaining in the period over which the Participant’s Fixed Period Account is to be paid. Notwithstanding the foregoing provisions of this Subsection (c), in the case of a Participant who incurs a Termination of Employment for any reason prior to the calendar year in which payments from a Fixed Period Account are to commence, the Fixed Period Account shall be paid to the Participant in a single lump sum payment in January of the calendar year following the calendar year in which the Termination of Employment occurs.

(d) Changes to Distribution Elections . The Plan Administrator may allow a Participant to elect a change to the timing and/or form of payment prescribed by any distribution election then in effect for the Participant under his or her Retirement Account or Fixed Period Account if (i) the changed election does not take effect until twelve (12) months following the date on which the changed election is made; (ii) the first payment with respect to which the changed election is made is deferred for at least five (5) years from the date the payment would otherwise have commenced; (iii) in the instance of a changed election to a Fixed Period Account, the changed election does not occur less than twelve (12) months before the date of the first scheduled payment; and (iv) the changed election otherwise satisfies the requirements of Section 409A. No changed election may alter the nonelective payment provisions of this Section 6, except to the extent required to apply to an alternative, nonelective payment provision in order for the changed election to satisfy Section 409A.

(e) Pre-2017 Deferral Contributions Accounts . Subject to Sections 6.3(a)(i), (iii) and (iv), payment from any Pre-2017 Deferral Contributions Account shall be made in five (5) substantially equal installments commencing within thirty (30) days following the Participant’s Termination of Employment. If a Participant is a Key Employee of the Employer Group any stock of which is publicly traded on an established securities market or otherwise, all within the meaning of Section 409A, at the date of his or her Termination of Employment, any payments otherwise due from such Participant’s Pre-2017 Deferral Contributions Account by reason of such Termination of Employment during the six-month period after the date of the Termination of Employment shall be deferred and such deferred amounts will be paid during the seventh month following such six-month anniversary.

6.4 Death Benefits .

(a) Designation Upon Commencement of Participation . Each Participant, upon becoming eligible to participate in the Plan, may designate a Beneficiary or Beneficiaries to receive his or her vested Account in the event of his or her death. A Participant may change his or her designated Beneficiary at any time and each change so made shall revoke all prior designations by the Participant. To be valid, all Beneficiary designations and changes shall be made on a form and in a manner provided by the Plan Administrator. N o such change shall become effective until received in writing and

acknowledged by the Plan Administrator and no such change may be given effect if not received prior to the date a distribution pursuant to Section 6 has been processed for payment (or, if applicable, the commencement of payment). In the event a Participant fails to designate any Beneficiary by making a valid election, the default Beneficiary designation provisions of this Plan shall apply.

(b) Death of Participant after Commencement of Annual Installments . If a Participant dies after commencement of Annual Installments from any or all of his or her Account, future annual payments will cease. Payment of the remaining Account (other than the Pre-2017 Deferral Contributions Account) shall be made in a single lump sum payment to the Beneficiary within ninety (90) days after the Participant’s death.

(c) Death of Participant prior to Commencement of Payments . If a Participant dies prior to the commencement of payment from his or her Account, payment of the Account (other than the Pre-2017 Deferral Contributions Account) shall be made in a single lump sum payment to the Beneficiary within ninety (90) days after the Participant’s death.

6.5 Trust .

(a) To provide a source for the satisfaction of obligations under the Plan, the Primary Sponsor may establish a Trust, which, if established, shall be a grantor trust.

(b) In the event a Trust is established, the Plan Administrator may direct the Trustee to pay for benefits of the Participant or his or her Beneficiary at the time and in the amount described in this Section 6. In the event the amounts held under the Trust which are attributable to a particular Plan Sponsor’s contributions are not sufficient to provide the full amount payable to the Participant(s) and/or Beneficiary(ies) of such Plan Sponsor, that Plan Sponsor shall pay for the remainder of such amount at the time set forth in Section 6. No other Plan Sponsor or Affiliate shall be responsible for the benefit obligations of a Plan Sponsor. Notwithstanding the foregoing, payments from the Trust shall be subject to the governing provisions of the agreement establishing the Trust.

SECTION 7

ADMINISTRATION OF THE PLAN

7.1 Operation of the Plan Administrator . If an organization is appointed to serve as the Plan Administrator, then the Plan Administrator may designate in writing a person who may act on behalf of the Plan Administrator. The Primary Sponsor shall have the right to remove the Plan Administrator at any time by notice in writing. The Plan Administrator may resign at any time by written notice or resignation to the Primary Sponsor. Upon removal or resignation, or in the event of the dissolution of the Plan Administrator, the Primary Sponsor may appoint a successor or succeed to the position itself.

7.2 Duties of the Plan Administrator.

(a) The Plan Administrator shall perform any act which the Plan authorizes or requires of the Plan Administrator by action taken in compliance with the Plan and may designate in writing other persons to carry out its duties under the Plan. The Plan Administrator may employ persons to render advice with regard to any of the Plan Administrator’s duties.

(b) The Plan Administrator shall from time to time establish rules, not contrary to the provisions of the Plan, for the administration of the Plan and the transaction of its business. The Plan Administrator shall have discretionary authority to construe the terms of the Plan and shall determine all questions arising in the administration, interpretation and application of the Plan, including, but not limited to, those concerning eligibility for benefits and it shall not act so as to discriminate in favor of any person. All determinations of the Plan Administrator shall be conclusive and binding on all Participants and Beneficiaries, subject to the provisions of the Plan and subject to applicable law.

(c) The Plan Administrator shall furnish Participants and Beneficiaries with all disclosures now or hereafter required by ERISA. The Plan Administrator shall file, as required, the various reports and disclosures concerning the Plan and its operations as required by ERISA and by the Code, and shall be solely responsible for establishing and maintaining all records of the Plan.

(d) The statement of specific duties for a Plan Administrator in this Section is not in derogation of any other duties which a Plan Administrator has under the provisions of the Plan or under applicable law.

