DISCUSSION AND ANALYSIS OF THE FINANCIAL STATUS AND BUSINESS RESULTS OF THE MANAGEMENT OF NICOLET BANKSHARES INC (Form 10-Q)

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Nicolet Bankshares, Inc. (the "Company" or "Nicolet") is a bank holding company
headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of
traditional banking and wealth management services to individuals and businesses
in its market area and through the branch offices of its banking subsidiary,
Nicolet National Bank (the "Bank"), in Northeast and Central Wisconsin, Northern
Michigan and the upper peninsula of Michigan.
Forward-Looking Statements
Statements made in this document and in any documents that are incorporated by
reference which are not purely historical are forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, including any
statements regarding descriptions of management's plans, objectives, or goals
for future operations, products or services, and forecasts of its revenues,
earnings, or other measures of performance. Forward-looking statements are based
on current management expectations and, by their nature, are subject to risks
and uncertainties. These statements generally may be identified by the use of
words such as "believe," "expect," "anticipate," "plan," "estimate," "should,"
"will," "intend," or similar expressions. Shareholders should note that many
factors, some of which are discussed elsewhere in this document, could affect
the future financial results of Nicolet and could cause those results to differ
materially from those expressed in forward-looking statements contained in this
document. These factors, many of which are beyond Nicolet's control, include,
but are not necessarily limited to the following:
•the magnitude and duration of the COVID-19 pandemic and the effects of the
COVID-19 pandemic on the business, customers, employees and third-party service
providers of Nicolet or any of its acquisition targets, including County;
•operating, legal and regulatory risks, including the effects of legislative or
regulatory developments affecting the financial industry generally or Nicolet
specifically;
•economic, market, political and competitive forces affecting Nicolet's banking
and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions,
which may impact Nicolet's net interest income;
•the risk that the proposed acquisition of County will not be consummated or
will not meet Nicolet's expectations regarding the timing of the proposed
acquisition;
•the possibility that the anticipated benefits of the Mackinac acquisition are
not realized when expected or at all, including as a result of the impact of, or
problems arising from, the integration of the two companies or as a result of
the strength of the economy and competitive factors in the areas where Nicolet
does business;
•the possibility that the proposed Birmingham Sale will not close when expected
or at all because required regulatory approvals are not received or other
conditions to the closing are not satisfied on a timely basis or at all;
•diversion of management time on pandemic-related or acquisition-related issues;
•adoption of new accounting standards, including the effects from the adoption
of the CECL model on January 1, 2020, or changes in existing standards;
•changes to statutes, regulations, or regulatory policies or practices resulting
from the COVID-19 pandemic;
•compliance or operational risks related to new products, services, ventures, or
lines of business, if any, that Nicolet may pursue or implement;
•changes in consumer demand for financial services; and
•the risk that Nicolet's analysis of these risks and forces could be incorrect
and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements,
and you should not place undue reliance on such statements. Nicolet specifically
disclaims any obligation to update factors or to publicly announce the results
of revisions to any of the forward-looking statements or comments included
herein to reflect future events or developments.

overview

The following discussion is management's analysis of the consolidated financial
condition as of September 30, 2021 and December 31, 2020 and results of
operations for the three and nine-month periods ended September 30, 2021 and
2020. It should be read in conjunction with Nicolet's audited consolidated
financial statements included in Nicolet's Annual Report on Form 10-K for the
year ended December 31, 2020.

Evaluation of financial performance and certain balance sheet line items between
2021 and 2020 were impacted by the timing and size of Nicolet's acquisition of
Mackinac Financial Corporation ("Mackinac") on September 3, 2021. The inclusion
of the Mackinac balance sheet (at approximately 30% of Nicolet's then pre-merger
asset size) explains a substantial portion of the increase in certain period end
balances, while the income statement results reflect only one month of
contribution from Mackinac in 2021. At acquisition, Mackinac added $1.5 billion
in assets, $0.9 billion of loans, $1.4 billion of deposits, and goodwill of $92
million, for a total purchase price that included $180 million of common equity
(or 2.3 million shares) and $49 million of cash.
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The initial impacts of the COVID-19 pandemic (declared in March 2020) resulted
in, among other things, stock and global markets decline, disruption in business
and leisure activities as nation-wide stay-at-home orders were mandated,
significant strain on the health care industry as it addressed the severity of
the health crisis, and shifts in the general economy (such as high unemployment,
negative GDP expectations, an immediate 150 bps decline in Federal funds rates,
and unprecedented government stimulus), triggering a 2020 recession. The
dramatic events surrounding the pandemic, fluctuating social and economic
changes since the onset of the pandemic, and uncertainty about the longevity of
the pandemic's effects were significant and unfolding throughout most of 2020,
but have abated somewhat for 2021 as people and businesses were supported by
government stimulus and are adjusting to a vaccination rollout and a new normal
in a still evolving environment, including a second wave of the pandemic from a
new strain of the virus.

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

During 2020, we originated 2,725 PPP loans totaling $351 million, bearing a 1%
contractual rate, and earned a $12.3 million fee. During 2021, under the latest
round of the SBA's program, Nicolet originated 2,205 PPP loans totaling $160
million and earned a $9.3 million fee. Of the total fees, $5.7 million was
accreted into interest in 2020 and $9.8 million was accreted in the first nine
months of 2021. At September 30, 2021, the net carrying value of all PPP loans
held for investment was $68 million, or 2% of total loans, for a net
$118 million decrease from year-end 2020, as loan forgiveness has outpaced the
latest round of new PPP loans. SBA loan forgiveness that started in November
2020 has boosted overall borrower equity in their businesses and meaningfully
improves the credit quality of many commercial relationships.


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Performance Summary
Table 1: Earnings Summary and Selected Financial Data
                                                                               At or for the Three Months Ended                                            At or for the Nine Months Ended
(In thousands, except per share data)           9/30/2021            6/30/2021            3/31/2021            12/31/2020           9/30/2020               9/30/2021              9/30/2020
Results of operations:
Interest income                               $    38,741          $    38,307          $    36,876          $    38,037          $    37,270          $       113,924           $   111,165
Interest expense                                    3,557                2,736                3,235                4,019                4,710                    9,528                15,845
Net interest income                                35,184               35,571               33,641               34,018               32,560                  104,396                95,320
Provision for credit losses                         6,000                    -                  500                1,300                3,000                    6,500                 9,000
Net interest income after provision for
credit losses                                      29,184               35,571               33,141               32,718               29,560                   97,896                86,320
Noninterest income                                 13,996               20,178               17,126               16,879               18,691                   51,300                45,747
Noninterest expense                                33,061               30,747               26,081               25,367               23,685                   89,889                75,352
Income before income tax expense                   10,119               25,002               24,186               24,230               24,566                   59,307                56,715
Income tax expense                                  2,295                6,718                5,947                6,145                6,434                   14,960                14,331
Net income                                          7,824               18,284               18,239               18,085               18,132                   44,347                42,384
Net income attributable to noncontrolling
interest                                                -                    -                    -                   98                   30                        -                   249
Net income attributable to Nicolet
Bankshares, Inc.                              $     7,824          $    

18,284 $ 18,239 $ 17,987 $ 18,102

    $        44,347           $    42,135
Earnings per common share:
Basic                                         $      0.75          $      1.85          $      1.82          $      1.79          $      1.75          $          4.39           $      4.04
Diluted                                       $      0.73          $      1.77          $      1.75          $      1.74          $      1.72          $          4.22           $      3.97
Common Shares:
Basic weighted average                             10,392                9,902                9,998               10,074               10,349                   10,098                10,426
Diluted weighted average                           10,776               10,326               10,403               10,350               10,499                   10,503                10,605
Outstanding (period end)                           11,952                9,843                9,988               10,011               10,196                   11,952                10,196
Period-End Balances:
Loans                                         $ 3,533,198          $ 

2,820,331 $ 2,846,351 $ 2,789,101 $ 2,908,793

       $     3,533,198           $ 2,908,793
Allowance for credit losses - loans                38,399               32,561               32,626               32,173               31,388                   38,399                31,388
Securities available-for-sale, at fair value      715,942              562,028              558,229              539,337              535,351                  715,942               535,351
Goodwill and other intangibles, net               269,954              173,711              174,501              175,353              176,213                  269,954               176,213
Total assets                                    6,407,820            4,587,347            4,543,804            4,551,789            4,706,375                6,407,820             4,706,375
Deposits                                        5,428,774            3,939,022            3,900,594            3,910,399            3,712,808                5,428,774             3,712,808
Stockholders' equity (common)                     729,278              559,395              550,046              539,189              538,068                  729,278               538,068
Book value per common share                         61.01                56.83                55.07                53.86                52.77                    61.01                 52.77
Tangible book value per common share (2)            38.43                39.18                37.60                36.34                35.49                    38.43                 35.49
Average Balances:
Loans                                         $ 3,076,422          $ 2,869,105          $ 2,825,664          $ 2,868,827          $ 2,871,256          $     2,924,648           $ 2,760,309
Interest-earning assets                         4,734,768            4,109,394            4,089,603            4,091,460            4,216,106                4,313,618             3,768,676
Goodwill and other intangibles, net               201,748              174,026              174,825              175,678              169,353                  183,632               166,493
Total assets                                    5,246,193            4,527,839            4,514,927            4,515,226            4,633,359                4,765,665             4,167,902
Deposits                                        4,448,468            3,897,797            3,875,205            3,793,430            3,636,260                4,075,923             3,320,994
Interest-bearing liabilities                    3,093,031            2,684,871            2,764,232            2,744,578            2,933,737                2,848,583             2,632,280
Stockholders' equity (common)                     608,946              550,974              544,541              537,920              537,826                  568,390               523,904
Financial Ratios: (1)
Return on average assets                             0.59  %              1.62  %              1.64  %              1.58  %              1.55  %                  1.24   %              1.35  %
Return on average common equity                      5.10                13.31                13.58                13.30                13.39                    10.43                 10.74
Return on average tangible common equity (2)         7.62                19.46                20.01                19.75                19.54                    15.41                 15.75
Average equity to average assets                    11.61                12.17                12.06                11.91                11.61                    11.93                 12.57
Stockholders' equity to assets                      11.38                12.19                12.11                11.85                11.43                    11.38                 11.43
Tangible common equity to tangible assets (2)        7.48                 8.74                 8.60                 8.31                 7.99                     7.48                  7.99
Net interest margin                                  2.94                 3.45                 3.31                 3.29                 3.06                     3.22                  3.35
Net loan charge-offs to average loans                0.01                 0.01                 0.01                 0.07                 0.10                     0.01                  0.04
Nonperforming loans to total loans                   0.47                 0.25                 0.31                 0.34                 0.38                     0.47                  0.38
Nonperforming assets to total assets                 0.33                 0.21                 0.28                 0.29                 0.25                     0.33                  0.25
Efficiency ratio                                    65.32                59.37                51.84                48.99                46.18                    58.86                 52.71
Effective tax rate                                  22.68                26.87                24.59                25.36                26.19                    25.22                 25.27



