Nicolet Bankshares, Inc. (the "Company" or "Nicolet") is a bank holding company headquartered inGreen 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 andCentral Wisconsin ,Northern Michigan and the upper peninsula ofMichigan . 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 theMackinac 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 onJanuary 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 ofSeptember 30, 2021 andDecember 31, 2020 and results of operations for the three and nine-month periods endedSeptember 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 endedDecember 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 ofMackinac Financial Corporation ("Mackinac") onSeptember 3, 2021 . The inclusion of theMackinac 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 fromMackinac 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. 27 -------------------------------------------------------------------------------- The initial impacts of the COVID-19 pandemic (declared inMarch 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 byJune 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. AtSeptember 30, 2021 , the net carrying value of all PPP loans held for investment was$68 million , or 2% of total loans, for a net$118 million decrease from year-end 2020, as loan forgiveness has outpaced the latest round of new PPP loans. SBA loan forgiveness that started inNovember 2020 has boosted overall borrower equity in their businesses and meaningfully improves the credit quality of many commercial relationships. 28 -------------------------------------------------------------------------------- Performance Summary Table 1: Earnings Summary and Selected Financial Data At or for the Three Months Ended At or for the Nine Months Ended (In thousands, except per share data) 9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020 9/30/2021 9/30/2020 Results of operations: Interest income$ 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
$ 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
$ 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. 29 --------------------------------------------------------------------------------
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
269,954 173,711 174,501 175,353 176,213 Tangible assets$ 6,137,866 $ 4,413,636
Tangible Common Equity: Equity (general)
269,954 173,711 174,501 175,353 176,213 Tangible common equity$ 459,324 $ 385,684
Average Tangible Common Equity: Equity (general)
$ 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
Net income was$44.3 million for the nine months endedSeptember 30, 2021 , compared to$42.1 million for the nine months endedSeptember 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 byFederal Reserve rate cuts inMarch 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 endedSeptember 30, 2021 , compared to 3.35% for the nine months endedSeptember 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 atSeptember 30, 2021 , compared to 0.29% atDecember 31, 2020 and 0.25% atSeptember 30, 2020 . For additional information regarding nonperforming assets, see "Balance Sheet Analysis - Nonperforming Assets." •AtSeptember 30, 2021 , assets were$6.4 billion , up$1.9 billion (41%) fromDecember 31, 2020 and up$1.7 billion (36%) fromSeptember 30, 2020 , mainly due to the acquisition ofMackinac . For additional balance sheet discussion see "Balance Sheet Analysis." •AtSeptember 30, 2021 , loans were$3.5 billion ,$744 million (27%) higher thanDecember 31, 2020 and$624 million (21%) higher thanSeptember 30, 2020 , largely due to the acquisition ofMackinac . 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 atSeptember 30, 2021 , an increase of$1.5 billion (39%) fromDecember 31, 2020 and$1.7 billion (46%) higher thanSeptember 30, 2020 , substantially attributable to theMackinac 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." 30 -------------------------------------------------------------------------------- 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. 31 --------------------------------------------------------------------------------
Table 2: Analysis of the average balance sheet and net interest income – tax-equivalent basis
For the nine months over
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. 32 --------------------------------------------------------------------------------
Table 2: Analysis of the average balance sheet and net interest income – tax-equivalent basis (continued)
For the three months that have passed
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. 33 --------------------------------------------------------------------------------
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)
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
Interest-bearing liabilities Savings $ 48$ (75) $
(27) $ 209
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 sinceMarch 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 theMackinac 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 34 -------------------------------------------------------------------------------- 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 theMackinac and Advantage acquisitions (inSeptember 2021 andAugust 2020 , respectively). Between the comparable nine-month periods, average loans increased$164 million (6%), mostly due to organic loan growth and the timing of theMackinac 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 atSeptember 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 theMackinac and Advantage acquisitions (inSeptember 2021 andAugust 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 inJuly 2021 (up 164 bps to 2.87%). Provision for Credit Losses The provision for credit losses was$6.5 million for the nine months endedSeptember 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 endedSeptember 30, 2020 (all related to the ACL-Loans). The 2021 provision for credit losses was mostly due to the Day 2 ACL increase from theMackinac 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 35 --------------------------------------------------------------------------------
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
(25) %$ 51,300 $ 45,747 $ 5,553 12 %
Combined fiduciary service income and brokerage fee income
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 endedSeptember 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 inAugust 2020 . Other income of$3.6 million for the nine months endedSeptember 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 36 -------------------------------------------------------------------------------- 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