(e) Each Plan Sponsor shall indemnify and hold harmless each person constituting the Plan Administrator from and against any and all claims and expenses (including, without limitation, attorney’s fees and related costs) arising in connection with the performance by the person of his duties in that capacity, other than any of the foregoing arising in connection with the willful neglect or willful misconduct of the person acting.

7.3 Action by the Primary Sponsor or a Plan Sponsor . Any action to be taken by the Primary Sponsor or a Plan Sponsor shall be taken by resolution or written direction duly adopted by its board of directors or appropriate governing body, as the case may be; provided, however, that by such resolution or written direction, the board of directors or appropriate governing body, as the case may be, may delegate to any officer or other appropriate person of a Plan Sponsor the authority to take any such actions as may be specified in such resolution or written direction, to the extent not otherwise inconsistent with the provisions of the Plan.

SECTION 8

CLAIM REVIEW PROCEDURE

8.1 Notice of Denial . If a Participant or a Beneficiary is denied a claim for benefits under the Plan, the Plan Administrator shall provide to the claimant written notice of the denial within ninety (90) days after the Plan Administrator receives the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall the extension exceed a period of ninety (90) days from the end of such initial period. Any extension notice shall indicate the special circumstances requiring the extension of time, the date by which the Plan Administrator expects to render the final decision, the standards on which entitlement to benefits are based, the unresolved issues that prevent a decision on the claim and the additional information needed to resolve those issues.

8.2 Contents of Notice of Denial . If a Participant or Beneficiary is denied a claim for benefits under a Plan, the Plan Administrator shall provide to such claimant written notice of the denial which shall set forth:

(a) the specific reasons for the denial;

(b) specific references to the pertinent provisions of the Plan on which the denial is based;

(c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

(d) an explanation of the Plan’s claim review procedures, and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review.

8.3 Right to Review . After receiving written notice of the denial of a claim, a claimant or his or her representative shall be entitled to:

(a) request a full and fair review of the denial of the claim by written application to the Plan Administrator;

(b) request, free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim;

(c) submit written comments, documents, records, and other information relating to the denied claim to the Plan Administrator; and

(d) a review that takes into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

8.4 Application for Review . If a claimant wishes a review of the decision denying his or her claim to benefits under the Plan, he or she must submit the written application to the Plan Administrator within sixty (60) days after receiving written notice of the denial.

8.5 Hearing . Upon receiving a written application for review, pursuant to Section 8.4, the Plan Administrator may schedule a hearing for purposes of reviewing the claimant’s claim, which hearing shall take place not more than thirty (30) days from the date on which the Plan Administrator received such written application for review.

8.6 Notice of Hearing . At least ten (10) days prior to the scheduled hearing, the claimant and his or her representative designated in writing by him or her, if any, shall receive written notice of the date, time, and place of such scheduled hearing. The claimant or his or her representative, if any, may request that the hearing be rescheduled, for his or her convenience, on another reasonable date or at another reasonable time or place.

8.7 Counsel . All claimants requesting a review of the decision denying their claim for benefits may employ counsel for purposes of the hearing.

8.8 Decision on Review . No later than sixty (60) days following the receipt of the written application for review, the Plan Administrator shall submit its decision on the review in writing to the claimant involved and to his representative, if any, unless the Plan Administrator determines that special circumstances (such as the need to hold a hearing) require an extension of time, to a day no later than one hundred twenty (120) days after the date of receipt of the written application for review. If the Plan Administrator determines that the extension of time is required, the Plan Administrator shall furnish to the claimant written notice of the extension before the expiration of the initial sixty (60) day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render its decision on review. In the case of a decision adverse to the claimant, the Plan Administrator shall provide to the claimant written notice of the denial which shall include:

(a) the specific reasons for the decision;

(b) specific references to the pertinent provisions of the Plan on which the decision is based;

(c) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits; and

(d) an explanation of the Plan’s claim review procedures, and the time limits applicable to such procedures, including a statement of the claimant’s right to bring an action under Section 502(a) of ERISA following the denial of the claim upon review.

8.9 Statute of Limitations. A claimant wishing to seek judicial review of an adverse benefit determination under the Plan, whether in whole or in part, must file any suit or legal action, including, without limitation, a civil action under Section 502(a) of ERISA, within one year of the date the final decision on the adverse benefit determination on review is issued or should have been issued under Section 8.8 or lose any rights to bring such an action. If any such judicial proceeding is undertaken, the evidence presented shall be strictly limited to the evidence timely presented to the Plan Administrator. Notwithstanding anything in the Plan to the contrary, a claimant must exhaust all administrative remedies available to such Claimant under the Plan before such claimant may seek judicial review pursuant to Section 502(a) of ERISA.

SECTION 9

LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY

INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS

9.1 No Alienation . No benefit which shall be payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for, or against, such person, and the same shall not be recognized under the Plan, except to such extent as may be required by law.

9.2 Incompetency . Whenever any benefit which shall be payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined to be incompetent by qualified medical advice, the Plan Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of such minor or incompetent, or to cause the same to be paid to such minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of such minor or incompetent if one has been appointed or to cause the same to be used for the benefit of such minor or incompetent.

SECTION 10

LIMITATION OF RIGHTS

Membership in the Plan shall not give any Employee any right or claim except to the extent that such right is specifically fixed under the terms of the Plan. The adoption of the Plan by any Plan Sponsor shall not be construed to give any Employee a right to be continued in the employ of a Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the employment of any Employee at any time.

SECTION 11

AMENDMENT TO OR TERMINATION OF THE PLAN

11.1 Amendment and Termination by Primary Sponsor . The Primary Sponsor or any successor thereto reserves the right by action of the Governing Body or its delegatee at any time to modify or amend or terminate the Plan. No such modifications or amendments shall have the effect of retroactively changing or depriving Participants or Beneficiaries of benefits already accrued under the Plan; provided, however, that the Primary Sponsor reserves the right to amend the Plan in any respect to comply with the provisions of Section 409A so as not to trigger any unintended tax consequences prior to the distribution of benefits provided herein. Except as provided herein, upon termination of the Plan, each Participant’s Account shall be paid in due course in accordance with Section 6. Notwithstanding the foregoing, the Primary Sponsor may cause one or more Plan Sponsors to pay the lump sum value of Participant Accounts if the Primary Sponsor determines that such payment of retirement benefits will not constitute an impermissible acceleration of payments under one of the exceptions provided in Treasury Regulations Section 1.409A-3(j)(4)(ix), or any successor guidance. In such an event, payment shall be made at the earliest date permitted under such guidance. No Plan Sponsor other than the Primary Sponsor shall have the right to so modify, amend or terminate the Plan.