(1) Income statement-related ratios for partial-year periods are annualized.
(2) The ratios of tangible book value per common share, return on average
tangible common equity, and tangible common equity to tangible assets exclude
goodwill and other intangibles, net. These financial ratios have been included
as they are considered to be critical metrics with which to analyze and evaluate
financial condition and capital strength. See Table 1A: Non-GAAP Financial
Measures for a reconciliation of these financial measures.
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Table 1A: Non-GAAP Financial Measures

                                                                    At or for the Three Months Ended                                        At or for the Nine Months Ended
(In thousands, except per share
data)                                9/30/2021            6/30/2021            3/31/2021            12/31/2020           9/30/2020            9/30/2021          9/30/2020
Tangible Assets:
Total assets                       $ 6,407,820          $ 4,587,347        

$ 4,543,804 $ 4,551,789 $ 4,706,375
goodwill and other intangibles, net

                                    269,954              173,711              174,501              175,353              176,213
Tangible assets                    $ 6,137,866          $ 4,413,636         

$ 4,369,303 $ 4,376,436 $ 4,530,162
Tangible Common Equity: Equity (general) $ 729,278 $ 559,395

$ 550,046 $ 539,189 $ 538,068
goodwill and other intangibles, net

                                    269,954              173,711              174,501              175,353              176,213
Tangible common equity             $   459,324          $   385,684         

$ 375,545 $ 363,836 $ 361,855
Average Tangible Common Equity: Equity (general) $ 608,946 $ 550,974

$ 544,541 $ 537,920 $ 537,826 $ 568,390

         $ 523,904
Goodwill and other intangibles,
net                                    201,748              174,026              174,825              175,678              169,353             183,632 

166.493

Average material hard equity $ 407,198 $ 376,948

$ 369,716 $ 362,242 $ 368,473 $ 384,758

$ 357,411


Net income was $44.3 million for the nine months ended September 30, 2021,
compared to $42.1 million for the nine months ended September 30, 2020. Earnings
per diluted common share was $4.22 for the first nine months of 2021, compared
to $3.97 for the first nine months of 2020.
•Net interest income was $104.4 million for the first nine months of 2021, up
$9.1 million (10%) over the first nine months of 2020. Interest income grew $2.8
million attributable to favorable volumes (mostly higher loan volumes), partly
offset by net unfavorable rates (influenced by Federal Reserve rate cuts in
March 2020). Interest expense favorably decreased $6.3 million between the
nine-month periods reflecting disciplined deposit pricing. Net interest margin
was 3.22% for the nine months ended September 30, 2021, compared to 3.35% for
the nine months ended September 30, 2020, influenced by the changing balance
sheet mix, including elevated cash levels, in the lower rate environment. For
additional information regarding net interest income, see "Income Statement
Analysis - Net Interest Income."
•Noninterest income was $51.3 million for the first nine months of 2021, up $5.6
million (12%) from the comparable 2020 period. Excluding net asset gains
(losses), noninterest income was $47.6 million for the first nine months of
2021, up $0.7 million (1%) over 2020, predominantly on higher wealth revenue
(trust services and brokerage fee income combined) and card interchange income,
partly offset by lower net mortgage income. For additional information regarding
noninterest income, see "Income Statement Analysis - Noninterest Income."
•Noninterest expense was $89.9 million, $14.5 million (19%) higher than the
first nine months of 2020. Personnel costs increased $7.3 million, and
non-personnel expenses combined increased $7.3 million (22%) over the comparable
2020 period. For additional information regarding noninterest expense, see
"Income Statement Analysis - Noninterest Expense."
•Nonperforming assets were $21 million, representing 0.33% of total assets at
September 30, 2021, compared to 0.29% at December 31, 2020 and 0.25% at
September 30, 2020. For additional information regarding nonperforming assets,
see "Balance Sheet Analysis - Nonperforming Assets."
•At September 30, 2021, assets were $6.4 billion, up $1.9 billion (41%) from
December 31, 2020 and up $1.7 billion (36%) from September 30, 2020, mainly due
to the acquisition of Mackinac. For additional balance sheet discussion see
"Balance Sheet Analysis."
•At September 30, 2021, loans were $3.5 billion, $744 million (27%) higher than
December 31, 2020 and $624 million (21%) higher than September 30, 2020, largely
due to the acquisition of Mackinac. On average, loans grew $164 million (6%)
over the first nine months of 2020. For additional information regarding loans,
see "Balance Sheet Analysis - Loans."
•Total deposits were $5.4 billion at September 30, 2021, an increase of $1.5
billion (39%) from December 31, 2020 and $1.7 billion (46%) higher than
September 30, 2020, substantially attributable to the Mackinac acquisition.
Year-to-date average deposits were $755 million (23%) higher than the first nine
months of 2020. For additional information regarding deposits, see "Balance
Sheet Analysis - Deposits."
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INCOME STATEMENT ANALYSIS
Net Interest Income
Tax-equivalent net interest income is a non-GAAP measure, but is a preferred
industry measurement of net interest income (and its use in calculating a net
interest margin) as it enhances the comparability of net interest income arising
from taxable and tax-exempt sources. The tax-equivalent adjustments bring
tax-exempt interest to a level that would yield the same after-tax income by
applying the effective Federal corporate tax rates to the underlying assets.
Tables 2 and 3 present information to facilitate the review and discussion of
selected average balance sheet items, tax-equivalent net interest income,
interest rate spread and net interest margin.

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Table 2: Analysis of the average balance sheet and net interest income – tax-equivalent basis

For the nine months over 30. September,

                                                             2021                                                             2020
                                     Average                                   Average                Average                                   Average
(in thousands)                       Balance             Interest             Yield/Rate              Balance             Interest             Yield/Rate
ASSETS
Interest-earning assets
PPP Loans                         $   173,463          $  11,123                     8.46  %       $   199,662          $   4,263                     2.80  %
Commercial-based loans ex PPP       2,222,290             75,845                     4.50  %         2,083,768             80,224                     5.06  %
Retail-based loans                    528,895             17,357                     4.38  %           476,879             17,190                     4.81  %
Total loans, including loan fees
(1)(2)                              2,924,648            104,325                     4.71  %         2,760,309            101,677                     4.85  %
Investment securities:
Taxable                               418,897              5,935                     1.89  %           349,202              6,115                     2.34  %
Tax-exempt (2)                        140,691              2,252                     2.13  %           130,714              2,165                     2.21  %
Total investment securities           559,588              8,187                     1.95  %           479,916              8,280                     2.30  %
Other interest-earning assets         829,382              2,140                     0.34  %           528,451              1,917                     0.48  %
Total non-loan earning assets       1,388,970             10,327                     0.99  %         1,008,367             10,197                     1.35  %
Total interest-earning assets       4,313,618          $ 114,652                     3.51  %         3,768,676          $ 111,874                     3.91  %
Other assets, net                     452,047                                                          399,226
Total assets                      $ 4,765,665                                                      $ 4,167,902
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings                           $   595,385          $     272                     0.06  %       $   395,961          $     588                     0.20  %
Interest-bearing demand               681,079              2,114                     0.41  %           551,018              3,092                     0.75  %
Money market accounts ("MMA")         889,022                363                     0.05  %           723,323              1,313                     0.24  %
Core time deposits                    318,477              2,165                     0.91  %           400,198              4,901                     1.64  %
Total interest-bearing core
deposits                            2,483,963              4,914                     0.26  %         2,070,500              9,894                     0.64  %
Brokered deposits                     284,738              2,885                     1.35  %           279,165              3,302                     1.58  %
Total interest-bearing deposits     2,768,701              7,799                     0.38  %         2,349,665             13,196                     0.75  %
PPPLF                                       -                  -                        -  %           191,535                507                     0.35  %
Other interest-bearing
liabilities                            79,882              1,729                     2.87  %            91,080              2,142                     3.10  %
Total wholesale funding                79,882              1,729                     2.87  %           282,615              2,649                     1.23  %
Total interest-bearing
liabilities                         2,848,583              9,528                     0.45  %         2,632,280             15,845                     0.80  %
Noninterest-bearing demand
deposits                            1,307,222                                                          971,329
Other liabilities                      41,470                                                           40,389
Stockholders' equity                  568,390                                                          523,904
Total liabilities and
 stockholders' equity             $ 4,765,665                                                      $ 4,167,902
Net interest income and rate
spread                                                 $ 105,124                     3.06  %                            $  96,029                     3.11  %
Tax-equivalent adjustment                              $     728                                                        $     709
Net interest income and net
interest margin                                        $ 104,396                     3.22  %                            $  95,320                     3.35  %
Selected Additional Information:
Total loans ex. PPP               $ 2,751,185          $  93,202                     4.48  %       $ 2,560,647          $  97,414                     5.01  %
Total interest-earning assets ex
PPP                                 4,140,155            103,529                     3.31  %         3,569,014            107,611                     3.98  %
Total interest-bearing
liabilities ex PPPLF                2,848,583              9,528                     0.45  %         2,440,745             15,338                     0.84  %
Net interest rate spread ex PPP &
PPPLF                                                                                2.86  %                                                          3.14  %


(1)Nonaccrual loans and loans held for sale are included in the daily average
loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is
computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted
for the disallowance of interest expense.