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 endedSeptember 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 ofMackinac ). 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 theMackinac 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 theMackinac 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 37 -------------------------------------------------------------------------------- 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 EndedSeptember 30, 2021 versus Three Months EndedSeptember 30, 2020 Net income was$7.8 million for the three months endedSeptember 30, 2021 , compared to$18.1 million for the three months endedSeptember 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 withMackinac , 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 theMackinac 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 ofMackinac ). 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 38 -------------------------------------------------------------------------------- network with theMackinac 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 theMackinac 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 AtSeptember 30, 2021 , period end assets were$6.4 billion , up$1.9 billion (41%) fromDecember 31, 2020 , mostly due to theMackinac 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 atSeptember 30, 2021 , were up$1.5 billion fromDecember 31, 2020 , also mostly attributable to theMackinac acquisition. Total stockholders' equity was$729 million , an increase of$190 million fromDecember 31, 2020 , primarily from the common stock issued in theMackinac acquisition and retained earnings, partly offset by stock repurchases and negative net fair value investment changes. Compared toSeptember 30, 2020 , assets were$6.4 billion , up$1.7 billion (36%) fromSeptember 30, 2020 , also mainly due to theMackinac acquisition. The increase in assets fromSeptember 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%) overSeptember 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 fromSeptember 30, 2020 , primarily due to common stock issued in theMackinac 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 ofMackinac , Nicolet serviced a diverse customer base throughout northeastern and centralWisconsin and inMenominee, Michigan . With the acquisition ofMackinac onSeptember 3, 2021 , the Company has expanded intoNorthern Michigan and theUpper Peninsula ofMichigan , as well as adding to its presence in upper northeasternWisconsin . 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. AtSeptember 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. 39 --------------------------------------------------------------------------------
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 atSeptember 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. AtSeptember 30, 2021 , loans were$3.5 billion ,$744 million (27%) higher thanDecember 31, 2020 , largely due to the acquisition ofMackinac , 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 theBirmingham, Michigan branch. Commercial-based loans of$2.6 billion increased$444 million sinceDecember 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 atSeptember 30, 2021 . Residential real estate loans of$878 million grew$281 million (47%) from year-end 2020, to represent 25% of total loans atSeptember 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 -------------------------------------------------------------------------------- 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. AtSeptember 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 atDecember 31, 2020 and$31.4 million atSeptember 30, 2020 . The change in the ACL-Loans from year-end 2020 was mostly due to theMackinac 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 fromSeptember 30, 2020 was also largely due to theMackinac 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. 41 --------------------------------------------------------------------------------
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 ofSeptember 30, 2021 , only 2 loans remain under temporary payment modification structure. In addition, atSeptember 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"). AtSeptember 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 atDecember 31, 2020 . The increase in nonperforming assets was largely due to the acquisition ofMackinac . 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 -------------------------------------------------------------------------------- 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) atSeptember 30, 2021 andDecember 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 atSeptember 30, 2021 , increased$1.5 billion (39%) fromDecember 31, 2020 , largely due to theMackinac 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 toSeptember 30, 2020 , total deposits increased$1.7 billion (46%), also largely due to theMackinac acquisition. Customer core deposits increased$1.7 billion , while brokered deposits grew$30 million . The increase in total deposits sinceSeptember 30, 2020 was also influenced by the liquidity objectives of consumers and businesses in very uncertain times noted above. 43 --------------------------------------------------------------------------------
Table 9: Composition of the deposit at the end of the period
September 30, 2021 December 31, 2020 September 30, 2020 (in thousands) Amount % of Total Amount % of Total Amount % of Total Noninterest-bearing demand$ 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 ofSeptember 30, 2021 andDecember 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.
44
--------------------------------------------------------------------------------
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%
45 -------------------------------------------------------------------------------- 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. AtSeptember 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) 447,898 646,748Company 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. OnAugust 17, 2021 , Nicolet's board authorized an increase to the program of$40 million . As a result, atSeptember 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
————————————————– ——————————————
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 sinceDecember 31, 2020 . Future Accounting Pronouncements InMarch 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 ofMarch 12, 2020 throughDecember 31, 2022 . The Company continues to evaluate the impact of reference rate reform on its consolidated financial statements.
© Edgar Online, source