11.2 Termination by a Plan Sponsor . Each Plan Sponsor, other than the Primary Sponsor, shall have the right to terminate its participation in the Plan by resolution of its board of directors or other appropriate governing body and notice in writing to the Primary Sponsor. Any termination by a Plan Sponsor shall not be a termination as to any other Plan Sponsor. Any such termination shall not trigger, in and of itself, payment of any affected Participant’s Account.

11.3 Termination by Primary Sponsor . If the Plan is terminated by the Primary Sponsor it shall terminate as to all Plan Sponsors.

SECTION 12

ADOPTION OF PLAN BY AFFILIATES

Any Affiliate, if the Affiliate is authorized to do so by the Plan Administrator, may adopt the Plan by action of the board of directors or other appropriate governing body of the Affiliate. Any adoption shall be evidenced by certified copies of the resolutions of the foregoing board of directors or governing body indicating the adoption by the adopting Affiliate. The resolution shall state and define the Effective Date of the adoption of the Plan by the adopting Affiliate.

SECTION 13

MISCELLANEOUS

13.1 Unfunded Obligations . Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of any Plan Sponsor or, if established, the Trust. Any and all of the assets of each Plan Sponsor and any Trust assets which are attributable to amounts paid into the Trust by the Plan Sponsors shall be, and remain, the general unpledged, unrestricted assets of the respective Plan Sponsor, which shall be subject to the claims of that Plan Sponsor’s general creditors. Each Plan

Sponsor’s obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Plan Sponsor to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors. It is the intention of the Plan Sponsors that the Plan and, if established, the Trust be unfunded for purposes of the Code and for purposes of Title I of ERISA. Nothing contained in this Plan shall constitute a guaranty by a Plan Sponsor or any other entity that the assets of the Plan Sponsor will be sufficient to pay any benefit hereunder.

13.2 Plan Expenses . All expenses of the Plan may be applied as a charge to the Accounts of Participants, as determined by the Plan Administrator.

13.3 Tax Withholding . When payments are made under the Plan, the Plan Sponsor shall have the right to deduct from each payment made under the Plan, or any other compensation payable to a Participant or Beneficiary, any required withholding taxes respecting such payments. Prior to the date a Participant’s Account becomes payable pursuant to Section 6, the Plan Sponsor may deduct from the Participant’s Account, or from other compensation payable to the Participant, any required federal employment taxes imposed under Code Sections 3101, 3121(a) and 3121(v)(2) and any taxes required under any state, local and foreign laws (the “Tax Obligations”), that may be imposed on amounts deferred pursuant to this Plan prior to the time such amounts are paid or made available to the Participant and to pay the income tax at source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local, or foreign tax laws as a result of an accelerated payment of the Tax Obligations (the “Income Tax Obligations”). Accelerated payments pursuant to this Section 13.3 shall not exceed the amount of the Tax Obligations and Income Tax Obligations and shall be made in the form of a payment directly to the applicable taxing authorities pursuant to the withholding provisions of applicable law.

13.4 Intended Tax Treatment . The Plan Sponsor does not represent or guarantee that any particular federal or state income, payroll, personal property or other tax consequence will result from participation in this Plan. However, the Plan Sponsor intends that no contribution made to this Plan, nor the income thereon, be included in the taxable income of a Participant until, and to the extent of, distributions made from this Plan. Accordingly, notwithstanding any provision of this Plan to the contrary, the Plan Administrator shall interpret and administer this Plan in accordance with the applicable requirements prescribed by Section 409A.

13.5 Notice of Address . Each individual entitled to a benefit under the Plan must file with the Primary Sponsor, in writing, his or her post office address and each change of post office address which occurs between the date of his or her Termination of Employment and the date he or she ceases to be a Participant. Any communication, statement or notice addressed to such individual at his or her latest reported office address will be binding upon him or her for all purposes of the Plan and neither the Plan Administrator nor any Plan Sponsor shall be obliged to search for or ascertain his or her whereabouts.

13.6. Delivery of Notices . Any notice required or permitted to be given hereunder to a Participant or Beneficiary will be properly given if mailed by first class mail, postage prepaid, to the Participant or Beneficiary at his or her last post office address as shown on the Primary

Sponsor’s records. Any notice to the Plan Administrator or the Primary Sponsor shall be properly given or filed upon receipt by the Plan Administrator or the Primary Sponsor at such address as may be specified from time to time by the Plan Administrator.

13.7 Receipt or Release . Any payment to a Participant or a Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims arising under, or with respect to, the Plan against the Plan Administrator and each Plan Sponsor. The Plan Administrator may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.

13.8 Governing Law . To the extent not preempted by applicable federal law, the Plan shall be governed by and construed in accordance with the laws of the State of Wisconsin.

13.9 Section 409A . The Plan’s governing provisions are drafted with the intent that they comply with all applicable of Section 409A and, in the event of any ambiguity, such provisions shall be construed in a manner consistent with that intent.

IN WITNESS WHEREOF, the Primary Sponsor has caused this indenture to be executed as of the date first above written.

	Nicolet National Bank:

	By:

	Title:	President and CEO

Exhibit 10.12

EXECUTION VERSION

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made as of the 4th day of February, 2016 (the “Agreement”), by and among (i) NICOLET NATIONAL BANK (the “Bank”), a National Bank organized under the laws of the State of Wisconsin, a wholly owned subsidiary of NICOLET BANKSHARES, INC. (the “Company”), a bank holding company organized under the laws of the State of Wisconsin, (ii) the Company, and (iii) PATRICK J. MADSON, a resident of the State of Wisconsin (the “Executive”).