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Table 2: Analysis of the average balance sheet and net interest income – tax-equivalent basis (continued)

For the three months that have passed 30. September,

                                                            2021                                                            2020
                                     Average                                  Average                Average                                  Average
(in thousands)                       Balance            Interest             Yield/Rate              Balance            Interest             Yield/Rate
ASSETS
Interest-earning assets
PPP Loans                         $   109,318          $  2,310                     8.27  %       $   332,816          $  2,477                     2.91  %
Commercial-based loans ex PPP       2,378,480            26,759                     4.40  %         2,064,191            26,021                     4.93  %
Retail-based loans                    588,624             6,242                     4.24  %           474,249             5,577                     4.70  %
Total loans, including loan fees
(1)(2)                              3,076,422            35,311                     4.51  %         2,871,256            34,075                    
4.66  %
Investment securities:
Taxable                               472,598             2,061                     1.74  %           356,908             2,001                     2.24  %
Tax-exempt (2)                        139,272               744                     2.14  %           139,245               763                     2.19  %
Total investment securities           611,870             2,805                     1.83  %           496,153             2,764                     2.23  %
Other interest-earning assets       1,046,476               869                     0.33  %           848,697               680                     0.32  %
Total non-loan earning assets       1,658,346             3,674                     0.55  %         1,344,850             3,444                     1.02  %
Total interest-earning assets       4,734,768          $ 38,985                     3.24  %         4,216,106          $ 37,519                     3.50  %
Other assets, net                     511,425                                                         417,253
Total assets                      $ 5,246,193                                                     $ 4,633,359
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings                           $   662,260          $    100                     0.06  %       $   443,121          $    127                     0.11  %
Interest-bearing demand               711,442               685                     0.38  %           585,528               844                     0.57  %
MMA                                   962,538               135                     0.06  %           777,696               233                     0.12  %
Core time deposits                    329,012               630                     0.76  %           374,230             1,337                     1.42  %
Total interest-bearing core
deposits                            2,665,252             1,550                     0.23  %         2,180,575             2,541                     0.46  %
Brokered deposits                     284,164               894                     1.25  %           336,026             1,243                     1.47  %
Total interest-bearing deposits     2,949,416             2,444                     0.33  %         2,516,601             3,784                     0.60  %
PPPLF                                       -                 -                        -  %           335,865               297                     0.35  %
Other interest-bearing
liabilities                           143,615             1,113                     3.08  %            81,271               629                     3.05  %
Total wholesale funding               143,615             1,113                     3.08  %           417,136               926                     0.87  %
Total interest-bearing
liabilities                         3,093,031             3,557            
        0.46  %         2,933,737             4,710                     0.64  %
Noninterest-bearing demand
deposits                            1,499,052                                                       1,119,659
Other liabilities                      45,164                                                          42,137
Stockholders' equity                  608,946                                                         537,826
Total liabilities and
 stockholders' equity             $ 5,246,193                                                     $ 4,633,359
Net interest income and rate
spread                                                 $ 35,428                     2.78  %                            $ 32,809                     2.86  %
Tax-equivalent adjustment                              $    244                                                        $    249
Net interest income and net
interest margin                                        $ 35,184                     2.94  %                            $ 32,560                     3.06  %
Selected Additional Information:
Total loans ex. PPP               $ 2,967,104          $ 33,001                     4.37  %       $ 2,538,440          $ 31,598                     4.89  %
Total interest-earning assets ex
PPP                                 4,625,450            36,675                     3.12  %         3,883,290            35,042                     3.55  %
Total interest-bearing
liabilities ex PPPLF                3,093,031             3,557                     0.46  %         2,597,872             4,413                     0.67  %
Net interest rate spread ex PPP &
PPPLF                                                                               2.66  %                                                         2.88  %


(1)Nonaccrual loans and loans held for sale are included in the daily average
loan balances outstanding.
(2)The yield on tax-exempt loans and tax-exempt investment securities is
computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted
for the disallowance of interest expense.

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Table 3: Volume / rate deviation – tax-equivalent basis

                                            For the Three Months Ended                                 For the Nine Months Ended
                                                September 30, 2021                                         September 30, 2021
                                         Compared to September 30, 2020:                            Compared to September 30, 2020:
                                      Increase (Decrease) Due to Changes in                      Increase (Decrease) Due to Changes in
(in thousands)                      Volume                Rate            Net (1)              Volume               Rate            Net (1)
Interest-earning assets
PPP Loans                      $       (2,481)         $  2,314          $  

(167) $ (627) $ 7,487 $ 6,860
Commercial loans, e.g. PPP 3,547

            (2,809)             738                  4,484            (8,863)          (4,379)
Retail-based loans                      1,249              (584)             665                  1,786            (1,619)             167
Total loans (2)                         2,315            (1,079)           1,236                  5,643            (2,995)           2,648
Investment securities:
Taxable                                   438              (378)              60                    643              (823)            (180)
Tax-exempt (2)                              -               (19)             (19)                   161               (74)              87
Total investment securities               438              (397)              41                    804              (897)             (93)
Other interest-earning assets             107                82              189                    456              (233)             223
 Total non-loan earning assets            545              (315)             230                  1,260            (1,130)             130

Sum of interest-bearing assets $ 2,860 $ (1,394) $ 1,466 $ 6,903 $ (4,125) $ 2,778

Interest-bearing liabilities
Savings                        $           48          $    (75)         $  

(27) $ 209 $ (525) $ (316)
Interest-bearing demand

                   159              (318)            (159)                   616            (1,594)            (978)
MMA                                        47              (145)             (98)                   247            (1,197)            (950)
Core time deposits                       (146)             (561)            (707)                  (861)           (1,875)          (2,736)
Total interest-bearing core
deposits                                  108            (1,099)            (991)                   211            (5,191)          (4,980)
Brokered deposits                        (176)             (173)            (349)                    64              (481)            (417)
Total interest-bearing
deposits                                  (68)           (1,272)          (1,340)                   275            (5,672)          (5,397)
PPPLF                                    (148)             (149)            (297)                  (253)             (254)            (507)
Other interest-bearing
liabilities                               600              (116)             484                    186              (599)            (413)
Total wholesale funding                   452              (265)             187                    (67)             (853)            (920)
Total interest-bearing
liabilities                               384            (1,537)          (1,153)                   208            (6,525)          (6,317)
Net interest income            $        2,476          $    143          $ 2,619          $       6,695          $  2,400          $ 9,095

(1) The interest rate change due to both the rate and volume has been allocated in proportion to the respective dollar change amounts. (2) The return on tax-free loans and tax-free securities is calculated at the same rate as a federal tax rate of 21% and adjusted for the deduction of interest expenses.


Short-term interest rates have remained steady since March 2020, while the yield
curve has begun to steepen mainly since year end 2020. The succeeding quarters
felt the pressure of a low interest rate environment and bloated cash balances
from government stimulus, both in the form of stimulus checks to individuals and
PPP loans for businesses. The continued elevation of low interest-earning asset
balances have further decreased margins along with the normal pressures of a
near-zero rate environment. Though margins remain depressed, interest income
dollars continue to rise on favorable asset volumes and proactive expense
reduction measures. The following paragraphs will discuss the comparison of the
first nine months of 2021 and 2020, with COVID-19 pandemic impacts appearing in
second quarter 2020 and the economy beginning to rebound in the first part of
2021. Though improving, we see continued margin pressure and pricing impacts on
loans and deposits.
Tax-equivalent net interest income was $105.1 million for the first nine months
of 2021, comprised of net interest income of $104.4 million ($9.1 million or 10%
higher than the first nine months of 2020), and a $0.7 million tax-equivalent
adjustment. The $9.1 million increase in tax-equivalent net interest income was
attributable to net favorable volumes (which added $6.7 million, mostly from
higher loan volumes and organic loan growth, as well as interest-earning assets
from the Mackinac and Advantage acquisitions) and net favorable rates (which
increased net interest income $2.4 million due to a lower cost of funds largely
as a result of prudent deposit pricing actions).
Between the comparable nine-month periods, the interest rate spread decreased 5
bps, largely attributable to the lower interest rate environment between the
periods and the higher concentration of low-earning cash compared to the first
nine months of 2020. The 2021 interest-earning asset yield declined 40 bps to
3.51%, partly from the 14 bps decline in loans but was more significantly
impacted by the decrease in the loans-to-earning asset mix (to 68% compared to
73% for the first nine months of 2020) given the dramatic increase in cash.
Other interest-earning assets (which are predominantly cash) declined 14 bps,
while
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total non-loan earning assets declined 36 bps. The 2021 cost of funds declined
favorably 35 bps to 0.45%, largely from improved interest-bearing core deposit
rates, as well as lower brokered and other interest-bearing liabilities rates.
The contribution from net free funds decreased 8 bps, due mostly to the reduced
value in the lower rate environment, though offset partly by the 29% increase in
average net free funds (largely from higher average noninterest-bearing demand
deposits and stockholders' equity) between the nine-month periods. As a result,
the tax-equivalent net interest margin was 3.22% for the first nine months of
2021, down 13 bps compared to 3.35% for the comparable 2020 period.
Average interest-earning assets increased to $4.3 billion, up $0.5 billion (14%)
over the 2020 comparable period, primarily due to significantly higher cash
starting in second quarter 2020, the addition of PPP loans (beginning second
quarter 2020), and the timing of the Mackinac and Advantage acquisitions (in
September 2021 and August 2020, respectively). Between the comparable nine-month
periods, average loans increased $164 million (6%), mostly due to organic loan
growth and the timing of the Mackinac and Advantage acquisitions, which added
loans of $930 million and $88 million, respectively, at acquisition. In
addition, PPP loan activity remains strong, with a net average balance of $173
million at September 30, 2021, as loan forgiveness has outpaced the latest round
of funding. Total non-loan interest-earning assets increased $381 million (38%)
on average, largely due to higher cash. The mix of average interest-earning
assets shifted to lower-yielding assets, at 68% loans, 13% investments and 19%
other interest-earning assets (mostly cash) for the first nine months of 2021,
compared to 73%, 13% and 14%, respectively, for the first nine months of 2020.
Tax-equivalent interest income was $114.7 million for the first nine months of
2021, up $2.8 million from the first nine months of 2020, and the related
interest-earning asset yield was 3.51%, down 40 bps from the comparable period
in 2020. Interest income on loans increased $2.6 million over the first nine
months of 2020, with net decreases in interest rates more than offset by
favorable volumes. The 2021 loan yield was 4.71%, down 14 bps from the first
nine months of 2020, largely from the significantly lower rate environment
impacting yields on new, renewed and variable rate loans. Between the comparable
nine-month periods, interest income on non-loan earning assets combined grew
$0.1 million to $10.3 million on higher average volumes (up 38%, mostly cash),
though the yield declined 36 bps (to 0.99%) in the lower rate environment,
mostly from the significantly higher cash.
Average interest-bearing liabilities were $2.8 billion, an increase of $216
million (8%), primarily due to the significant increase in deposits from
government stimulus activities and deposited PPP loan proceeds, though also
partly due to the timing of the Mackinac and Advantage acquisitions (in
September 2021 and August 2020, respectively). The mix of average
interest-bearing liabilities was 87% core deposits, 10% brokered deposits and 3%
other funding for the first nine months of 2021, compared to 79%, 10% and 11%,
respectively, for the first nine months of 2020.
Interest expense decreased to $9.5 million for the first nine months of 2021,
down $6.3 million compared to the first nine months of 2020, on slightly higher
volumes of average interest-bearing liabilities (up 8% to $2.8 billion) but at a
lower overall cost of funds (down 35 bps to 0.45%). Interest expense on deposits
decreased $5.4 million (41%) from the first nine months of 2020 given higher
average interest-bearing deposit balances at a lower cost (down 37 bps to 0.38%)
as product rate changes were made in the lower rate environment, and brokered
deposits cost 23 bps less, largely from maturities of higher-costing term
brokered funds procured during March-April 2020 under competitive conditions as
part of previously discussed liquidity actions. Interest expense on other
interest-bearing liabilities was down between the comparable nine-month periods,
as interest expense on lower average balances (down $203 million) more than
offset the higher rates related to the subordinated notes issued in July 2021
(up 164 bps to 2.87%).
Provision for Credit Losses
The provision for credit losses was $6.5 million for the nine months ended
September 30, 2021 (comprised of $4.5 million related to the ACL-Loans, and $2.0
million for the ACL on unfunded commitments), compared to $9.0 million for the
nine months ended September 30, 2020 (all related to the ACL-Loans). The 2021
provision for credit losses was mostly due to the Day 2 ACL increase from the
Mackinac acquisition. In comparison, the provision for credit losses was
significantly increased for most of 2020 given unprecedented economic
disruptions and uncertainty surrounding the COVID-19 pandemic, and the related
credit stress on our customers, though tempered starting in late 2020 and
continuing into 2021 as potential deterioration of loan quality metrics
initially anticipated did not materialize.
The provision for credit losses is predominantly a function of Nicolet's
methodology and judgment as to qualitative and quantitative factors used to
determine the appropriateness of the ACL-Loans and unfunded commitments. The
appropriateness of the ACL-Loans is affected by changes in the size and
character of the loan portfolio, changes in levels of collateral dependent and
other nonperforming loans, historical losses and delinquencies in each portfolio
segment, the risk inherent in specific loans, concentrations of loans to
specific borrowers or industries, existing and future economic conditions, the
fair value of underlying collateral, and other factors which could affect
expected credit losses. The ACL for unfunded commitments is affected by many of
the same factors as the ACL-Loans, as well as funding assumptions relative to
lines of credit. See also Note 6, "Loans, Allowance for Credit Losses - Loans,
and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements
under Part I, Item 1, for additional disclosures. For additional information
regarding asset
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Quality and the ACL loans, see “BALANCE SHEET ANALYSIS – Loans”, “- Loan loss allowances – Loans” and “- Bad assets”.

Noninterest Income
Table 4: Noninterest Income
                                                  Three Months Ended September 30,                                                Nine Months Ended September 30,
(in thousands)                     2021               2020            $ Change            % Change                2021                2020            $ Change            % Change
Trust services fee income     $     2,043          $  1,628          $    415                    25  %       $      5,724          $  4,717          $  1,007                    21  %
Brokerage fee income                3,154             2,489               665                    27                 8,938             7,080             1,858                    26
Mortgage income, net                4,808             9,675            (4,867)                  (50)               17,637            21,965            (4,328)                  (20)
Service charges on deposit
accounts                            1,314             1,037               277                    27                 3,541             3,075               466                    15
Card interchange income             2,299             1,877               422                    22                 6,492             5,076             1,416                    28
BOLI income                           572               531                41                     8                 1,658             1,774              (116)                   (7)
Other income                          993             1,237              (244)                  (20)                3,594             3,245               349                    11

Non-interest income without

 net gains                         15,183            18,474            (3,291)                  (18)               47,584            46,932               652                     1
Asset gains (losses), net          (1,187)              217            (1,404)                     N/M              3,716            (1,185)            4,901                      N/M

Total non-interest income $ 13,996 $ 18,691 $ (4,695)

                  (25) %       $     51,300          $ 45,747          $  5,553                    12  %

Combined fiduciary service income and brokerage fee income $ 5,197 $ 4,117 $ 1,080

                    26  %       $     14,662          $ 11,797          $  2,865                    24  %


N/M means not meaningful.
Noninterest income was $51.3 million for the first nine months of 2021, an
increase of $5.6 million (12%) compared to $45.7 million for the comparable
period of 2020. Noninterest income excluding net asset gains (losses) grew $0.7
million (1%) between the comparable nine-month periods, predominantly on higher
wealth revenue (trust services and brokerage fee income combined) and card
interchange income, partly offset by lower net mortgage income.
Trust services fee income and brokerage fee income combined were $14.7 million,
up $2.9 million (24%) over the first nine months of 2020, consistent with the
growth in accounts and assets under management.
Mortgage income represents net gains received from the sale of residential real
estate loans into the secondary market, capitalized mortgage servicing rights
("MSRs"), servicing fees net of MSR amortization, fair value marks on the
mortgage interest rate lock commitments and forward commitments ("mortgage
derivatives"), and MSR valuation changes, if any. Net mortgage income of $17.6
million, decreased $4.3 million (20%) between the comparable nine-month periods,
predominantly on slowing mortgage activity from the record levels experienced in
2020. Gains on sales and capitalized gains combined decreased $5.7 million,
while net servicing fees increased $0.1 million (with higher income on the
larger portfolio serviced for others, partially offset by an increase in MSR
amortization), the mortgage derivatives were $0.6 million favorable, and MSR
impairment was down $0.6 million on slower paydown activity. See also
"Lending-Related Commitments" and Note 7, "Goodwill and Other Intangibles and
Mortgage Servicing Rights" of the Notes to Unaudited Consolidated Financial
Statements under Part I, Item 1, for additional disclosures on the MSR asset.
Service charges on deposit accounts were up $0.5 million to $3.5 million for the
nine months ended September 30, 2021, mainly as we waived certain fees during
2020 to provide economic relief to our customers at the inception of the
pandemic.
Card interchange income grew $1.4 million (28%) between the comparable
nine-month periods due to higher volume and activity, as activity was tempered
starting late in first quarter 2020 with the onset of the pandemic, as well as
cautionary spending of consumers given the economic uncertainty.
BOLI income was down $0.1 million between the comparable nine-month periods,
attributable to BOLI death benefits received in 2020, partly offset by income on
higher average balances from $3 million BOLI acquired with Advantage in August
2020.
Other income of $3.6 million for the nine months ended September 30, 2021 was up
$0.3 million from the comparable 2020 period, largely due to the change in fair
value of nonqualified deferred compensation plan assets from the significant
market decline at the onset of the pandemic. See also "Noninterest Expense" for
discussion on the offsetting fair value change to the nonqualified deferred
compensation plan liabilities.
Net asset gains of $3.7 million for the first nine months of 2021 were primarily
attributable to favorable fair value marks on equity securities (including $3.5
million from the second quarter 2021 initial public offering of an equity
investment), while net
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asset losses of $1.2 million for the first nine months of 2020 were primarily
attributable to unfavorable fair value marks on equity securities (reflecting
the significant market declines at the onset of the pandemic).