RECITALS:

The Bank desires to employ the Executive as the SVP – Wealth Management of the Bank and the Executive desires to accept such employment on the terms and conditions set forth herein;

Therefore, in consideration of the mutual agreements set forth herein, the parties hereby agree as follows:

1. Definitions . Whenever used in this Agreement, the following terms and their variant forms shall have the meaning set forth below:

1.1 “ Agreement ” shall mean this Agreement and any exhibits incorporated herein together with any amendments hereto made in the manner described in this Agreement.

1.2 “ Area ” shall mean the geographic area within a fifty (50) mile radius of the Bank’s corporate office and each branch office, it being the express intent of the parties that the Area as defined herein is the area where the Executive performs or performed services on behalf of the Bank under this Agreement as of, or within a reasonable time prior to, the termination of the Executive's employment hereunder.

1.3 “ Bank Information ” means Confidential Information and Trade Secrets.

1.4 “ Business of the Bank ” shall mean the business conducted by the Bank, which is the business of commercial banking.

1.5 “ Cause ” shall mean:

1.5.1 With respect to termination by the Bank:

(a) a material breach of the terms of this Agreement by the Executive, including, without limitation, failure by the Executive to perform his duties and responsibilities in the manner and to the extent required under this Agreement, which remains uncured after the expiration of thirty (30) days following the delivery of written notice of such breach to the Executive by the Bank. Such notice shall (i) specifically identify the duties that the Board of Directors of the Bank believes the Executive has failed to perform, (ii) state the facts upon which such Board of Directors made such determination, and (iii) be approved by a resolution passed by two-thirds (2/3) of the directors then in office;

(b) conduct by the Executive that amounts to fraud, dishonesty or willful misconduct in the performance of his duties and responsibilities hereunder;

(c) arrest for, charged in relation to (by criminal information, indictment or otherwise), or conviction of the Executive during the Term of this Agreement of a crime involving breach of trust or moral turpitude;

(d) conduct by the Executive that amounts to gross and willful insubordination or inattention to his duties and responsibilities hereunder; or

(e) conduct by the Executive that results in removal from his position as an officer or executive of the Bank pursuant to a written order by any regulatory agency with authority or jurisdiction over the Bank.

1.5.2 With respect to termination by the Executive, the following conditions will establish good reason for the Executive to terminate his employment and receive compensation as set forth in section 4.1 of the Agreement so long as the termination occurs during a period of time not to exceed two years following the occurrence of any of the conditions without the Executive’s consent, the Executive provides notice to the Bank of the good reason condition within ninety (90) days after the condition arises and the Bank has 30 days to cure the condition:

(a) a material diminution to the scope of the Executive’s authority (including supervisory authority), duties or responsibility;

(b) following a Change of Control, a material diminution of reporting relationship;

(c) following a Change of Control, a material change in the geography where the Executive must perform his service (e.g. a location that is beyond a 50-mile radius from the Executive’s office location immediately prior to the Change of Control);

(d) following a Change of Control, any material decrease in base compensation, bonus opportunity or other benefits provided for in Section 4 from the level in effect immediately prior to the Change of Control;

(e) any other material breach in the Agreement.

1.6 “ Change of Control ” means any one of the following events the effective date of which occurs during the Term:

(a) the acquisition by any one person, or more than one person acting as a group (other than any person or more than one person acting as a group who is considered to own more than fifty percent (50%) of the total fair market value or voting power of the Bank or the Company, as applicable, prior to such acquisition) of stock of the Bank or the Company, as applicable, that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or voting power of the stock of the Bank or the Company, as applicable;

(b) the date any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or group, which date is not prior to the first day of the Term) ownership of stock of the Bank or the Company, as applicable, possessing thirty percent (30%) or more of the total voting power of the stock of the Bank or the Company, as applicable;

(c) the date a majority of members of the Company’s Board of Directors is replaced during any twelve-month period, commencing no earlier than the first day of the Term, by the directors whose appointment is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election; or

(d) the date that any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or group, which date is not prior to the first day of the Term) assets of the Company that have a total gross fair market value of forty percent (40%) or more of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions; provided, however, that transfers to the following entities or person(s) shall not be deemed to result in a Change of Control under this Subsection (d):

(i) an entity that is controlled by the shareholders of the Company immediately after the transfer;

(ii) a shareholder (determined immediately before the asset transfer) of the Company in exchange for or with respect to its stock;

(iii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company;

(iv) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company; or

(v) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in the above Subsection (d)(iv).

For purposes of this Section 1.6, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company or the Bank. Notwithstanding the other provisions of this Section 1.6, no Change of Control shall be deemed to have occurred for purposes of this Agreement by reason of any actions or events in which the Executive participates in a capacity other than in the Executive’s capacity as an employee and, if applicable,

the Executive’s capacity as a director or shareholder of the Company or the Bank. Notwithstanding the other provisions of this Section 1.6, in the event of a merger, consolidation, reorganization, share exchange or other transaction as to which the holders of the capital stock of the Company before the transaction continue after the transaction to hold, directly or indirectly through a holding company or otherwise, shares of capital stock of the Company (or other surviving company) representing more than fifty percent (50%) of the value or ordinary voting power to elect directors of the capital stock of the Company (or other surviving company), such transaction shall not constitute a Change of Control. The provisions of this Section 1.6 shall be construed in a manner consistent with the applicable provisions of Section 409A of the Internal Revenue Code and the rules and regulations promulgated thereunder.

1.6A “ Company ” shall mean Nicolet Bankshares, Inc., a bank holding company incorporated under the laws of the State of Wisconsin.

1.7 “ Confidential Information ” means data and information relating to the business of the Bank (which does not rise to the status of a Trade Secret) which is or has been disclosed to the Executive or of which the Executive became aware as a consequence of or through the Executive's relationship to the Bank and which has value to the Bank and is not generally known to its competitors. Confidential Information shall not include any data or information that has been voluntarily disclosed to the public by the Bank (except where such public disclosure has been made by the Executive without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

1.8 “ Disability ” shall mean the inability of the Executive to perform each of his material duties under this Agreement for the duration of the short-term disability period under the Bank's policy then in effect (or, if no such policy is in effect, a period of one-hundred eighty (180) consecutive days) as certified by a physician chosen by the Bank and reasonably acceptable to the Executive.