Noninterest Expense
Table 5: Noninterest Expense
                                               Three Months Ended September 30,                                                  Nine Months Ended September 30,
($ in thousands)                2021                2020             Change            % Change                  2021                  2020             Change             % Change
Personnel                  $     16,927          $ 14,072          $ 2,855                    20  %       $    49,127               $ 41,877          $  7,250                    17  %
Occupancy, equipment and
office                            5,749             4,051            1,698                    42               13,939                 12,616             1,323                    10
Business development and
marketing                         1,654               810              844                   104                3,853                  4,683              (830)                  (18)
Data processing                   2,939             2,612              327                    13                8,408                  7,574               834                    11
Intangibles amortization            758               834              (76)                   (9)               2,400                  2,707              (307)                  (11)
FDIC assessments                    480               347              133                38                    1,555                    347             1,208                N/M
Merger-related expense            2,793               151            2,642                N/M                   3,449                    853             2,596                N/M
Other expense                     1,761               808              953                   118                7,158                  4,695             2,463                    52

Total expenditure independent of interest $ 33,061 $ 23,685 $ 9,376

                  40  %       $    89,889               $ 75,352          $ 14,537                    19  %
Non-personnel expenses     $     16,134          $  9,613          $ 6,521                    68  %       $    40,762               $ 33,475          $  7,287                    22  %
Average full-time
equivalent ("FTE")
employees                           646               523              123                    24  %               591                    553                38                     7  %

N / M means not meaningful.

Noninterest expense was $89.9 million, an increase of $14.5 million (19%) over
the first nine months of 2020. Personnel costs increased $7.3 million (17%),
while non-personnel expenses combined increased $7.3 million (22%) compared to
the first nine months of 2020.
Personnel expense was $49.1 million for the nine months ended September 30,
2021, an increase of $7.3 million from the comparable period in 2020. The
increase in personnel was largely due to higher equity and other incentives
commensurate with the strong earnings for the first part of 2021, as well as an
increase in salaries from merit increases between the periods and higher average
FTEs (mostly from the acquisition of Mackinac). Personnel expense was also
impacted by the change in the fair value of nonqualified deferred compensation
plan liabilities from the significant market decline at the onset of the
pandemic. See also "Noninterest Income" for discussion on the offsetting fair
value change to the nonqualified deferred compensation plan assets.
Occupancy, equipment and office expense was $13.9 million for the first nine
months of 2021, up $1.3 million (10%) compared to the first nine months of 2020,
as 2021 included $0.9 million of accelerated depreciation and write-offs related
to branch closures, as well as higher expense for the expanded branch network
with the Mackinac acquisition and additional expense for software and technology
solutions to drive operational efficiency, and enhance products or services. In
addition, second quarter 2020 included $0.5 million of accelerated depreciation
and write-offs related to branch closures.
Business development and marketing expense was $3.9 million, down $0.8 million
(18%), between the comparable nine-month periods, largely due to the $1.25
million micro-grant program in second quarter 2020 (which provided funds
directly to customers who otherwise qualified for small PPP loans of less than
$5,000, as a more cost beneficial result for the customer), as well as lower
marketing costs from differences in the timing and extent of donations,
marketing campaigns, promotions, and media.
Data processing expense was $8.4 million, up $0.8 million (11%) between the
comparable nine-month periods, mostly due to volume-based increases in core
processing charges, as well as the larger operating base with the Mackinac
acquisition.
Intangibles amortization decreased $0.3 million between the comparable
nine-month periods mainly from declining amortization on the aging intangibles
of previous acquisitions, partly offset by amortization from the new intangibles
of recent acquisitions.
FDIC assessments increased to $1.6 million for the first nine months of 2021 as
the small bank assessment credits were fully utilized during third quarter 2020
and also reflecting the higher assessment base.
Other expense was $7.2 million, up $2.5 million (52%) between the comparable
nine-month periods, mostly due to an increase in director fees (reflective of
the additional complexity of a larger company, including the addition of two new
directors), higher professional fees, costs to carry closed bank branches, and
overall higher expenses related to the larger operating base. In
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addition, 2021 included a $2.1 million contract termination charge, while 2020
included $1.0 million of lease termination charges related to branch closures
and $0.5 million to terminate the Commerce merger agreement.
Income Taxes
Income tax expense was $15.0 million (effective tax rate of 25.22%) for the
first nine months of 2021, compared to $14.3 million (effective tax rate of
25.27%) for the comparable period of 2020.

Income Statement Analysis - Three Months Ended September 30, 2021 versus Three
Months Ended September 30, 2020
Net income was $7.8 million for the three months ended September 30, 2021,
compared to $18.1 million for the three months ended September 30, 2020.
Earnings per diluted common share was $0.73 for third quarter 2021, compared to
$1.72 for third quarter 2020.
Tax-equivalent net interest income was $35.4 million for third quarter 2021,
comprised of net interest income of $35.2 million ($2.6 million or 8% over third
quarter 2020), and a tax-equivalent adjustment of $0.2 million (essentially
unchanged from third quarter 2020). Tax-equivalent interest income increased
$1.5 million between the third quarter periods, with $2.9 million from stronger
volumes (led by average loans which grew $205 million or 7% over third quarter
2020, including both organic loan growth and one month of the loans acquired
with Mackinac, net of PPP loan forgiveness), partly offset by $1.4 million from
lower yields. In addition, growth in other interest-earning assets (mostly cash)
also contributed to the stronger volumes between the comparable third quarter
periods, increasing $198 million (23%) to represent 22% of interest-earning
assets for third quarter 2021, compared to 20% for third quarter 2020. Interest
expense decreased $1.2 million from third quarter 2020, as the impact of the
lower interest rate environment more than offset the higher average deposit
balances. For additional information regarding average balances, net interest
income and net interest margin, see "INCOME STATEMENT ANALYSIS - Net Interest
Income."
The net interest margin for third quarter 2021 was 2.94%, down from 3.06% for
third quarter 2020, influenced by the changing balance sheet mix with higher
levels of low-earning cash. The yield on interest-earning assets of 3.24%
declined 26 bps from third quarter 2020. The yield on loans excluding PPP loans
was 4.37%, 52 bps lower than third quarter 2020 mostly attributable to the
impact of the lower interest rate environment on variable loans offset partly by
floors and the mix of fixed rate loans. The cost of funds of 0.46% declined 18
bps between the comparable quarters as deposit costs were adjusted down in the
lower interest rate environment, and third quarter 2020 was also influenced by
the the inclusion of PPPLF funds costing 35 bps.
Provision for credit losses was $6.0 million for third quarter 2021 (comprised
of $4.0 million related to the ACL-Loans, and $2.0 million for the ACL on
unfunded commitments), compared to provision for credit losses of $3.0 million
for third quarter 2020. The 2021 provision for credit losses was mostly due to
the Day 2 ACL increase from the Mackinac acquisition as net charge-offs were
negligible (at 0.01% for year-to-date 2021) and asset quality metrics remain
strong, while the 2020 provision reflected the unknown magnitude of the evolving
impact of credit stress on our customers arising from pandemic-based business
disruptions and other recessionary conditions. For additional information
regarding the allowance for credit losses-loans and asset quality, see "BALANCE
SHEET ANALYSIS - Allowance for Credit Losses - Loans" and "BALANCE SHEET
ANALYSIS - Nonperforming Assets."
Noninterest income was $14.0 million for third quarter 2021, a decrease of $4.7
million (25%) from third quarter 2020. Noninterest income excluding net asset
gains (losses) was down $3.3 million (18%) between the comparable third quarter
periods, predominantly on lower net mortgage income. Net mortgage income of $4.8
million for third quarter 2021 was down $4.9 million (50%) from third quarter
2020, predominantly on slowing mortgage activity from the record levels
experienced in 2020, including lower sale gains and capitalized gains combined
(down $5.8 million, commensurate with the lower volumes sold into the secondary
market), partly offset by a $0.2 million favorable change in the fair value of
the mortgage derivatives, and $0.7 million lower MSR asset impairment given
slower refinance activity. Trust services fee income and brokerage fee income
combined was up $1.1 million (26%), consistent with the growth in assets under
management. Service charges on deposit accounts grew $0.3 million to $1.3
million for third quarter 2021, mainly as we waived certain fees during third
quarter 2020 to provide economic relief to our customers at the inception of the
pandemic. Card interchange income grew $0.4 million (22%) due to higher volume
and activity. Net asset losses of $1.2 million in third quarter 2021 were
primarily attributable to fair value marks on equity securities, compared to net
asset gains of $0.2 million in third quarter 2020. For additional information
regarding noninterest income, see "INCOME STATEMENT ANALYSIS - Noninterest
Income."
Noninterest expense was $33.1 million for third quarter 2021, an increase of
$9.4 million (40%) from third quarter 2020, including a $2.9 million increase in
personnel expense and a $6.5 million increase in non-personnel expenses. The
increase in personnel was largely due to higher equity and other incentives
commensurate with the strong earnings for the first part of 2021, as well as an
increase in salaries from merit increases between the periods and higher average
FTEs (mostly from the acquisition of Mackinac). Occupancy, equipment, and office
of $5.7 million was up $1.7 million (42%), as 2021 included $0.9 million of
accelerated depreciation and write-offs related to branch closures, as well as
higher expense for the expanded branch
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network with the Mackinac acquisition and additional expense for software and
technology solutions to drive operational efficiency, and enhance products or
services. Business development and marketing of $1.7 million increased $0.8
million versus third quarter 2020 due to higher marketing costs from differences
in the timing and extent of donations, marketing campaigns, promotions, and
media. Data processing expense was $2.9 million, up $0.3 million (13%) between
the comparable third quarter periods, mostly due to volume-based increases in
core processing charges, as well as the larger operating base with the Mackinac
acquisition. FDIC assessments increased to $0.5 million for third quarter 2021
as the small bank assessment credits were fully utilized during third quarter
2020 and also reflecting the higher assessment base. Other expense was $1.8
million, up $1.0 million between the comparable third quarter periods, mostly
due to an increase in director fees (reflective of the additional complexity of
a larger company, including the addition of two new directors in third quarter
2021), higher professional fees, costs to carry closed bank branches, and
overall higher expenses related to the larger operating base. For additional
information regarding noninterest expense, see "INCOME STATEMENT ANALYSIS -
Noninterest Expense."
Income tax expense for third quarter 2021 was $2.3 million, with an effective
tax rate of 22.68%, compared to income tax expense of $6.4 million and an
effective tax rate of 26.19% for third quarter 2020.

BALANCE SHEET ANALYSIS
At September 30, 2021, period end assets were $6.4 billion, up $1.9 billion
(41%) from December 31, 2020, mostly due to the Mackinac acquisition which added
total assets of $1.5 billion at acquisition. The increase in assets from
year-end 2020 included a $744 million increase in loans, a $548 million increase
in cash and cash equivalents, and a $226 million increase in investment
securities. Total deposits of $5.4 billion at September 30, 2021, were up $1.5
billion from December 31, 2020, also mostly attributable to the Mackinac
acquisition. Total stockholders' equity was $729 million, an increase of $190
million from December 31, 2020, primarily from the common stock issued in the
Mackinac acquisition and retained earnings, partly offset by stock repurchases
and negative net fair value investment changes.
Compared to September 30, 2020, assets were $6.4 billion, up $1.7 billion (36%)
from September 30, 2020, also mainly due to the Mackinac acquisition. The
increase in assets from September 30, 2020 included a $624 million increase in
loans, a $497 million increase in cash and cash equivalents, and a $230 million
increase in investment securities. On the funding side, deposits increased $1.7
billion (46%) over September 30, 2020, while total borrowings decreased $262
million due to the early repayment of PPPLF funding given the strong core
deposit base. Stockholders' equity increased $191 million from September 30,
2020, primarily due to common stock issued in the Mackinac acquisition and net
income, partially offset by stock repurchases over the year and negative net
fair value investment changes.

Loans

In addition to the discussion that follows, see also Note 6, "Loans, Allowance
for Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited
Consolidated Financial Statements under Part I, Item 1, for additional
disclosures on loans. For additional information regarding the allowance for
credit losses and nonperforming assets see also "BALANCE SHEET ANALYSIS -
Allowance for Credit Losses - Loans" and "BALANCE SHEET ANALYSIS - Nonperforming
Assets."
Prior to the acquisition of Mackinac, Nicolet serviced a diverse customer base
throughout northeastern and central Wisconsin and in Menominee, Michigan. With
the acquisition of Mackinac on September 3, 2021, the Company has expanded into
Northern Michigan and the Upper Peninsula of Michigan, as well as adding to its
presence in upper northeastern Wisconsin. The Company concentrates on
originating loans in its local markets and assisting its current loan customers.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas. Significant loan concentrations are considered to exist for a
financial institution when there are amounts loaned to multiple numbers of
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic or other conditions. At September 30, 2021, no significant
industry concentrations existed in Nicolet's portfolio in excess of 10% of total
loans.
An active credit risk management process is used to ensure that sound and
consistent credit decisions are made. The credit management process is regularly
reviewed and the process has been modified over the past several years to
further strengthen the controls. Factors that are important to managing overall
credit quality are sound loan underwriting and administration, systematic
monitoring of existing loans and commitments, effective loan review on an
ongoing basis, early problem loan identification and remedial action to minimize
losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies.
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Table 6: Credit composition at the end of the period

                                                 September 30, 2021                                   December 31, 2020                                    September 30, 2020
(in thousands)                            Amount                  % of Total                   Amount                  % of Total                   Amount                  % of Total
Commercial & industrial            $         887,910                        25  %       $         750,718                        27  %       $         735,531                        25  %
PPP loans                                     68,347                         2                    186,016                         7                    335,236                        12
Owner-occupied CRE                           697,816                        20                    521,300                        19                    499,605                        17
Agricultural                                 112,409                         3                    109,629                         4                    111,022                         4
Commercial                                 1,766,482                        50                  1,567,663                        57                  1,681,394                        58
CRE investment                               662,871                        19                    460,721                        16                    475,050                        16
Construction & land development              173,971                         5                    131,283                         5                    121,647                         4
Commercial real estate                       836,842                        24                    592,004                        21                    596,697                        20
Commercial-based loans                     2,603,324                        74                  2,159,667                        78                  2,278,091                        78
Residential construction                      59,611                         2                     41,707                         1                     57,496                         2
Residential first mortgage                   688,491                        19                    444,155                        16                    428,017                        15
Residential junior mortgage                  130,279                         4                    111,877                         4                    112,173                         4
Residential real estate                      878,381                        25                    597,739                        21                    597,686                        21
Retail & other                                51,493                         1                     31,695                         1                     33,016                         1
Retail-based loans                           929,874                        26                    629,434                        22                    630,702                        22
Total loans                        $       3,533,198                       100  %       $       2,789,101                       100  %       $       2,908,793                       100  %
Total loans ex. PPP loans          $       3,464,851                        98  %       $       2,603,085                        93  %       $       2,573,557                        88  %


As noted in Table 6 above, the loan portfolio at September 30, 2021, was 74%
commercial-based and 26% retail-based. Commercial-based loans are considered to
have more inherent risk of default than retail-based loans, in part because of
the broader list of factors that could impact a commercial borrower negatively.
In addition, the commercial balance per borrower is typically larger than that
for retail-based loans, implying higher potential losses on an individual
customer basis. Credit risk on commercial-based loans is largely influenced by
general economic conditions and the resulting impact on a borrower's operations
or on the value of underlying collateral, if any. PPP loans, however, initially
added during second quarter 2020, are fully guaranteed by the SBA, warranting no
credit loss provisions.
At September 30, 2021, loans were $3.5 billion, $744 million (27%) higher than
December 31, 2020, largely due to the acquisition of Mackinac, which added loans
of $930 million at acquisition, partly offset by the transfer of $177 million of
loans to other assets held for sale in anticipation of the previously announced
sale of the Birmingham, Michigan branch. Commercial-based loans of $2.6 billion
increased $444 million since December 31, 2020, including a $118 million
decrease in the net carrying value of PPP loans (with the additional $160
million from the latest round of PPP loans, more than offset by continued PPP
loan forgiveness). Commercial and industrial loans continue to be the largest
segment of Nicolet's portfolio and represented 25% of the total portfolio at
September 30, 2021.
Residential real estate loans of $878 million grew $281 million (47%) from
year-end 2020, to represent 25% of total loans at September 30, 2021.
Residential first mortgage loans include conventional first-lien home mortgages,
while residential junior mortgage real estate loans consist mainly of home
equity lines and term loans secured by junior mortgage liens. As part of its
management of originating residential mortgage loans, the vast majority of
Nicolet's long-term, fixed-rate residential real estate mortgage loans are sold
in the secondary market with servicing rights retained. Nicolet's mortgage loans
are typically of high quality and have historically had low net charge-off
rates.
Retail and other loans were up $20 million from year-end 2020, and represented
approximately 1% of the total loan portfolio, and include predominantly
short-term and other personal installment loans not secured by real estate.

Allowance for Credit Losses - Loans
In addition to the discussion that follows, see also Note 6, "Loans, Allowance
for Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited
Consolidated Financial Statements under Part I, Item 1, for additional
disclosures on the allowance for credit losses.
Credit risks within the loan portfolio are inherently different for each loan
type as summarized under "BALANCE SHEET ANALYSIS - Loans." A discussion of the
loan portfolio credit risk can be found in the "Loans" section in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's 2020 Annual Report on Form 10-K. Credit risk is
controlled and monitored through the use of lending standards, a thorough review
of potential borrowers, and ongoing review of loan payment performance. Active
asset quality administration, including early problem loan identification and
timely resolution of problems, aids in the management of credit risk and
minimization of loan losses. For additional information regarding nonperforming
assets see also "BALANCE SHEET ANALYSIS - Nonperforming Assets."
                                       40
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The ACL-Loans represents management's estimate of expected credit losses in the
Company's loan portfolio at the balance sheet date. To assess the
appropriateness of the ACL-Loans, an allocation methodology is applied by
Nicolet which focuses on evaluation of qualitative and environmental factors,
including but not limited to: (i) evaluation of facts and issues related to
specific loans; (ii) management's ongoing review and grading of the loan
portfolio; (iii) consideration of historical loan loss and delinquency
experience on each portfolio segment; (iv) trends in past due and nonperforming
loans; (v) the risk characteristics of the various loan segments; (vi) changes
in the size and character of the loan portfolio; (vii) concentrations of loans
to specific borrowers or industries; (viii) existing economic conditions; (ix)
the fair value of underlying collateral; and (x) other qualitative and
quantitative factors which could affect expected credit losses. Assessing these
numerous factors involves significant judgment; therefore, management considers
the ACL-Loans a critical accounting policy.
Management allocates the ACL-Loans by pools of risk within each loan portfolio
segment. The allocation methodology consists of the following components. First,
a specific reserve is established for individually evaluated credit-deteriorated
loans, which management defines as nonaccrual credit relationships over
$250,000, collateral dependent loans, purchased credit-deteriorated loans, and
other loans with evidence of credit deterioration. The specific reserve in the
ACL-Loans for these credit deteriorated loans is equal to the aggregate
collateral or discounted cash flow shortfall. Second, management allocates the
ACL-Loans with historical loss rates by loan segment. The loss factors are
measured on a quarterly basis and applied to each loan segment based on current
loan balances and projected for their expected remaining life. Next, management
allocates ACL-Loans using the qualitative factors mentioned above. Consideration
is given to those current qualitative or environmental factors that are likely
to cause estimated credit losses as of the evaluation date to differ from the
historical loss experience of each loan segment. Lastly, management considers
reasonable and supportable forecasts to assess the collectability of future cash
flows.
At September 30, 2021, the ACL-Loans was $38.4 million (representing 1.09% of
period end loans and 1.11% of period end loans excluding PPP loans) compared to
$32.2 million at December 31, 2020 and $31.4 million at September 30, 2020. The
change in the ACL-Loans from year-end 2020 was mostly due to the Mackinac
acquisition, including $4.0 million of provision added for the Day 2 allowance
and $1.9 million related to purchased credit deteriorated loans. The increase in
the ACL-Loans from September 30, 2020 was also largely due to the Mackinac
acquisition. Net charge-offs (0.01% of average loans, annualized) remain
negligible. The components of the ACL-Loans are detailed further in Table 7
below.
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Table 7: Loan loss provisions – loans