1.9 Reserved

1.10 “ Initial Term ” shall mean that period of time commencing on the date of this Agreement and running until the close of business on the last business day immediately preceding the third anniversary of the date of this Agreement or any earlier termination of employment of the Executive under this Agreement as provided for in Section 3.

1.10A “ Separation from Service ” shall mean a termination of the Executive’s employment with the Bank and all affiliated companies that, together with the Bank, constitute the ‘service recipient’ within the meaning of Code Section 409A and the regulations thereunder that constitutes a ‘separation from service’ within the meaning of Code Section 409A and the regulations thereunder.

1.11 “ Term ” shall mean the last day of the Initial Term or most recent subsequent renewal period.

1.12 “ Trade Secrets ” means Bank information including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers which:

(a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

2. Duties .

2.1 Position . The Executive is employed as Senior Vice President – Wealth Management of the Bank, subject to the direction of the Chairman & CEO of Nicolet Bankshares, Inc. or its designee(s) and shall perform and discharge well and faithfully the duties which may be assigned to him from time to time by the Bank in connection with the conduct of its business. The duties and responsibilities of the Executive are set forth on Exhibit A attached hereto.

2.2 Full-Time Status . In addition to the duties and responsibilities specifically assigned to the Executive pursuant to Section 2.1 hereof, the Executive shall:

(a) devote substantially all of his time, energy and skill during regular business hours to the performance of the duties of his employment (reasonable vacations and reasonable absences due to illness excepted) and faithfully and industriously perform such duties;

(b) diligently follow and implement all reasonable and lawful management policies and decisions communicated to him by the Board of Directors of the Bank; and

(c) timely prepare and forward to the Chairman & CEO or its designees all reports and accountings as may be requested of the Executive.

2.3 Permitted Activities . The Executive shall devote his entire business time, attention and energies to the Business of the Bank and the Company and shall not during the Term be engaged (whether or not during normal business hours) in any other business or professional activity, whether or not such activity is pursued for gain, profit or other pecuniary advantage; but this shall not be construed as preventing the Executive from:

(a) investing his personal assets in businesses which (subject to clause (b) below) are not in competition with the Business of the Bank or the Company and which will not require any services on the part of the Executive in their operation or affairs and in which his participation is solely that of an investor;

(b) purchasing securities in any corporation whose securities are regularly traded provided that such purchase shall not result in him collectively owning beneficially at any time five percent (5%) or more of the equity securities of any business in competition with the Business of the Bank or the Company; and

(c) participating in civic and professional affairs and organizations and conferences, preparing or publishing papers or books or teaching so long as the Board of Directors of the Bank approves of such activities prior to the Executive's

engaging in them.

3. Term and Termination .

3.1 Term . This Agreement shall remain in effect for the Term. While this Agreement remains in effect, it shall automatically renew each day after the date of this Agreement so that the Term remains a three-year term from day-to-day hereafter unless the Bank or the Executive gives written notice to the other of its intent that the automatic renewals shall cease. In the event such notice of non-renewal is properly given, this Agreement and the Term shall expire on the third anniversary of the thirtieth (30th) day following the date such written notice is received.

3.2 Termination . During the Term, the employment of the Executive under this Agreement may be terminated only as follows:

3.2.1 By the Bank:

(a) Reserved;

(b) For Cause, upon written notice to the Executive pursuant to Section 1.5.1 hereof, where the notice has been approved by a resolution passed by two-thirds (2/3) of the directors of the Bank then in office;

(c) Without Cause at any time, provided that the Bank shall give the Executive thirty (30) days' prior written notice of its intent to terminate, in which event the Bank shall be required to continue to meet its obligations to the Executive under Section 4.1 for a period equal to the lesser of (i) twelve (12) months following the termination or (ii) the remaining Term of the Agreement; or

(d) Upon the Disability of Executive at any time, provided that the Bank shall give the Executive thirty (30) days' prior written notice of its intent to terminate, in which event, the Bank shall be required to continue to meet its obligations under Section 4.1 for a period of six (6) months following the termination or until the Executive begins receiving payments under the Bank's long-term disability policy, whichever occurs first.

3.2.2 By the Executive:

(a) For Cause, in which event the Bank shall be required to continue to meet its obligations under Section 4.1 for a period equal to the lesser of (i) twelve (12) months following the termination or (ii) the remaining Term of the Agreement; or

(b) Without Cause or upon the Disability of the Executive, provided that the Executive shall give the Bank sixty (60) days' prior written notice of his intent to terminate.

3.2.3 At any time upon mutual, written agreement of the parties.

3.2.4 Notwithstanding anything in this Agreement to the contrary, the Term shall end automatically upon the Executive's death.

3.3 Change of Control .

(a) If, within six (6) months after a Change of Control as defined in Section 1.6(a),(b) or (c), the Executive terminates his employment with the Bank under this Agreement for Cause, the Executive, or in the event of his subsequent death, his designated beneficiaries or his estate, as the case may be, shall receive, as liquidated damages, in lieu of all other claims, a severance payment equal to one and one-half (1.5) times the Executive’s then current Base Salary and bonus then in effect, if any, paid in a lump sum cash payment in accordance with Section 3.3A.

(b) In no event shall the payment(s) described in this Section 3.3 exceed the amount permitted by Section 280G of the Internal Revenue Code, as amended (the ‘Code’). Therefore, if the aggregate present value (determined as of the date of the Change of Control in accordance with the provisions of Section 280G of the Code) of both the severance payment and all other payments to the Executive in the nature of compensation which are contingent on a change in ownership or effective control of the Bank or in the ownership of a substantial portion of the assets of the Bank (the ‘Aggregate Severance’) would result in a ‘parachute payment,’ as defined under Section 280G of the Code, then the Aggregate Severance shall not be greater than an amount equal to 2.99 multiplied by the Executive’s ‘base amount’ for the ‘base period,’ as those terms are defined under Section 280G of the Code. In the event the Aggregate Severance is required to be reduced pursuant to this Section 3.3, the latest payments in time shall be reduced first and if multiple portions of the Aggregate Severance to be reduced are paid at the same time, any non-cash payments will be reduced before any cash payments, and any remaining cash payments will be reduced pro rata.