                                                               Nine Months Ended                          Year Ended
(in thousands)                                   September 30, 2021         September 30, 2020         December 31, 2020
ACL-Loans:
Balance at beginning of period                  $         32,173           $         13,972           $         13,972
Adoption of CECL                                               -                      8,488                      8,488
Initial PCD ACL                                                -                        797                        797
Total impact for adoption of CECL                              -                      9,285                      9,285
ACL on PCD loans acquired                                  1,896                          -                          -
Provision for credit losses                                4,500                      9,000                     10,300
Charge-offs                                                 (436)                    (1,002)                    (1,689)
Recoveries                                                   266                        133                        305
Net (charge-offs) recoveries                                (170)                      (869)                    (1,384)
Balance at end of period                        $         38,399           $         31,388           $         32,173
Net loan (charge-offs) recoveries:
Commercial & industrial                         $            (31)          $           (512)          $           (692)
Owner-occupied CRE                                             -                       (257)                      (449)
Agricultural                                                 (48)                         -                          -
CRE investment                                                (2)                       (20)                      (190)
Construction & land development                                -                          -                          -
Residential construction                                       -                          -                          -
Residential first mortgage                                   (34)                         7                          9
Residential junior mortgage                                    4                         18                         67
Retail & other                                               (59)                      (105)                      (129)
Total net (charge-offs) recoveries              $           (170)          $           (869)          $         (1,384)

Conditions:

ACL-Loans to total loans                                    1.09   %                   1.08   %                   1.15  %
ACL-Loans to total loans ex. PPP loans                      1.11   %                   1.22   %                   1.24  %
Net charge-offs to average loans, annualized                0.01   %                   0.04   %                   0.05  %
Net charge-offs to average loans ex. PPP loans,
annualized                                                  0.01   %                   0.05   %                   0.05  %



Nonperforming Assets
As part of its overall credit risk management process, management is committed
to an aggressive problem loan identification philosophy. This philosophy has
been implemented through the ongoing monitoring and review of all pools of risk
in the loan portfolio to ensure that problem loans are identified early and the
risk of loss is minimized. Management continues to actively work with customers
and monitor credit risk from the ongoing economic disruptions surrounding the
COVID-19 pandemic. Since the pandemic started, approximately 1,000 loans were
provided temporary payment modifications, and as of September 30, 2021, only 2
loans remain under temporary payment modification structure. In addition, at
September 30, 2021, 14 loans with a current balance of $5 million have been
classified as troubled debt restructurings (included in Table 8 below), with $2
million reflected as performing troubled debt restructurings and the remainder
in nonaccrual). See also Note 6, "Loans, Allowance for Credit Losses - Loans,
and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements
under Part I, Item 1, for further disclosures on credit quality. For additional
information see also "BALANCE SHEET ANALYSIS - Loans" and "BALANCE SHEET
ANALYSIS - Allowance for Credit Losses-Loans."
Nonperforming loans are considered one indicator of potential future loan
losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or
more past due but still accruing interest. Loans are generally placed on
nonaccrual status when contractually past due 90 days or more as to interest or
principal payments. Additionally, whenever management becomes aware of facts or
circumstances that may adversely impact the collectability of principal or
interest on loans, it is management's practice to place such loans on nonaccrual
status immediately. Nonperforming assets include nonperforming loans and other
real estate owned ("OREO"). At September 30, 2021, nonperforming assets were $21
million, comprised of $17 million of nonaccrual loans and $4 million of OREO,
and represented 0.33% of total assets, compared to $13 million or 0.29% of total
assets at December 31, 2020. The increase in nonperforming assets was largely
due to the acquisition of Mackinac.
The level of potential problem loans is another predominant factor in
determining the relative level of risk in the loan portfolio and in determining
the appropriate level of the ACL-Loans. Potential problem loans are generally
defined by management to include loans rated as Substandard by management but
that are in performing status; however, there are circumstances present
                                       42
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which might adversely affect the ability of the borrower to comply with present
repayment terms. The decision of management to include performing loans in
potential problem loans does not necessarily mean that Nicolet expects losses to
occur, but that management recognizes a higher degree of risk associated with
these loans. The loans that have been reported as potential problem loans are
predominantly commercial-based loans covering a diverse range of businesses and
real estate property types. Potential problem loans were $13 million (0.4% of
loans) and $21 million (0.7% of loans) at September 30, 2021 and December 31,
2020, respectively. Potential problem loans require a heightened management
review of the pace at which a credit may deteriorate, the duration of asset
quality stress, and uncertainty around the magnitude and scope of economic
stress that may be felt by Nicolet's customers and on underlying real estate
values.
Table 8: Nonperforming Assets
(in thousands)                                  September 30, 2021         December 31, 2020         September 30, 2020
Nonperforming loans:
Commercial & industrial                        $          1,778           $          2,646          $          3,011
Owner-occupied CRE                                        2,990                      1,869                     2,471
Agricultural                                              1,782                      1,830                     2,297
Commercial                                                6,550                      6,345                     7,779
CRE investment                                            4,249                      1,488                       911
Construction & land development                           1,093                        327                       533
Commercial real estate                                    5,342                      1,815                     1,444
Commercial-based loans                                   11,892                      8,160                     9,223
Residential construction                                      -                          -                         -
Residential first mortgage                                4,495                        823                     1,312
Residential junior mortgage                                 232                        384                       411
Residential real estate                                   4,727                      1,207                     1,723
Retail & other                                               96                         88                        51
Retail-based loans                                        4,823                      1,295                     1,774
Total nonaccrual loans                                   16,715                      9,455                    10,997
Accruing loans past due 90 days or more                       -                          -                         -
Total nonperforming loans                      $         16,715           $          9,455          $         10,997
Nonaccrual loans (included above) covered by
SBA guarantee                                  $          1,729           $          1,265          $         (1,172)
OREO:
Commercial real estate owned                   $          1,219           $              -          $              -
Residential real estate owned                               355                          -                         -
Bank property real estate owned                           2,895                      3,608                     1,000
Total OREO                                                4,469                      3,608                     1,000
Total nonperforming assets                     $         21,184           $         13,063          $         11,997
Performing troubled debt restructurings        $          2,103           $          2,120          $              -

Conditions:

Nonperforming loans to total loans                         0.47   %                   0.34  %                   0.38   %
Nonperforming assets to total loans plus OREO              0.60   %                   0.47  %                   0.41   %
Nonperforming assets to total assets                       0.33   %                   0.29  %                   0.25   %
ACL-Loans to nonperforming loans                            230   %                    340  %                    285   %



Deposits
Deposits represent Nicolet's largest source of funds. The deposit levels have
been heavily influenced by the ongoing economic uncertainty, government stimulus
payments and other directives related to the pandemic, which reduced spending
and increased liquidity of consumers and businesses, as well as by PPP loan
proceeds retained on deposit by corporate borrowers. In addition, Mackinac added
deposits of $1.4 billion at acquisition. The deposit composition is presented in
Table 9 below.
Total deposits of $5.4 billion at September 30, 2021, increased $1.5 billion
(39%) from December 31, 2020, largely due to the Mackinac acquisition. Core
customer deposits increased $1.5 billion, while brokered deposits increased $32
million. The growth in deposits was also aided by additional government stimulus
payments and new PPP funds on deposit.
Compared to September 30, 2020, total deposits increased $1.7 billion (46%),
also largely due to the Mackinac acquisition. Customer core deposits increased
$1.7 billion, while brokered deposits grew $30 million. The increase in total
deposits since September 30, 2020 was also influenced by the liquidity
objectives of consumers and businesses in very uncertain times noted above.
                                       43
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Table 9: Composition of the deposit at the end of the period

                                                   September 30, 2021                                   December 31, 2020                                  September 30, 2020
(in thousands)                               Amount                  % of Total                  Amount                  % of Total                  Amount                  % of Total
Noninterest-bearing demand            $       1,852,119                       34  %       $       1,212,787                       31  %       $       1,135,384                       30  %
Money market and interest-bearing
demand                                        2,154,557                       40  %               1,551,325                       40  %               1,432,667                       39  %
Savings                                         775,281                       14  %                 521,814                       13  %                 480,745                       13  %
Time                                            646,817                       12  %                 624,473                       16  %                 664,012                       18  %
Total deposits                        $       5,428,774                      100  %       $       3,910,399                      100  %       $       3,712,808                      100  %
Brokered transaction accounts         $         152,858                        3  %       $          46,340                        1  %       $          35,975                        1  %
Brokered and listed time deposits               204,202                        4  %                 278,521                        7  %                 290,827                        8  %
Total brokered deposits               $         357,060                        7  %       $         324,861                        8  %       $         326,802                        9  %
Customer transaction accounts         $       4,629,099                       85  %       $       3,239,586                       83  %       $       3,012,821                       81  %
Customer time deposits                          442,615                        8  %                 345,952                        9  %                 373,185                       10  %
Total customer deposits (core)        $       5,071,714                       93  %       $       3,585,538                       92  %       $       3,386,006                       91  %



Lending-Related Commitments
As of September 30, 2021 and December 31, 2020, Nicolet had the following
off-balance sheet lending-related commitments.
Table 10: Commitments
(in thousands)                           September 30, 2021       December 31, 2020
Commitments to extend credit            $         1,111,156      $          950,287
Financial standby letters of credit                  13,947                 

8,241

Performance standby letters of credit                 8,821                 

8,366


Interest rate lock commitments to originate residential mortgage loans held for
sale (included above in commitments to extend credit) and forward commitments to
sell residential mortgage loans held for sale are considered derivative
instruments ("mortgage derivatives") and the notional amounts represented $78
million and $320,000, respectively, at September 30, 2021. In comparison,
interest rate lock commitments to originate residential mortgage loans held for
sale and forward commitments to sell residential mortgage loans held for sale
represented $113 million and $20 million, respectively, at December 31, 2020.
The net fair value of these mortgage derivatives combined was a gain of $104,000
at September 30, 2021 compared to a loss of $244,000 at December 31, 2020.

Liquidity Management
Liquidity management refers to the ability to ensure that cash is available in a
timely and cost-effective manner to meet cash flow requirements of depositors
and borrowers and to meet other commitments as they fall due, including the
ability to service debt, invest in subsidiaries, repurchase common stock, pay
dividends to shareholders (if any), and satisfy other operating requirements.
Given the stable core customer deposit base, fairly consistent patterns of
activity in the core deposit base (including extra growth in core deposits
during the pandemic as previously discussed), and the minimal use of capacity
available in numerous non-core funding sources, Nicolet's liquidity levels and
resources have been sufficient to fund loans, accommodate deposit trends and
cycles, and to meet other cash needs as necessary. At the onset of the pandemic,
but prior to the announcement of government stimulus, management initiated
preparatory actions to increase on-balance sheet liquidity to ensure we could
meet customer needs. These actions proved later to not be necessary, leading us
to reduce non-deposit funding. In addition to this on-balance sheet liquidity
build, remaining liquidity facilities continue to provide capacity and
flexibility in an uncertain time.
Funds are available from a number of basic banking activity sources including,
but not limited to, the core deposit base; repayment and maturity of loans;
investment securities calls, maturities, and sales; and procurement of
additional brokered deposits or other wholesale funding. At September 30, 2021,
approximately 20% of the $765 million investment securities portfolio was
pledged to secure public deposits, as applicable, and for other purposes as
required by law. Additional funding sources at September 30, 2021, consist of
$175 million of available and unused Federal funds lines, available borrowing
capacity at the FHLB of $219 million, and borrowing capacity in the brokered
deposit market.
In consideration of the funds availability for the Bank and the current high
levels of cash in a very low interest rate environment, management has taken
prudent pricing actions on deposits and loans, as well as actions to reduce
non-deposit funding. Brokered deposits have matured without renewal and selected
FHLB advances were repaid early.
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Management is committed to the Parent Company being a source of strength to the
Bank and its other subsidiaries, and therefore, regularly evaluates capital and
liquidity positions of the Parent Company in light of current and projected
needs, growth or strategies. The Parent Company uses cash for normal expenses,
debt service requirements, and when opportune, for common stock repurchases,
repayment of debt, or investment in other strategic actions such as mergers or
acquisitions. At September 30, 2021, the Parent Company had $85 million in cash.
Additional cash sources, among others, available to the Parent Company include
its $10 million available and unused line of credit, and access to the public or
private markets to issue new equity, subordinated notes or other debt. On July
7, 2021, Nicolet completed the private placement of $100 million in
fixed-to-floating rate subordinated notes (the "Notes") due in 2031. (See Note
8, "Short and Long-Term Borrowings" of the Notes to Unaudited Consolidated
Financial Statements under Part I, Item 1, for additional information on the new
Notes). Dividends from the Bank and, to a lesser extent, stock option exercises,
also represent significant sources of cash flows for the Parent Company.
Cash and cash equivalents at September 30, 2021 and December 31, 2020 were $1.4
billion and $803 million, respectively. The increase in cash and cash
equivalents since year-end 2020 included $52 million net cash provided by
operating activities (mostly earnings), $267 million net cash provided by
investing activities (with net cash received in the Mackinac acquisition
exceeding cash payments to fund loan growth and net investment purchases), and
$228 million net cash provided by financing activities (mostly deposit growth
and proceeds received from the subordinated notes issuance). Management believes
its liquidity resources were sufficient as of September 30, 2021 to fund loans,
accommodate deposit cycles and trends, and to meet other cash needs as necessary
in these unsettled times.

Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and
maintenance of yield, is highly important to Nicolet's business success and
profitability. As an ongoing part of its financial strategy and risk management,
Nicolet attempts to understand and manage the impact of fluctuations in market
interest rates on its net interest income. The consolidated balance sheet
consists mainly of interest-earning assets (loans, investments and cash) which
are primarily funded by interest-bearing liabilities (deposits and other
borrowings). Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. Market rates are highly sensitive to many
factors beyond our control, including but not limited to general economic
conditions and policies of governmental and regulatory authorities. Our
operating income and net income depends, to a substantial extent, on "rate
spread" (i.e., the difference between the income earned on loans, investments
and other earning assets and the interest expense paid to obtain deposits and
other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits
on the sensitivity to changes in interest rates on earnings and market value of
assets and liabilities. Such policies are set and monitored by management and
the board of directors' Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on
net interest income, Nicolet measures its overall interest rate sensitivity
through a net interest income analysis, which calculates the change in net
interest income in the event of hypothetical changes in interest rates under
different scenarios versus a baseline scenario. Such scenarios can involve
static balance sheets, balance sheets with projected growth, parallel (or
non-parallel) yield curve slope changes, immediate or gradual changes in market
interest rates, and one-year or longer time horizons. The simulation modeling
uses assumptions involving market spreads, prepayments of rate-sensitive
instruments, renewal rates on maturing or new loans, deposit retention rates,
and other assumptions.
Among other scenarios, Nicolet assessed the impact on net interest income in the
event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to
the change in prime rate) over a one-year time horizon to a static (flat)
balance sheet. The results provided include the liquidity measures mentioned
earlier and reflect the changed interest rate environment, partly in response to
the pandemic. The interest rate scenarios are used for analytical purposes only
and do not necessarily represent management's view of future market interest
rate movements. Based on financial data at September 30, 2021 and December 31,
2020, the projected changes in net interest income over a one-year time horizon,
versus the baseline, are presented in Table 11 below. The results are within
Nicolet's guidelines of not greater than -10% for +/- 100 bps and not greater
than -15% for +/- 200 bps and given the relatively short nature of the Company's
balance sheet, reflect a largely unchanged risk position as expected.
Table 11: Interest Rate Sensitivity
                                        September 30, 2021      December 31, 2020
200 bps decrease in interest rates                  (0.3) %                (0.8) %
100 bps decrease in interest rates                  (0.3) %                (0.8) %
100 bps increase in interest rates                   1.3  %                 4.0  %
200 bps increase in interest rates                   2.8  %                 

8.1%

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Actual results may differ from these simulated results due to timing, magnitude
and frequency of interest rate changes, as well as changes in market conditions
and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from
the effect on an industrial company. While a financial institution's operating
expenses, particularly salary and employee benefits, are affected by general
inflation, the asset and liability structure of a financial institution consists
largely of monetary items. Monetary items, such as cash, investments, loans,
deposits and other borrowings, are those assets and liabilities which are or
will be converted into a fixed number of dollars regardless of changes in
prices. As a result, changes in interest rates have a more significant impact on
a financial institution's performance than does general inflation.

capital city

Management regularly reviews the adequacy of its capital to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The capital position and strategies are
actively reviewed in light of perceived business risks associated with current
and prospective earning levels, liquidity, asset quality, economic conditions in
the markets served, and level of returns available to shareholders. Management
intends to maintain an optimal capital and leverage mix for growth and
shareholder return. For details on the change in capital see "BALANCE SHEET
ANALYSIS."
The Company's and the Bank's regulatory capital ratios remain above minimum
regulatory ratios, including the capital conservation buffer. At September 30,
2021, the Bank's regulatory capital ratios qualify the Bank as well-capitalized
under the prompt-corrective action framework. This strong base of capital has
allowed Nicolet to be opportunistic in the current environment and in strategic
growth. A summary of Nicolet's and the Bank's regulatory capital amounts and
ratios, as well as selected capital metrics are presented in the following
table.
Table 12: Capital
                                                            At or for the Nine             At or for the
                                                               Months Ended                  Year Ended
($ in thousands)                                            September 30, 2021           December 31, 2020
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)      $          33,680             $          40,544
Common stock repurchased during the period (full shares)            447,898                       646,748
Company Risk-Based Capital:
Total risk-based capital                                  $         615,052             $         406,325
Tier 1 risk-based capital                                           488,620                       385,068
Common equity Tier 1 capital                                        464,355                       361,162
Total capital ratio                                                    14.6     %                    12.9  %
Tier 1 capital ratio                                                   11.6     %                    12.2  %
Common equity tier 1 capital ratio                                     11.0     %                    11.4  %
Tier 1 leverage ratio                                                   9.6     %                     9.0  %
Bank Risk-Based Capital:
Total risk-based capital                                  $         515,152             $         351,081
Tier 1 risk-based capital                                           487,622                       329,824
Common equity Tier 1 capital                                        487,622                       329,824
Total capital ratio                                                    12.3     %                    11.2  %
Tier 1 capital ratio                                                   11.6     %                    10.5  %
Common equity tier 1 capital ratio                                     11.6     %                    10.5  %
Tier 1 leverage ratio                                                   9.8     %                     7.8  %

* Reflects common stock repurchased as part of Board approval for the common stock repurchase program.


In managing capital for optimal return, we evaluate capital sources and uses,
pricing and availability of our stock in the market, and alternative uses of
capital (such as the level of organic growth or acquisition opportunities) in
light of strategic plans. During the first nine months of 2021, $34 million was
utilized to repurchase and cancel 447,898 shares of common stock, at an average
per share cost of $75.20, pursuant to our common stock repurchase program. On
August 17, 2021, Nicolet's board authorized an increase to the program of $40
million. As a result, at September 30, 2021, there remained $47 million
authorized under this repurchase program, as modified, to be utilized from
time-to-time to repurchase shares in the open market, through block transactions
or in private transactions.
                                       46

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

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

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