3.3A Severance .

(a) Payment of severance amounts due upon the Executive’s termination of employment pursuant to Sections 3.2.1(c) or (d); Section 3.2.2(a); or Section 3.3, as applicable, including any reimbursements to which the Executive is entitled pursuant to Section 4.3, shall commence or be made, as applicable, within ninety (90) days after the Executive experiences a Separation from Service on or after the date the Executive’s employment is terminated.

(b) Notwithstanding any provision in the Agreement to the contrary, to the extent necessary to avoid the imposition of tax on the Executive under Code Section 409A, any payments that are otherwise payable to the Executive within the first six (6) months following the effective date of the Executive’s Separation from Service, shall be suspended and paid as soon as practicable following the end of the six-month period following such effective date if, immediately prior to the Executive’s Separation from Service, the Executive is determined to be a ‘specified employee’ (within the meaning of Code Section 409A(a)(2)(B)(i)) of the Bank (or any related ‘service recipient’ within the meaning of Code Section 409A and the regulations thereunder). Any payments suspended by operation of the foregoing

sentence shall be paid as a lump sum in the seventh month following such effective date. Payments (or portions thereof) that would be paid latest in time during the six-month period will be suspended first.

3.4 Effect of Termination . Upon termination of the Executive's employment hereunder, the Bank shall have no further obligations to the Executive or the Executive's estate with respect to this Agreement, except for the payment of salary and bonus amounts, if any, accrued pursuant to Sections 4.1 and 4.2 hereof and unpaid as of the effective date of the termination of employment and payments set forth in Sections 3.2.1(a), (c) or (d); Section 3.2.2(a); Section 3.3; and Section 4.3, as applicable. Nothing contained herein shall limit or impinge upon any other rights or remedies of the Bank or the Executive under any other agreement or plan to which the Executive is a party or of which the Executive is a beneficiary.

4. Compensation . The Executive shall receive the following salary and benefits during the

Term, except as otherwise provided below:

4.1 Base Salary . During the Term in effect at the time of this Agreement, the Executive shall be compensated at a base rate of $300,000 per year (the “Base Salary”). The Executive's Base Salary shall be reviewed by the Chairman & CEO at least annually, and based on its evaluation of Executive's performance, may recommend to the Board of Directors of the Bank that the Executive's Base Salary be increased in such amount, if any, as may be determined by the Board of Directors of the Bank. Base Salary shall be payable in accordance with the Bank's normal payroll practices.

4.2 Incentive Compensation . The Executive shall be eligible to receive annual bonus compensation, if any, at a target rate of 30% of the Executive’s base pay as recommended by the Chairman & CEO and as approved by the Board of Directors of the Bank pursuant to any incentive compensation program as may be adopted from time to time by the Bank.

4.3 Health Insurance .

(a) In the event of termination by the Bank without Cause (Section 3.2.1(c)) or by the Executive for Cause (Section 3.2.2(a)) or following a Change of Control (Section 3.3), the Bank shall reimburse Executive for the cost of premium payments paid by the Executive to continue his then existing health insurance for herself and his eligible dependents as provided by the Bank for a period of twelve (12) months following the date of termination of employment.

(b) In no event shall any reimbursement pursuant to this Section 4.3 be paid after the last day of the taxable year following the taxable year in which the expense was incurred. The amount of reimbursable expenses incurred in one taxable year shall not affect the expenses eligible for reimbursement in any other taxable year. Such right to reimbursement is not subject to liquidation or exchange for another benefit.

4.4 Business Expenses; Memberships . The Bank specifically agrees to reimburse the Executive for:

(a) reasonable and necessary business (including travel) expenses incurred by him in the performance of his duties hereunder, as approved by the Chairman & CEO; and

(b) reasonable dues and business related expenditures, including initiation fees, associated with memberships, as selected by the Executive, including country clubs and professional associations which are commensurate with his position.

provided, however, that the Executive shall, as a condition of reimbursement, submit verification of the nature and amount of such expenses in accordance with reimbursement policies from time to time adopted by the Bank and in sufficient detail to comply with rules and regulations promulgated by the Internal Revenue Service.

4.5 Company Car . The Bank shall provide Executive with a company car. The year, make, model, and replacement of such company car shall be commensurate with the year, make, model and replacement of the company cars the Bank provides to other Bank officers. Subject to Bank approval, the Executive shall have the right to select the make and model the company car. The Executive’s personal use of the company car shall be subject to taxation, as is required by applicable law.

4.6 Restricted Stock . As of the Executive’s hire date, the Bank grants Executive seventeen thousand (17,000) shares of restricted stock (the “Restricted Stock”), which shall vest evenly over a five (5) year period. For example, on each of the first five (5) anniversaries of this grant date, three thousand four hundred (3,400) shares of Restricted Stock shall vest.

4.7 Benefits . In addition to the benefits specifically described in this Agreement, the Executive shall be entitled to such benefits as may be available from time to time to executives of the Bank similarly situated to the Executive. All such benefits shall be awarded and administered in accordance with the Bank's standard policies and practices. Such benefits may include, by way of example only, vacation pay, profit-sharing plans, retirement or investment funds, dental, health, life and disability insurance benefits and such other benefits as the Bank deems appropriate.

4.8 Withholding . The Bank may deduct from each payment of compensation hereunder all amounts required to be deducted and withheld in accordance with applicable federal and state income, FICA and other withholding requirements.

4.9 Reimbursement of Expenses; In-Kind Benefits . All expenses eligible for reimbursement under this Agreement must be incurred by the Executive during the Term of this Agreement to be eligible for reimbursement. All in-kind benefits described in this Agreement must be provided by the Bank during the Term of this Agreement. The amount of reimbursable expenses incurred, and the amount of in-kind benefits provided, in one taxable year shall not

affect the expenses eligible for reimbursement, or in-kind benefits provided, in any other taxable year. All reimbursements shall be paid as soon as administratively practicable, but in no event shall any reimbursement be paid after the last day of the calendar year following the calendar year in which the expense was incurred. Such right to reimbursement or in-kind benefits are not subject to liquidation or exchange for another benefit.

5. Bank Information .

5.1 Ownership of Bank Information . All Bank Information received or developed by the Executive while employed by the Bank will remain the sole and exclusive property of the Bank.

5.2 Obligations of the Executive . The Executive agrees:

(a) to hold Bank Information in strictest confidence;

(b) not to use, duplicate, reproduce, distribute, disclose or otherwise disseminate Bank Information or any physical embodiments of Bank Information; and

(c) in any event, not to take any action causing or fail to take any action necessary in order to prevent any Bank Information from losing its character or ceasing to qualify as Confidential Information or a Trade Secret.

In the event that the Executive is required by law to disclose any Bank Information, the Executive will not make such disclosure unless (and then only to the extent that) the Executive has been advised by independent legal counsel that such disclosure is required by law and then only after prior written notice is given to the Bank when the Executive becomes aware that such disclosure has been requested and is required by law. This Section 5 shall survive for a period of twelve (12) months following termination of this Agreement for any reason with respect to Confidential Information, and shall survive termination of this Agreement for any reason for so long as is permitted by applicable law, with respect to Trade Secrets.

5.3 Delivery upon Request or Termination . Upon request by the Bank, and in any event upon termination of his employment with the Bank, the Executive will promptly deliver to the Bank all property belonging to the Bank, including, without limitation, all Bank Information then in his possession or control.

6. Non-Competition . The Executive agrees that during his employment by the Bank hereunder and, in the event of his termination:

• by the Bank for Cause pursuant to Section 3.2.l(b),

• by the Executive without Cause pursuant to Section 3.2.2(b), or

• by the Executive in connection with a Change of Control pursuant to Section 3.3,

for a period of twelve (12) months thereafter, he will not (except on behalf of or with the prior written consent of the Bank), within the Area, either directly or indirectly, on his own behalf or in the service or on behalf of others, as an executive employee or in any other capacity which involves duties and responsibilities similar to those undertaken for the Bank (including as an organizer or proposed executive officer of a new financial institution), engage in any business which is the same as or essentially the same as the Business of the Bank and which is or is foreseeable to be competitive with the Bank. The Executive acknowledges that the degree of Bank Confidential Information made available to him are protectable interests warranting such restriction.

7. Non-Solicitation of Customers . The Executive agrees that during his employment by the Bank hereunder and, in the event of his termination:

• by the Bank for Cause pursuant to Section 3.2.l(b),

• by the Executive without Cause pursuant to Section 3.2.2(b), or

• by the Executive in connection with a Change of Control pursuant to Section 3.3,

for a period of twelve (12) months thereafter, he will not (except on behalf of or with the prior written consent of the Bank), within the Area, on his own behalf or in the service or on behalf of others, solicit, divert or appropriate or attempt to solicit, divert or appropriate, any business from any of the Bank's customers, including actively sought prospective customers, with whom the Executive has or had material contact during the last two (2) years of his employment, for purposes of providing products or services that are competitive with the Business of the Bank.

8. Non-Solicitation of Employees . The Executive agrees that during his employment by the Bank hereunder and, in the event of his termination:

• by the Bank for Cause pursuant to Section 3.2.1(b),

• by the Executive without Cause pursuant to Section 3.2.2(b), or

• by the Executive in connection with a Change of Control pursuant to Section 3.3,

for a period of twelve (12) months thereafter, he will not, within the Area, on his own behalf or in the service or on behalf of others, solicit, recruit or hire away or attempt to solicit, recruit or hire away, any employee of the Bank to another person or entity providing products or services that are competitive with the Business of the Bank, whether or not:

• such employee is a full-time employee or a temporary employee of the Bank,

• such employment is pursuant to written agreement, and

• such employment is for a determined period or is at will.

9. Remedies . The Executive agrees that the covenants contained in Sections 5 through 8 of this Agreement are of the essence of this Agreement; that each of the covenants is reasonable and necessary to protect the business, interests and properties of the Bank, and that irreparable loss and damage will be suffered by the Bank should he breach any of the covenants. Therefore, the Executive agrees and consents that, in addition to all the remedies provided by law or in equity, the Bank shall be entitled to a temporary restraining order and temporary and permanent injunctions to prevent a breach or contemplated breach of any of the covenants. The Bank and the Executive agree that all remedies available to the Bank or the Executive, as applicable, shall be cumulative.

10. Severability . The parties agree that each of the provisions included in this Agreement is separate, distinct and severable from the other provisions of this Agreement and that the invalidity or unenforceability of any Agreement provision shall not affect the validity or enforceability of any other provision of this Agreement. Further, if any provision of this Agreement is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between the provision and any applicable law or public policy, the provision shall be redrawn to make the provision consistent with and valid and enforceable under the law or public policy.

11. No Set-Off by the Executive . The existence of any claim, demand, action or cause of action by the Executive against the Bank whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Bank of any of its rights hereunder.

12. Notice . All notices and other communications required or permitted under this Agreement shall be in writing and, if mailed by prepaid first-class mail or certified mail, return receipt requested, shall be deemed to have been received on the earlier of the date shown on the receipt or three (3) business days after the postmarked date thereof. In addition, notices hereunder may be delivered by hand or overnight courier, in which event the notice shall be deemed effective when delivered. All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses:

(i)	If to the Bank, to it at:

	Post Office Box 23900
	Green Bay, Wisconsin 54305-3900

(ii)	If to the Executive, to him at:

	1425 Angel’s Path
	De Pere, WI 54115

13. Assignment . Neither party hereto may assign or delegate this Agreement or any of its rights and obligations hereunder without the written consent of the other party to this Agreement; provided, however, that the rights and obligations of the Bank shall apply to its successor(s) and the rights of the Executive shall inure to the benefit of the heirs or the estate of the Executive.

14. Waiver . A waiver by one party to this Agreement of any breach of this Agreement by the other party to this Agreement shall not be effective unless in writing, and no waiver shall operate or be construed as a waiver of the same or another breach on a subsequent occasion.

15. Arbitration . Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator may be entered only in a state court of Wisconsin or the federal court for the Eastern District of Wisconsin. The Bank and the Executive agree to share equally the fees and expenses associated with the arbitration proceedings.

16. Attorneys' Fees . In the event that the parties have complied with this Agreement with respect to arbitration of disputes and litigation ensues between the parties concerning the enforcement of an arbitration award, the party prevailing in such litigation shall be entitled to receive from the other party all reasonable costs and expenses, including without limitation attorneys’ fees, incurred by the prevailing party in connection with such litigation, and the other party shall pay such costs and expenses to the prevailing party within sixty (60) days after a final determination (excluding any appeals) is made with respect to the litigation.

17. Applicable Law . This Agreement shall be construed and enforced under and in accordance with the laws of the State of Wisconsin.

18. Interpretation . Words importing any gender include all genders. Words importing the singular form shall include the plural and vice versa. The terms “herein”, “hereunder”, “hereby”, “hereto”, “hereof' and any similar terms refer to this Agreement. Any captions, titles or headings

preceding the text of any article, section or subsection herein are solely for convenience of reference and shall not constitute part of this Agreement or affect its meaning, construction or effect.

19. Entire Agreement . This Agreement embodies the entire and final agreement of the parties on the subject matter stated in this Agreement. No amendment or modification of this Agreement shall be valid or binding upon the Bank or the Executive unless made in writing and signed by both parties.

20. Rights of Third Parties . Nothing herein expressed is intended to or shall be construed to confer upon or give to any person, firm or other entity, other than the parties hereto and their permitted assigns, any rights or remedies under or by reason of this Agreement.

21. Survival . The obligations of the Executive pursuant to Sections 5, 6, 7, 8 and 9 shall survive the termination of the employment of the Executive hereunder for the period designated under each of those respective sections.

IN WITNESS WHEREOF, the parties have caused this Employment Agreement to be executed on the day and year first above written.

THE BANK and THE COMPANY:		THE EXECUTIVE:

By: /s/ Robert B. Atwell		/s/ Patrick J. Madson

Print Name: Robert B. Atwell		Print Name: Patrick J. Madson

Title: Chairman and CEO

Exhibit A

Duties and Responsibilities of the Executive

Under the direction of the Chairman & CEO of Nicolet Bankshares, Inc., the Executive is responsible for the following:

Principal Accountabilities :

Overall responsibility for the financial and investment performance of the Company’s wealth management business.

Sets the direction, policies, and guidelines for the Bank’s wealth management line of business.

Develops the investment policy and directs all wealth management activities to achieve the investment objectives of the Company and its clients.

Establishes goals and oversees the development and implementation of investment policies and strategies and business development activities.

Oversees and manages wealth management advisors and staff. Hires, coaches and motivates the wealth management team to achieve and exceed benchmarks and sales goals. Provides investment expertise and support to advisors to assist in the closing and retention of business.

Evaluates and assigns appropriate books of clients to advisors as appropriate.

Stays abreast of current rules and regulations pertaining to wealth management services.

Develops and maintains a good understanding of the Company’s competitors and develops strategies around this understanding.

Identifies, attracts and closes new business, both individually and as part of the Wealth Management team of advisors.

Networks within the community to create new opportunities, focusing on centers of influence.

Develops and/or makes appropriate referrals for lending and deposit business for the Bank.

Exhibit 21.1

Subsidiaries of Nicolet Bankshares, Inc.:

Name and jurisdiction of incorporation/organization		Equity Interest Held by Registrant

Nicolet National Bank, organized under the laws of the United States of America		100%

Brookfield Investment Partners, LLC, a Wisconsin limited liability company		100%

Nicolet Advisory Services, LLC, a Wisconsin limited liability company		100%

Nicolet Joint Ventures, LLC, a Wisconsin limited liability company.		50%

In addition to the subsidiaries listed above, the Registrant owns all of the common stock of a) Nicolet Bankshares Statutory Trust I, b) Mid-Wisconsin Statutory Trust I, and c) Baylake Capital Trust II, which represents an approximate 3% equity interest in each trust, with preferred shareholders holding the remaining equity interest in each of the trusts.

Subsidiaries of Nicolet National Bank:

Name and jurisdiction of incorporation/organization		Equity Interest Held by Nicolet National Bank

Nicolet Investments, Inc., a Nevada corporation		100%

Nicolet Financial Group, LLC		100%

United Financial Services, Inc.(“UFS, Inc.”), a Wisconsin corporation		99.2%

Subsidiary of United Financial Services, Inc.:

Name and jurisdiction of incorporation/organization		Equity Interest Held by UFS, Inc.

United Financial Services, LLC		50.2%

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements (File No. 333-188853, File No. 333-188856, File No. 333-188857, File No. 333-188858, File No. 333-208192 and File No. 333-213734) on Forms S-8, (File No. 333-199216) on Form S-3, and (File No. 333-215057) on Form S-4 of Nicolet Bankshares, Inc. of our report dated March 7, 2016, relating to our audit of the consolidated financial statements and internal control over financial reporting which appears in this Annual Report on Form 10-K of Nicolet Bankshares, Inc. for the year ended December 31, 2016.

Atlanta, Georgia

March 10, 2017

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, Robert B. Atwell, certify that:

I have reviewed this annual report on Form 10-K of Nicolet Bankshares, Inc. (the “registrant”);

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;

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;

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 we 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

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 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.

March 10, 2017	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, 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:

I have reviewed this annual report on Form 10-K of Nicolet Bankshares, Inc. (the “registrant”);

(a)

(b)

(c)

(d)

(a)

(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.

March 10, 2017	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer
	Principal Financial 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 Annual Report of Nicolet Bankshares, Inc., (the “Company”) on Form 10-K as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Robert B. Atwell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C s.1350, as adopted pursuant to s.960 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 10, 2017	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, 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 Annual Report of Nicolet Bankshares, Inc., (the “Company”) on Form 10-K 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.960 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 10, 2017	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer