MMA loans

NICOLET BANKSHARES INC MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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

Evaluation of financial performance and certain balance sheet line items was
impacted by the timing and size of Nicolet's 2021 acquisitions, County Bancorp,
Inc. ("County") and Mackinac Financial Corporation ("Mackinac"). Certain income
statement results, average balances and related ratios for 2021 include partial
contributions from County and Mackinac, each from the respective acquisition
date. Additional information on Nicolet's recent acquisition activity is
included in Note 2, "Acquisitions" in the Notes to Consolidated Financial
Statements, under Part II, Item 8.

The detailed financial discussion that follows focuses on 2021 results compared
to 2020. For a discussion of 2020 results compared to 2019, see the information
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2020, filed with the SEC on February 26, 2021, which
information under that caption is incorporated herein by reference. Historical
results of operations are not necessarily predictive of future results.

Overview

2021 Highlights

In 2021, Nicolet delivered on growth, profitability, capital positioning, and
sound asset quality management.  On December 3, 2021, Nicolet completed its
acquisition of County for a total purchase price of $224 million, including the
issuance of 2.4 million shares of common stock valued at $176 million and the
remainder in cash consideration. County added total assets of $1.4 billion,
loans of $1.0 billion, and deposits of $1.0 billion, at acquisition. On
September 3, 2021, Nicolet completed its acquisition of Mackinac for a total
purchase price of $229 million, comprised of stock consideration of $180
million, or 2.3 million shares of common stock, and cash consideration of $49
million. At acquisition, Mackinac added total assets of $1.6 billion, loans of
$0.9 billion, and deposits of $1.4 billion.

Net income for the year ended December 31, 2021 was $61 million and earnings per
diluted common share was $5.44, compared to net income of $60 million and
earnings per diluted common share of $5.70 for 2020. Non-core items, and the
related tax effect of each, in net income included merger and integration
related expenses, Day 2 credit provision expense required under the CECL model,
branch optimization costs, and gains on other investments. For the full year,
non-core items negatively impacted diluted earnings per common share $1.13 for
2021 and $0.24 for 2020.

At December 31, 2021, Nicolet had total assets of $7.7 billion, an increase of
$3.1 billion (69%) over December 31, 2020, largely due to the acquisitions of
Mackinac and County. Total loans increased $1.8 billion (66%) and total deposits
increased $2.6 billion (65%) from December 31, 2020, also largely due to the
acquisitions of Mackinac and County. Total stockholders' equity was $892 million
at December 31, 2021, an increase of $353 million since December 31, 2020,
mostly due to the common stock issued in the Mackinac and County acquisitions.
For the year ended December 31, 2021, Nicolet repurchased approximately 793,000
shares of common stock for a total cost of $61.5 million, or an average cost of
$77.50 per share.

Nonperforming assets were $56 million at December 31, 2021, consisting of $44
million of nonaccrual loans (largely due to nonaccrual agricultural loans
acquired with County) and $12 million of other real estate owned (primarily
closed bank branch properties yet to be sold), and representing 0.73% of total
assets, compared to $13 million or 0.29% at year-end 2020. The allowance for
credit losses-loans increased to $50 million (1.07% of loans), mostly due to the
Day 2 allowance increase from acquisitions.

Nicolet's board and management team has several objectives in 2022, with the
primary being to ensure the successful cultural integration of the Mackinac and
County acquisitions from the prior year. The respective branch and system
conversions of both acquisitions were completed with very little disruption to
our customers during 2021. However, as with any sizable acquisition, the melding
of cultures does not happen immediately, and takes a tremendous amount of effort
by our entire employee base. We have worked hard to retain the right people and
hire new talent in many of the markets we've entered in the past year. As with
past acquisitions, we plan to show how our words matter, and will be investing
in the new communities we now serve. While new acquisitions take time and
resources to fully integrate, we don't plan to lose sight of our core franchise.
We expect to achieve solid organic growth in loans, deposits, wealth management
service revenue, and other revenue lines across our footprint. As the U.S.
economy continues to emerge from the pandemic of the past two years, there will
be several economic policy changes that will impact the banking industry in the
coming year and beyond. Nicolet is an asset sensitive bank, and therefore an
increase in interest rates is expected to increase our net interest income over
time. As interest rates are currently forecasted to increase several times
during 2022, we expect our revenues to be positively impacted, although the
degree to which remains unknown given several factors

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at play. We believe 2022 will be another year of opportunity, and have
positioned the Company to take advantage by maintaining a solid balance sheet
funded almost entirely by core deposits, ample liquidity, and prudent capital
management. Nicolet enters 2022 as a "well capitalized" financial institution
with more than $80 million in cash at its holding company. We expect this cash
to be deployed through continued use of our share repurchase program, potential
acquisitions, and other strategic long-term investments that will position
Nicolet for years to come.

Effects, actions and updates of the pandemic

The 2020 year was marked by significant events (health pandemic, large sudden
rate drop by the Federal Reserve, unprecedented government stimulus, political
changes and social issues, and other market and economic disruptions),
volatility, and uncertainty, that turned 2020 into a very tactical year for
Nicolet management. Management took several actions to respond: added $0.2
billion of liquidity (which later proved to not be necessary, leading to a
reduction in non-deposit leverage in the second half of the year), temporarily
(and later permanently) closed 8 branches, provided temporary relief to
customers through loan payment modifications on nearly 1,000 loans (with only a
fraction remaining on modified terms at year end 2020), dramatically elevated
the credit loss provision given pervading uncertainty (though slowed the
provision in fourth quarter as potential deterioration of loan quality metrics
initially anticipated had not materialized), channeled significant resources to
originate Paycheck Protection Program ("PPP") loans (peaking at 2,725 loans
totaling $351 million during 2020) and residential mortgages (over $1 billion
originated to consumers under atypical conditions), granted $1.25 million of aid
to expedite funds to smaller businesses who would have otherwise waited for
small PPP loans, kept people safe (with $0.6 million of expense in second
quarter for onsite-bonuses, testing and protective supplies), and prioritized
full return to on-site work by June to allow us to move forward on goals and
improvements. During 2020, we still executed on our acquisition strategy,
completing the all-cash acquisition of Advantage.

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 have abated somewhat during 2021 as consumers and
businesses were supported by government stimulus and the vaccination rollout.
Despite these challenges, Nicolet continues to focus on serving the needs of its
communities, including originating 2,205 PPP loans totaling $160 million during
2021, as well as serving our communities through charitable donations,
volunteerism, and community events. However, much uncertainty remains from new
strains of the virus, ongoing supply chain issues and competitive labor markets,
which could result in continued volatility.


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Table 1: Summary of revenues and selected financial data

                                                                  At and for the years ended December 31,
(in thousands, except per share data)                         2021                   2020                 2019
Results of operations:
Net interest income                                     $     157,955           $   129,338          $   116,078
Provision for credit losses                                    14,900                10,300                1,200
Noninterest income                                             67,364                62,626               53,367
Noninterest expense                                           129,297               100,719               96,799
Income before income tax expense                               81,122                80,945               71,446
Income tax expense                                             20,470                20,476               16,458
Net income                                                     60,652                60,469               54,988
Net income attributable to noncontrolling interest                  -                   347                  347

Net income attributable to Nicolet Bankshares, Inc. $60,652

    $    60,122          $    54,641
Earnings per common share:
Basic                                                   $        5.65           $      5.82          $      5.71
Diluted                                                 $        5.44           $      5.70          $      5.52
Common shares:
Basic weighted average                                         10,736                10,337                9,562
Diluted weighted average                                       11,145                10,541                9,900
Year-End Balances:
Loans                                                   $   4,621,836           $ 2,789,101          $ 2,573,751
Allowance for credit losses - loans ("ACL-Loans")              49,672                32,173               13,972
Total assets                                                7,695,037             4,551,789            3,577,260
Deposits                                                    6,465,916             3,910,399            2,954,453
Stockholders' equity (common)                                 891,891               539,189              516,262
Book value per common share                             $       63.73           $     53.86          $     48.76
Tangible book value per common share (1)                $       39.47           $     36.34          $     33.08
Financial Ratios:
Return on average assets                                         1.15   %              1.41  %              1.75  %
Return on average common equity                                  9.74                 11.40                12.89
Return on average tangible common equity (1)                    14.74                 16.76                18.53
Stockholders' equity to assets                                  11.59                 11.85                14.43
Tangible common equity to tangible assets (1)                    7.51                  8.31                10.27
Reconciliation of Non-GAAP Financial Measures:
Adjusted net income reconciliation: (2)
Net income attributable to Nicolet (GAAP)               $      60,652           $    60,122          $    54,641
Adjustments:
Provision expense related to merger                            14,400                     -                    -
Assets (gains) losses, net                                     (4,181)                1,805               (7,897)
Merger-related expense                                          5,651                 1,020                  100
Branch closure expense                                            944                   500                    -
Adjustments subtotal                                           16,814                 3,325               (7,797)
Tax on Adjustments (25% effective tax rate)                     4,204                   831               (1,949)
Adjustments, net of tax                                        12,611                 2,494               (5,848)

Adjusted net income attributable to Nicolet (non-GAAP) $73,263

     $    62,616          $    48,793
Adjusted Diluted earnings per common share (Non-GAAP)   $        6.57           $      5.94          $      4.93
Tangible assets:
Total assets                                            $   7,695,037           $ 4,551,789          $ 3,577,260
Goodwill and other intangibles, net                           339,492               175,353              165,967
Tangible assets                                         $   7,355,545           $ 4,376,436          $ 3,411,293
Tangible common equity:
Stockholders' equity (common)                           $     891,891           $   539,189          $   516,262
Goodwill and other intangibles, net                           339,492               175,353              165,967
Tangible common equity                                  $     552,399           $   363,836          $   350,295
Tangible average common equity:
Average stockholders' equity (common)                   $     622,903           $   527,428          $   423,952
Average goodwill and other intangibles, net                   211,463               168,802              129,112
Average tangible common equity                          $     411,440       

$358,626 $294,840


(1) 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.
(2) The adjusted net income measure and related reconciliation provide
information useful to investors in understanding the operating performance and
trends of Nicolet and also to aid investors in the comparison of Nicolet's
financial performance to the financial performance of peer banks.
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Non-GAAP Financial Measures

We identify "tangible book value per common share," "return on average tangible
common equity," "tangible common equity to tangible assets" "adjusted net
income," and "adjusted diluted earnings per common share" as "non-GAAP financial
measures." In accordance with the SEC's rules, we identify certain financial
measures as non-GAAP financial measures if such financial measures exclude or
include amounts in the most directly comparable measures calculated and
presented in accordance with generally accepted accounting principles ("GAAP")
in effect in the United States in our statements of income, balance sheet or
statements of cash flows. Non-GAAP financial measures do not include operating
and other statistical measures, ratios or statistical measures calculated using
exclusively financial measures calculated in accordance with GAAP.

Management believes that the presentation of these non-GAAP financial measures
(a) are important metrics used to analyze and evaluate our financial condition
and capital strength and provide important supplemental information that
contributes to a proper understanding of our operating performance and trends,
(b) enables a more complete understanding of factor and trends affecting our
business, and (c) allows investors to compare our financial performance to the
financial performance of our peers and to evaluate our performance in a manner
similar to management, the financial services industry, bank stock analysts, and
bank regulators. Management uses non-GAAP measures as follows: in the
preparation of our operating budgets, monthly financial performance reporting,
and in our presentation to investors of our performance. However, we acknowledge
that these non-GAAP financial measures have a number of limitations. Limitations
associated with non-GAAP financial measures include the risk that persons might
disagree as to the appropriateness of items comprising these measures and that
different companies might calculate these measures differently. These
disclosures should not be considered an alternative to our GAAP results. A
reconciliation of non-GAAP financial measures to the most directly comparable
GAAP financial measures is presented in the table above.

ANALYSIS OF THE INCOME STATEMENT

Net interest income

Net interest income is the primary source of Nicolet's revenue, and is the
difference between interest income on earning assets, such as loans and
investment securities, and interest expense on interest-bearing liabilities,
such as deposits and other borrowings. Net interest income is directly impacted
by the sensitivity of the balance sheet to changes in interest rates and by the
amount, mix and composition of interest-earning assets and interest-bearing
liabilities, including characteristics such as the fixed or variable nature of
the financial instruments, contractual maturities, and repricing frequencies.
Tax-equivalent net interest income is a non-GAAP measure, but is a preferred
industry measurement of net interest income (and is used in calculating a net
interest margin) as it enhances the comparability of net interest income arising
from taxable and tax-exempt sources. Tables 2 and 3 present information to
facilitate the review and discussion of selected average balance sheet items,
tax-equivalent net interest income, interest rate spread, and net interest
margin.

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Table 2: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent
Basis

                                                                                                                              Years Ended December 31,
(in thousands)                                                          2021                                                            2020                                                            2019
                                                 Average                                   Average               Average                                   Average               Average                                   Average
                                                 Balance             Interest            Yield/Rate              Balance             Interest            Yield/Rate              Balance             Interest            Yield/Rate
ASSETS
Interest-earning assets
PPP Loans                                     $   141,510          $  16,672                   11.78  %       $   220,544          $   8,062                    3.66  %       $         -          $       -                       -  %
Commercial-based loans ex PPP                   2,477,608            114,089                    4.60  %         2,088,149            105,643                    5.06  %         1,802,747            101,509                    5.63  %
Retail-based loans                                564,563             25,883                    4.58  %           478,894             22,776                    4.76  %           454,286             24,206                  

5.33%

  Total loans, including loan fees (1)(2)       3,183,681            156,644                    4.92  %         2,787,587            136,481                    4.90  %         2,257,033            125,715                    5.57  %
Investment securities:
  Taxable                                         592,561              9,934                    1.68  %           354,430              8,118                    2.29  %           276,742              7,584                    2.74  %
  Tax-exempt (2)                                  145,979              3,113                    2.13  %           135,779              2,961                    2.18  %           132,419              2,927                    2.21  %
   Total investment securities                    738,540             13,047                    1.77  %           490,209             11,079                    2.26  %           409,161             10,511                    2.57  %
Other interest-earning assets                     797,196              2,909                    0.36  %           572,016              2,611                    0.46  %           128,447              3,405                   

2.65%

  Total non-loan earning assets                 1,535,736             15,956                    1.04  %         1,062,225             13,690                    1.29  %           537,608             13,916                  

2.59%

  Total interest-earning assets                 4,719,417          $ 172,600                    3.66  %         3,849,812          $ 150,171                    3.90  %         2,794,641          $ 139,631                    5.00  %
Other assets, net                                 552,046                                                         405,395                                                         331,894
Total assets                                  $ 5,271,463                                                     $ 4,255,207                                                     $ 3,126,535
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings                                       $   644,525          $     382                    0.06  %       $   422,171          $     700                    0.17  %       $   318,525          $   1,528                    0.48  %
Interest-bearing demand                           725,686              2,816                    0.39  %           562,370              3,938                    0.70  %           486,139              4,852                    1.00  %
Money market accounts ("MMA")                     994,866                613                    0.06  %           749,877              1,502                    0.20  %           582,646              3,676                    0.63  %
Core time deposits                                364,069              2,846                    0.78  %           390,216              6,023                    1.54  %           402,141              8,136                   

2.02%

  Total interest-bearing core deposits          2,729,146              6,657                    0.24  %         2,124,634             12,163                    0.57  %         1,789,451             18,192                    1.02  %
Brokered deposits                                 308,091              3,791                    1.23  %           289,489              4,478                    1.55  %            75,159                773                    1.03  %
  Total interest-bearing deposits               3,037,237             10,448                    0.34  %         2,414,123             16,641                    0.69  %         1,864,610             18,965                    1.02  %
PPPLF                                                   -                  -                       -  %           161,634                571                    0.35  %                 -                  -                       -  %
Other interest-bearing liabilities                103,156              3,156                    3.06  %            84,751              2,652                    3.13  %            75,029              3,545                    4.72  %
  Total wholesale funding                         103,156              3,156                    3.06  %           246,385              3,223                    1.31  %            75,029              3,545                    4.72  %
  Total interest-bearing liabilities            3,140,393             13,604                    0.43  %         2,660,508             19,864                    0.75  %         1,939,639             22,510                    1.16  %
Noninterest-bearing demand deposits             1,461,850                                                       1,025,625                                                         733,661
Other liabilities                                  46,317                                                          41,646                                                          29,283
Stockholders' equity                              622,903                                                         527,428                                                         423,952
Total liabilities and stockholders' equity    $ 5,271,463                                                     $ 4,255,207                                                     $ 3,126,535
Tax-equivalent net interest income and rate
spread                                                             $ 158,996                    3.23  %                            $ 130,307                    3.15  %                            $ 117,121                    3.84  %
Tax-equivalent adjustment and net free funds                           1,041                    0.14  %                                  969                    0.23  %                                1,043                    0.35  %
Net interest income and net interest margin                        $ 157,955                    3.37  %                            $ 129,338                    3.38  %                            $ 116,078                    4.19  %

(1) Unexpected loans and loans held for sale are included in average daily loans outstanding.

(2) Return on tax-exempt loans and tax-exempt investment securities is calculated 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 Difference – Tax Equivalent

                                                  2021 Compared to 2020                                       2020 Compared to 2019
(in thousands)                            Increase (Decrease) Due to Changes in                       Increase (Decrease) Due to Changes in
                                        Volume               Rate             Net (1)              Volume                Rate             Net (1)
Interest-earning assets
PPP Loans                          $      (3,850)         $ 12,460          

$8,610 $8,062 $- $8,062
Commercial loans ex PPP

             19,329           (10,883)            8,446                 18,251            (14,117)            4,134
Retail-based loans                         4,919            (1,812)            3,107                  1,300             (2,730)           (1,430)
  Total loans, including loan fees
(2) (3)                                   20,398              (235)           20,163                 27,613            (16,847)           10,766
Investment securities:
  Taxable                                  2,723              (907)            1,816                  1,175               (641)              534
  Tax-exempt (3)                             218               (66)              152                     74                (40)               34
   Total investment securities             2,941              (973)            1,968                  1,249               (681)              568
Other interest-earning assets                552              (254)              298                  2,894             (3,688)             (794)
 Total non-loan earning assets             3,493            (1,227)            2,266                  4,143             (4,369)             (226)
Total interest-earning assets      $      23,891          $ (1,462)         $ 22,429          $      31,756          $ (21,216)         $ 10,540
Interest-bearing liabilities
Savings                            $         261          $   (579)         $   (318)         $         389          $  (1,217)         $   (828)
Interest-bearing demand                      943            (2,065)           (1,122)                   683             (1,597)             (914)
MMA                                          382            (1,271)             (889)                   842             (3,016)           (2,174)
Core time deposits                          (380)           (2,797)           (3,177)                  (235)            (1,878)           (2,113)
  Total interest-bearing core
deposits                                   1,206            (6,712)           (5,506)                 1,679             (7,708)           (6,029)
Brokered deposits                            274              (961)             (687)                 3,148                557             3,705
  Total interest-bearing deposits          1,480            (7,673)           (6,193)                 4,827             (7,151)           (2,324)
PPPLF                                       (286)             (285)             (571)                   571                  -               571
Other interest-bearing liabilities         1,195              (691)              504                     37               (930)             (893)
  Total wholesale funding                    909              (976)              (67)                   608               (930)             (322)
Total interest-bearing liabilities         2,389            (8,649)           (6,260)                 5,435             (8,081)           (2,646)
Net interest income                $      21,502          $  7,187          $ 28,689          $      26,321          $ (13,135)         $ 13,186

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

(2) Unexpected loans and loans held for sale are included in average daily loans outstanding.

(3) Return on tax-exempt loans and tax-exempt investment securities is calculated on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense .

Comparison 2021 versus 2020

Short-term interest rates have remained steady since March 2020, while the yield
curve has begun to steepen 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 2021
and 2020, with the pandemic impacts appearing 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 $159 million for 2021, comprised of net
interest income of $158 million ($29 million or 22% higher than 2020) and a $1
million tax-equivalent adjustment. The increase in tax-equivalent net interest
income was comprised of $22 million higher interest income and $6 million lower
interest expense. Higher volumes added $24 million to interest income (mostly
from higher loan volumes related to the Mackinac and County acquisitions and
organic loan growth, as well as growth in other interest-earning assets), offset
partly by a $2 million increase to interest expense on higher interest-bearing
liabilities (also mostly from volumes due to the Mackinac and County
acquisitions, as well as $100 million of subordinated notes issued in July
2021). Rate changes added $7 million to net interest income, mostly due to $9
million lower interest expense (including $7 million from prudent deposit
pricing actions on interest-bearing core deposits).

Average interest-earning assets were $4.7 billion for 2021, $0.9 billion (23%)
higher than 2020. Average loans increased $396 million (14%) to $3.2 billion,
largely due to the timing of the acquisitions (with Mackinac adding $0.9 billion
at acquisition in September 2021 and County adding $1.0 billion at acquisition
in December 2021). Investment securities increased $248 million, including
growth related to the acquisitions, as well as the strategic re-investment of
approximately $0.5 billion excess cash liquidity into U.S. Treasury securities
of varying yields and durations during fourth quarter 2021. Other
interest-earning assets were up $225

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million, mostly in cash, reflecting continued liquidity for businesses and consumers. As a result, the composition of average interest-earning assets has changed. Other interest-earning assets increased to 17% of total interest-earning assets for 2021 (vs. 15% for 2020) and investment securities increased to 16% of total interest-earning assets for 2021 (from 13% in 2020), while the percentage of loans decreased to represent 67% of total interest-earning assets for 2021 (from 72% the previous year).

Average interest-bearing liabilities were $3.1 billion for 2021, an increase of
$480 million (18%) from 2020, primarily due to the significant increase in
deposits from government stimulus activities and deposited PPP loan proceeds, as
well as the timing of the acquisitions (Mackinac in September 2021 and County in
December 2021). Average core interest-bearing deposits increased $605 million
and brokered deposits grew $19 million, while funding decreased $143 million
(mostly PPPLF funding). The mix of average interest-bearing liabilities was 87%
core deposits, 10% brokered deposits, and 3% other funding for 2021, compared to
80% core deposits, 11% brokered deposits, and 9% other funding in 2020.

The interest rate spread increased 8 bps between the periods, attributable to
the low interest rate environment and the changing balance sheet mix. The 2021
interest-earning asset yield decreased 24 bps to 3.66% for 2021, largely due to
the lower loans-to-earning asset mix given the higher mix of cash assets (as
noted above) combined with continued decline in yield (to 0.36% versus 0.46% in
2020). Loans yielded 4.92% for 2021, up slightly (2 bps) from 2020, mostly from
the yield on PPP loans (at 11.78% for 2021), as the yield on all other loans
decreased 40 bps (to 4.60%) largely from the lower interest rate environment
continuing to impact yields on new, renewed and variable rate loans. Investments
yielded 1.77%, 49 bps lower than 2020, attributable to the lower rate
environment along with the strategic re-investment of excess cash put into lower
yielding U.S. Treasuries, compared to the mix of the balance of the portfolio.
The cost of funds declined 32 bps to 0.43% for 2021, mainly due to lower rates
on core interest-bearing deposits (down 33 bps to 0.24%), as well as the
changing mix of interest-bearing liabilities (as noted above). The contribution
from net free funds decreased 9 bps, due mostly to the reduced value in the
lower interest rate environment, though offset partly by the increase in average
net free funds (largely from higher average noninterest-bearing demand deposits
and stockholders' equity) between the years. As a result, the net interest
margin was 3.37% for 2021, down 1 bps compared to 3.38% for 2020.

Tax-equivalent interest income was $173 million, up $22 million (15%) over 2020.
Interest income on loans increased $20 million (15%) over 2020, mostly due to
strong volumes from the 2021 acquisitions and organic loan growth. Between the
years, interest income on investment securities increased $2 million to $13
million, with $3 million from higher average volumes due to the 2021
acquisitions and strategic re-investment of cash (as noted above), partially
offset by $1 million lower rate from declining yields in the low interest rate
environment. Interest expense was $14 million for 2021, down $6 million (32%)
from 2020. Interest expense on deposits decreased $6 million from 2020 given
higher average deposit balances at a lower cost (down 35 bps to 0.34%) as
product rate changes were made in the lower interest rate environment, and
brokered deposits cost 32 bps less (largely from maturities of higher-costing
term brokered funds procured under competitive conditions in mid-2020 during the
pandemic). Interest expense on wholesale funding was minimally changed (down
2%), as interest expense on lower average balances (down $143 million, mostly
PPPLF) was offset by higher rates (up 175 bps to 3.06%), reflecting the July
2021 subordinated notes issuance ($100 million at 3.125%), debt acquired with
County, and the inclusion of the low-costing PPPLF during 2020.

Provision for credit losses

The provision for credit losses in 2021 was $14.9 million (comprised of $12.5
million related to the ACL-Loans, and $2.4 million for the ACL on unfunded
commitments). The 2021 provision for credit losses was mostly due to the
required Day 2 ACL increase from the acquisitions of County and Mackinac.
Comparatively, 2020 provision for credit losses was $10.3 million largely due to
the unprecedented economic disruptions and uncertainty surrounding the COVID
pandemic. Net charge-offs were negligible for both years.

The provision for credit losses is predominantly a function of Nicolet's
methodology and judgment as to qualitative and quantitative factors used to
determine the appropriateness of the ACL-Loans. The appropriateness of the
ACL-Loans is affected by changes in the size and character of the loan
portfolio, changes in levels of collateral-dependent and other nonperforming
loans, historical losses and delinquencies in each portfolio segment, the risk
inherent in specific loans, concentrations of loans to specific borrowers or
industries, existing and future economic conditions, the fair value of
underlying collateral, and other factors which could affect potential credit
losses. For additional information regarding asset quality and the ACL-Loans,
see "BALANCE SHEET ANALYSIS - Loans," and "- Allowance for Credit Losses -
Loans" and "-Nonperforming Assets."

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Noninterest Income

Table 4: Noninterest Income

(in thousands)                              Years Ended December 31,                                               Change From Prior Year
                                                                                            $ Change                % Change           $ Change            % Change
                                    2021              2020              2019                  2021                    2021               2020                2020
Trust services fee income        $  7,774          $  6,463          $  6,227          $     1,311                        20  %       $    236                    4  %
Brokerage fee income               12,143             9,753             8,115                2,390                        25  %          1,638                   20  %
Mortgage income, net               22,155            29,807            11,878               (7,652)                      (26) %         17,929                  151  %
Service charges on deposit
accounts                            5,023             4,208             4,824                  815                        19  %           (616)                 (13) %
Card interchange income             9,163             6,998             6,498                2,165                        31  %            500                    8  %
Bank owned life insurance
("BOLI") income                     2,380             2,710             2,369                 (330)                      (12) %            341                   14  %
Other income                        4,545             4,492             5,559                   53                         1  %         (1,067)                 (19) %
 Noninterest income without net
gains                              63,183            64,431            45,470               (1,248)                       (2) %         18,961                   42  %
Asset gains (losses), net           4,181            (1,805)            7,897                5,986                          N/M         (9,702)                    N/M
  Total noninterest income       $ 67,364          $ 62,626          $ 53,367          $     4,738                         8  %       $  9,259                   17  %
Trust services fee income
 & Brokerage fee income combined $ 19,917          $ 16,216          $ 14,342          $     3,701                        23  %       $  1,874                   13  %
N/M means not meaningful.

Comparison 2021 versus 2020

Noninterest income was $67 million for 2021, an increase of $5 million (8%) over
2020. Excluding net asset gains (losses), noninterest income for 2021 was down
$1 million (2%) compared to 2020. Notable contributions to the change in
noninterest income were:

•Trust services fee income and brokerage fee income combined were $20 million
for 2021, up $4 million (23%) from 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 was $22
million for 2021, down $8 million (26%) between the years, predominantly on
slowing mortgage activity from the record levels experienced in 2020. Gains on
sales and capitalized gains combined decreased $9 million, commensurate with the
lower volume of loans sold into the secondary market, while MSR impairment was
down $1 million on slower paydown activity. See also "Off-Balance Sheet
Arrangements, Lending-Related Commitments and Contractual Obligations" and Note
6, "Goodwill and Other Intangibles and Servicing Rights" in the Notes to
Consolidated Financial Statements, under Part II, Item 8

•Service charges on deposit accounts were up $1 million (19%) to $5 million for
2021, partly due to the waiver of certain fees during 2020 to provide economic
relief to our customers at the inception of the pandemic and partly due to the
larger deposit base from the 2021 acquisitions.

• Card trading revenue increased $2 million (31%) to $9 million in 2021 largely due to higher volume and activity, although activity in 2020 was also tempered by cautious consumer spending given the economic uncertainty of the pandemic.

• BOLI income decreased $0.3 million (12%) to $2 million for 2021, attributable to BOLI death benefits received in 2020, partially offset by income on higher average balances from BOLI acquired in recent acquisitions.

•The $4 million net asset gains in 2021 were primarily attributable to favorable
fair value marks on equity securities (including $3.5 million related to the
initial public offering of an equity investment). Net asset losses in 2020 of $2
million were comprised primarily of $1 million market losses on equity
securities held in the lower, more volatile market and $1 million of net losses
on branch other real estate owned write-downs. Additional information on the net
gains is also included in Note 16, "Asset Gains (Losses), Net," in the Notes to
Consolidated Financial Statements, under Part II, Item 8.

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Noninterest Expense

Table 5: Noninterest Expense

($ in thousands)                             Years Ended December 31,                                                 Change From Prior Year
                                                                                               Change                 % Change             Change            % Change
                                     2021               2020              2019                  2021                    2021                2020               2020
Personnel                        $  70,618          $  57,121          $ 54,437          $     13,497                        24  %       $ 2,684                     5  %
Occupancy, equipment and office     21,058             16,718            14,788                 4,340                        26  %         1,930                    13  %
Business development and
marketing                            5,403              5,396             5,685                     7                         -  %          (289)                   (5) %
Data processing                     11,990             10,495             9,950                 1,495                        14  %           545                     5  %
Intangibles amortization             3,494              3,567             3,872                   (73)                       (2) %          (305)                   (8) %
FDIC assessments                     2,035                707               593                 1,328                       188  %           114                    19  %
Merger-related expense               5,651              1,020               100                 4,631                       454  %           920                   920  %
Other expense                        9,048              5,695             7,374                 3,353                        59  %        (1,679)                  (23) %
Total noninterest expense        $ 129,297          $ 100,719          $ 96,799          $     28,578                        28  %       $ 3,920                     4  %
Non-personnel expenses           $  58,679          $  43,598          $ 42,362          $     15,081                        35  %       $ 1,236                     3  %
Average full-time equivalent
employees                              626                553               560                    73                        13  %            (7)                   (1) %

Comparison 2021 versus 2020

Non-interest expenses were $129 millionan augmentation of $29 million (28%) compared to 2020. Staff costs increased $13 millionwhile combined non-staff spending increased $15 million in 2020. Notable contributions to the change in non-interest expenses were:

•Personnel expense (including salaries, overtime, cash and equity incentives,
and employee benefit and payroll-related expenses) was $71 million for 2021, an
increase of $13 million (24%) over 2020. Salary expense increased $5 million
(16%) over 2020, reflecting higher salaries from the larger employee base (with
average full-time equivalent employees up 13%) as well as merit increases
between the years. Cash, equity and other incentives increased $6 million,
reflective of the strong earnings for the year, the successful integration of
two acquisitions, and large option grants during the year (intended to align
incentives with future strategic goals). Fringe benefits increased $2 million
over 2020, mainly on higher health costs between the years.

•Occupancy, equipment and office expense was $21 million for 2021, up $4 million
(26%) from 2020, with 2021 including $0.9 million of accelerated depreciation
and write-offs related to the branch closures, as well as higher expense for the
expanded branch network with the Mackinac and County acquisitions, and
additional expense for software and technology to drive operational
efficiencies, and enhance products or services. 2020 also included $0.5 million
of accelerated depreciation and write-offs related to branch closures.

•Business development and marketing expense was $5 million for 2021, minimally
changed from 2020. During 2021, business development costs have increased as
travel and entertainment is returning to more normal levels (though still down
from pre-pandemic levels), as well as lower marketing costs from differences in
the timing and extent of donations, marketing campaigns, promotions, and media.
In comparison, business development costs during 2020 were low from less travel
and entertainment during the pandemic. In addition, 2020 also included $1.25
million for the micro-grant program (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).

•Data processing expense was $12 million for 2021, up $1.5 million (14%) over
2020, mostly due to volume-based increases in core processing charges, as well
as the larger operating base following the Mackinac and County acquisitions.

•Intangible amortization was down slightly (2%) year-over-year, with lower amortization on aging intangible assets from previous acquisitions largely offset by amortization of new intangible assets from recent acquisitions.

•FDIC assessments increased to $2 million for 2021 as the small bank assessment
credits were fully utilized during third quarter 2020, and also reflecting the
higher assessment base.

•Other expense was $9 million for 2021, up $3 million (59%) from 2020, mostly
due to an increase in director fees (reflective of the additional complexity of
a larger company, including the addition of four new directors), higher
professional fees, costs to carry closed bank branches, and overall higher
expenses related to the larger operating base. In addition, 2021 included a $2
million contract termination charge, while 2020 included $1 million of lease
termination charges related to the branch closures.

                                       30
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Income taxes

Income tax expense was $20 million (effective tax rate of 25.2%) for 2021,
unchanged from 2020 income tax expense (effective tax rate of 25.3%). The
accounting for income taxes requires deferred income taxes to be analyzed to
determine if a valuation allowance is required. A valuation allowance is
required if it is more likely than not that some portion of the deferred tax
asset will not be realized. This analysis involves the use of estimates,
assumptions, interpretation, and judgment concerning accounting pronouncements
and federal and state tax codes; therefore, income taxes are considered a
critical accounting policy. At December 31, 2021 and 2020, no valuation
allowance was determined to be necessary. Additional information on the
subjectivity of income taxes is discussed further under "Critical Accounting
Policies-Income Taxes." The Company's income taxes accounting policy is
described in Note 1, "Nature of Business and Significant Accounting Policies,"
and additional disclosures relative to income taxes are included in Note 13,
"Income Taxes" in the Notes to Consolidated Financial Statements, under Part II,
Item 8.

BALANCE SHEET ANALYSIS

Loans

Nicolet services a diverse customer base throughout Northeast and Central
Wisconsin, Northern Michigan and the upper peninsula of Michigan, including the
following industries: manufacturing, wholesaling, paper, packaging, food
production and processing, agriculture, forest products, retail, service, and
businesses supporting the general building industry. The Company concentrates on
originating loans in its local markets and assisting current loan customers.
Nicolet actively utilizes government loan programs such as those provided by the
U.S. Small Business Administration ("SBA"), including the Paycheck Protection
Program, and the U.S. Department of Agriculture's Farm Service Agency ("FSA") to
help customers with current economic conditions and positioning their businesses
for the future. In addition to the discussion that follows, accounting policies
for loans are described in Note 1, "Nature of Business and Significant
Accounting Policies," and additional disclosures are included in Note 4, "Loans,
Allowance for Credit Losses - Loans, and Credit Quality," in the Notes to
Consolidated Financial Statements, under Part II, Item 8.

Table 6: Composition of the loan at the end of the period

                                                          December 31, 2021                            December 31, 2020                            December 31, 2019
                                                                              % of                                         % of                                         % of
(in thousands)                                         Amount                 Total                 Amount                 Total                 Amount                 Total
Commercial & industrial                         $       1,017,725                22  %       $         750,718                27  %       $         806,189                31  %
PPP loans                                                  24,531                 1  %                 186,016                 7  %                       -                 -  %
Owner-occupied CRE                                        787,189                17  %                 521,300                19  %                 496,372                19  %
Agricultural                                              794,728                17  %                 109,629                 4  %                  95,450                 4  %
Commercial                                              2,624,173                57  %               1,567,663                57  %               1,398,011                54  %
CRE investment                                            818,061                18  %                 460,721                16  %                 443,218                17  %
Construction & land development                           213,035                 5  %                 131,283                 5  %                  92,970                 4  %
Commercial real estate                                  1,031,096                23  %                 592,004                21  %                 536,188                21  %
   Commercial-based loans                               3,655,269                80  %               2,159,667                78  %               1,934,199                75  %
Residential construction                                   70,353                 1  %                  41,707                 1  %                  54,403                 2  %
Residential first mortgage                                713,983                15  %                 444,155                16  %                 432,167                17  %
Residential junior mortgage                               131,424                 3  %                 111,877                 4  %                 122,771                 5  %
  Residential real estate                                 915,760                19  %                 597,739                21  %                 609,341                24  %
Retail & other                                             50,807                 1  %                  31,695                 1  %                  30,211                 1  %
  Retail-based loans                                      966,567                20  %                 629,434                22  %                 639,552                25  %
Total loans                                     $       4,621,836               100  %       $       2,789,101               100  %       $       2,573,751               100  %
Total loans ex. PPP loans                       $       4,597,305                99  %       $       2,603,085                93  %       $       2,573,751               100  %


Total loans were $4.6 billion at December 31, 2021, an increase of $1.8 billion
(66%), compared to total loans of $2.8 billion at December 31, 2020. The
increase in loans during 2021 was largely due to the acquisitions of Mackinac
and County, which added total loans of $0.9 billion and $1.0 billion,
respectively, at acquisition, and also shifted the composition of the loan
portfolio. In addition, during 2021, under the latest round of the SBA's
program, we originated 2,205 PPP loans totaling $160 million, bearing a 1%
contractual rate, and earned a $9 million fee. In comparison, during 2020 we
originated 2,725 PPP loans totaling $351 million and earned a $12 million fee.
Of the total fees, $15 million was accreted into interest income during 2021 and
$6 million was accreted during 2020. At December 31, 2021, the net carrying
value of PPP loans was $25 million, or 1% of loans, with the decline in balance
due to SBA loan forgiveness.

As noted in Table 6 above, year-end 2021 loans were broadly 80% commercial-based
and 20% retail-based compared to 78% commercial-based and 22% retail-based at
year-end 2020. Commercial-based loans are considered to have more inherent risk
of

                                       31
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default than retail lending, in part because the trade balance per borrower is typically higher than retail lending, implying higher potential losses for each customer.

Commercial and industrial loans consist primarily of commercial loans to small
businesses, PPP loans, and, to a lesser degree, to municipalities within a
diverse range of industries. The credit risk related to commercial and
industrial loans is largely influenced by general economic conditions and the
resulting impact on a borrower's operations, or on the value of underlying
collateral, if any. Commercial and industrial loans, including the PPP loans,
continue to be the largest segment of Nicolet's portfolio, representing 23% of
the portfolio at year-end 2021.

Owner-occupied CRE loans represented 17% of loans at year-end 2021, down from
19% at year-end 2020. This category primarily consists of loans within a diverse
range of industries secured by business real estate that is occupied by
borrowers who operate their businesses out of the underlying collateral and who
may also have commercial and industrial loans. The credit risk related to
owner-occupied CRE loans is largely influenced by general economic conditions
and the resulting impact on a borrower's operations, or on the value of
underlying collateral.

Agricultural loans consist of loans secured by farmland and the related farming
operations. The credit risk related to agricultural loans is largely influenced
by the agricultural economy, including market prices for the cost of feed and
the price of milk, and/or the underlying value of the farmland. These loans
represented 17% of loans at year-end 2021, compared to 4% a year ago, with the
increase attributable to the acquisition of County.

The CRE investment loan classification primarily includes commercial-based
mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential
real estate properties, and multi-family residential properties. Lending in this
segment has been focused on loans that are secured by commercial
income-producing properties as opposed to speculative real estate development.
These loans represented 18% of loans at December 31, 2021, compared to 16% of
loans at year-end 2020.

Loans in the construction and land development portfolio represented 5% of total
loans at year-end 2021, unchanged from a year ago. Construction and land
development loans provide financing for the development of commercial income
properties, multi-family residential development, and land designated for future
development. Nicolet controls the credit risk on these types of loans by making
loans in familiar markets, reviewing the merits of individual projects,
controlling loan structure, and monitoring the progress of projects through the
analysis of construction advances. Credit risk is managed by employing sound
underwriting guidelines, lending primarily to borrowers in local markets,
periodically evaluating the underlying collateral, and formally reviewing the
borrower's financial soundness and relationships on an ongoing basis.

On a combined basis, Nicolet's residential real estate loans represented 19% of
total loans at year-end 2021 compared to 21% of total loans at year-end 2020.
Residential first mortgage loans include conventional first-lien home mortgages.
Residential junior mortgage loans consist 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 first mortgage loans are sold in the secondary market with the
servicing rights retained. Nicolet's mortgage loans are typically of high
quality and have historically had low net charge-off rates.

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

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

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Table 7: Breakdown of loan maturities

The following table presents the maturity distribution of the loan portfolio at
December 31, 2021.

(in thousands)                                                                  Loan Maturity
                                     One Year           After One Year         After Five Years to       After Fifteen
                                     or Less             to Five Years            Fifteen Years              Years               Total
Commercial & industrial,
including PPP loans               $   345,594          $      577,573          $     116,133             $    2,956          $ 1,042,256
Owner-occupied CRE                     90,536                 531,131                135,019                 30,503              787,189
Agricultural                          315,180                 330,463                132,590                 16,495              794,728
CRE investment                        138,655                 482,783                162,333                 34,290              818,061
Construction & land development        80,768                  85,296                 35,526                 11,445              213,035
Residential construction *             53,796                   3,611                  4,601                  8,345               70,353
Residential first mortgage             32,070                 169,965                160,050                351,898              713,983
Residential junior mortgage             8,381                   5,333                 29,510                 88,200              131,424
Retail & other                         23,307                  17,036                  7,359                  3,105               50,807
  Total loans                     $ 1,088,287          $    2,203,191          $     783,121             $  547,237          $ 4,621,836
Percent by maturity distribution           23  %                   48  %                  17     %               12  %               100  %
Fixed rate loans:
Commercial & industrial,
including PPP loans               $    64,138          $      510,361          $      70,506             $    2,956          $   647,961
Owner-occupied CRE                     80,883                 490,757                 64,326                  1,493              637,459
Agricultural                          180,313                 255,168                119,672                 13,206              568,359
CRE investment                        126,489                 454,391                110,181                  4,785              695,846
Construction & land development        50,945                  62,484                 17,250                     75              130,754
Residential construction *             43,601                   3,187                  4,426                  7,334               58,548
Residential first mortgage             24,994                 167,612                146,480                274,211              613,297
Residential junior mortgage             1,542                   3,025                  1,589                    144                6,300
Retail & other                          3,034                  16,435                  6,692                  2,173               28,334
Total fixed rate loans            $   575,939          $    1,963,420          $     541,122             $  306,377          $ 3,386,858
Floating rate loans:
Commercial & industrial,
including PPP loans               $   281,456          $       67,212          $      45,627             $        -          $   394,295
Owner-occupied CRE                      9,653                  40,374                 70,693                 29,010              149,730
Agricultural                          134,867                  75,295                 12,918                  3,289              226,369
CRE investment                         12,166                  28,392                 52,152                 29,505              122,215
Construction & land development        29,823                  22,812                 18,276                 11,370               82,281
Residential construction *             10,195                     424                    175                  1,011               11,805
Residential first mortgage              7,076                   2,353                 13,570                 77,687              100,686
Residential junior mortgage             6,839                   2,308                 27,921                 88,056              125,124
Retail & other                         20,273                     601                    667                    932               22,473
Total floating rate loans         $   512,348          $      239,771          $     241,999             $  240,860          $ 1,234,978

* Residential construction loans with a loan term after five years represent a permanent loan construction product.

Allowance for Credit Losses – Loans

In addition to the discussion that follows, accounting policies for the
allowance for credit losses - loans are described in Note 1, "Nature of Business
and Significant Accounting Policies," and additional ACL-Loans disclosures are
included in Note 4, "Loans, Allowance for Credit Losses - Loans, and Credit
Quality," in the Notes to Consolidated Financial Statements, under Part II, Item
8.

Credit risks within the loan portfolio are inherently different for each loan
type as described under "BALANCE SHEET ANALYSIS - Loans." Credit risk is
controlled and monitored through the use of lending standards, a thorough review
of potential borrowers, and ongoing review of loan payment performance. Active
asset quality administration, including early problem loan identification and
timely resolution of problems, aids in the management of credit risk and
minimization of loan losses. Loans charged off are subject to continuous review,
and specific efforts are taken to achieve maximum recovery of principal,
interest, and related expenses. For additional information regarding
nonperforming assets see "BALANCE SHEET ANALYSIS - Nonperforming Assets."

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The ACL-Loans represents management's estimate of expected credit losses in the
Company's loan portfolio at the balance sheet date. To assess the overall
appropriateness of the ACL-Loans, management applies an allocation methodology
which focuses on evaluation of qualitative and environmental factors, including
but not limited to: (i) evaluation of facts and issues related to specific
loans; (ii) management's ongoing review and grading of the loan portfolio; (iii)
consideration of historical loan loss and delinquency experience on each
portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk
characteristics of the various loan segments; (vi) changes in the size and
character of the loan portfolio; (vii) concentrations of loans to specific
borrowers or industries; (viii) existing economic conditions; (ix) the fair
value of underlying collateral; and (x) other qualitative and quantitative
factors which could affect expected credit losses. Assessing these factors
involves significant judgment; therefore, management considers the ACL-Loans a
critical accounting policy, as further discussed under "Critical Accounting
Estimates - Allowance for Credit Losses - Loans."

Management allocates the ACL-Loans by pools of risk within each loan portfolio
segment. The allocation methodology consists of the following components. First,
a specific reserve is established for individually evaluated credit deteriorated
loans, which management defines as nonaccrual credit relationships over
$250,000, collateral dependent loans, purchased credit deteriorated loans, and
other loans with evidence of credit deterioration. The specific reserve in the
ACL-Loans for these credit deteriorated loans is equal to the aggregate
collateral or discounted cash flow shortfall. Second, management allocates the
ACL-Loans with historical loss rates by loan segment. The loss factors are
measured on a quarterly basis and applied to each loan segment based on current
loan balances and projected for their expected remaining life. Next, management
allocates the ACL-Loans using the qualitative and environmental factors
mentioned above. Consideration is given to those current qualitative or
environmental factors that are likely to cause estimated credit losses at the
evaluation date to differ from the historical loss experience of each loan
segment. Lastly, management considers reasonable and supportable forecasts to
assess the collectability of future cash flows.

Management performs ongoing intensive analysis of its loan portfolio to allow
for early identification of customers experiencing financial difficulties,
maintains prudent underwriting standards, understands the economy in its
markets, and considers the trend of deterioration in loan quality in
establishing the level of the ACL-Loans. In addition, various regulatory
agencies periodically review the ACL-Loans. These agencies may require the
Company to make additions to the ACL-Loans or may require that certain loan
balances be charged off or downgraded into classified loan categories when their
credit evaluations differ from those of management based on their judgments of
collectability from information available to them at the time of their
examination.

At December 31, 2021, the ACL-Loans was $50 million (representing 1.07% of
period end loans) compared to $32 million at December 31, 2020. The increase in
the ACL-Loans was largely due to the acquisitions of Mackinac and County, which
combined added $12 million of provision for the Day 2 allowance and $5 million
related to purchased credit deteriorated loans. Net charge-offs (0.01% of
average loans) remain negligible. The components of the ACL-Loans are detailed
further in Tables 8 and 9 below.

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Table 8: Allowance for Credit Losses – Loans

(in thousands)                                                   Years 

Ended the 31st of December,

                                                      2021                 2020                 2019
Allowance for credit losses - loans:
Beginning balance                                $    32,173          $    13,972          $    13,153
Adoption of CECL                                           -                8,488                    -
Initial PCD ACL                                            -                  797                    -
  Total impact for adoption of CECL                        -                9,285                    -
ACL on PCD loans acquired                              5,159                    -                    -
Net charge-offs:
Commercial & industrial                                   50                 (692)                 261
Owner-occupied CRE                                         -                 (449)                 (91)
Agricultural                                             (48)                   -                    -
CRE investment                                            (2)                (190)                   -
Construction & land development                            -                    -                    -
Residential construction                                   -                    -                 (226)
Residential first mortgage                               (93)                   9                   14
Residential junior mortgage                                4                   67                  (41)
Retail & other                                           (71)                (129)                (298)
  Total net charge-offs                                 (160)              (1,384)                (381)
Provision for credit losses                           12,500               10,300                1,200
Ending balance of ACL-Loans                      $    49,672          $    32,173          $    13,972
Ratio of net charge-offs to average loans by
loan composition
Commercial & industrial                                (0.01) %              0.07  %             (0.04) %
Owner-occupied CRE                                         -  %              0.09  %              0.02  %
Agricultural                                            0.02  %                 -  %                 -  %
CRE investment                                             -  %              0.04  %                 -  %
Construction & land development                            -  %                 -  %                 -  %
Residential construction                                   -  %                 -  %              0.57  %
Residential first mortgage                              0.02  %                 -  %                 -  %
Residential junior mortgage                                -  %             (0.06) %              0.04  %
Retail & other                                          0.18  %              0.42  %              1.06  %
Total net charge-offs to average loans                  0.01  %              0.05  %              0.02  %


The allocation of the ACL-Loans by loan category for each of the past three
years is shown in Table 9. The largest portions of the ACL-Loans were allocated
to commercial & industrial loans and agricultural loans, representing 25% and
19%, respectively, of the ACL-Loans at December 31, 2021. In comparison, the
largest portions of the ACL-Loans were allocated to commercial & industrial
loans and owner-occupied CRE, representing 36% and 18%, respectively, of the
ACL-Loans at December 31, 2020. This change in allocated ACL-Loans was
attributable to the change in loan portfolio composition, mostly related to the
agricultural loans acquired with County, as well as changes in outstanding loan
balances between the years and risk trends within loan categories.

Table 9: Breakdown of allowance for credit losses – Loans

                                                     December 31, 2021                                                    December 31, 2020                                                    December 31, 2019
                                   Allocated              % of Loan          ACL Category as            Allocated              % of Loan          ACL Category as            Allocated              % of Loan          ACL Category as
(in thousands)                     Allowance              Portfolio          a % of Total ACL           Allowance              Portfolio          a % of Total ACL           Allowance              Portfolio          a % of Total ACL
Commercial & industrial *      $       12,613                    23  %                  25  %       $       11,644                    34  %                  36  %       $        5,471                    31  %                  39  %
Owner-occupied CRE                      7,222                    17  %                  14  %                5,872                    19  %                  18  %                3,010                    19  %                  22  %
Agricultural                            9,547                    17  %                  19  %                1,395                     4  %                   4  %                  579                     4  %                   4  %
CRE investment                          8,462                    18  %                  17  %                5,441                    16  %                  17  %                1,600                    17  %                  11  %
Construction & land
development                             1,812                     5  %                   4  %                  984                     5  %                   3  %                  414                     4  %                   3  %
Residential construction                  900                     1  %                   2  %                  421                     1  %                   1  %                  368                     2  %                   3  %
Residential first mortgage              6,844                    15  %                  14  %                4,773                    16  %                  15  %                1,669                    17  %                  12  %
Residential junior mortgage             1,340                     3  %                   3  %                1,086                     4  %                   4  %                  517                     5  %                   4  %
Retail & other                            932                     1  %                   2  %                  557                     1  %                   2  %                  344                     1  %                   2  %
Total ACL-Loans                $       49,672                   100  %                 100  %       $       32,173                   100  %                 100  %       $       13,972                   100  %                

100% * PPP loans are fully guaranteed by the SBA; therefore, no ACL loans have been assigned to these loans.

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Non-performing 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
to monitor credit risk from the ongoing economic disruptions surrounding the
pandemic. Since the pandemic started, nearly 1,000 loans were provided temporary
payment modifications, and as of December 31, 2021, no loans remain under
temporary payment modification structure. In addition to the discussion that
follows, accounting policies for loans and the ACL-Loans are described in Note
1, "Nature of Business and Significant Accounting Policies," and additional
credit quality disclosures are included in Note 4, "Loans, Allowance for Credit
Losses - Loans, and Credit Quality," in the Notes to Consolidated Financial
Statements, under Part II, Item 8.

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 (which include nonperforming loans and
other real estate owned "OREO") were $56 million at December 31, 2021, compared
to $13 million at December 31, 2020. Nonaccrual loans were $44 million at
December 31, 2021, compared to $9 million at December 31, 2020, with the
increase largely due to the nonaccrual agricultural loans acquired with County.
OREO was $12 million at December 31, 2021, up from $4 million at year-end 2020,
with the increase primarily due to the addition of closed bank branch
properties. Nonperforming assets as a percent of total assets was 0.73% at
December 31, 2021, compared to 0.29% at December 31, 2020.

The level of potential problem loans is another predominant factor in
determining the relative level of risk in the loan portfolio and in determining
the appropriate level of the ACL-Loans. Potential problem loans are generally
defined by management to include loans rated as Substandard by management but
that are in performing status; however, there are circumstances present which
might adversely affect the ability of the borrower to comply with present
repayment terms. The decision of management to include performing loans in
potential problem loans does not necessarily mean that Nicolet expects losses to
occur, but that management recognizes a higher degree of risk associated with
these loans. The loans that have been reported as potential problem loans are
predominantly commercial-based loans covering a diverse range of businesses and
real estate property types. Potential problem loans were $53 million (1% of
total loans) and $21 million (1% of total loans) at December 31, 2021 and 2020,
respectively, with the increase largely due to the agricultural loans acquired
with County. Potential problem loans require a heightened management review of
the pace at which a credit may deteriorate, the duration of asset quality
stress, and uncertainty around the magnitude and scope of economic stress that
may be felt by Nicolet's customers and on underlying real estate values.

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Table 10: Non-performing assets

(in thousands)                                  December 31, 2021         December 31, 2020         December 31, 2019
Nonperforming loans:
Commercial & industrial                        $          1,908          $          2,646          $          6,249
PPP loans                                                     -                         -                         -
Owner-occupied CRE                                        4,220                     1,869                     3,311
Agricultural                                             28,367                     1,830                     1,898
CRE investment                                            4,119                     1,488                     1,073
Construction & land development                           1,071                       327                        20
Residential construction                                      -                         -                         -
Residential first mortgage                                4,132                       823                     1,090
Residential junior mortgage                                 243                       384                       480
Retail & other                                               94                        88                         1
Total nonaccrual loans                                   44,154                     9,455                    14,122
Accruing loans past due 90 days or more                       -                         -                         -
  Total nonperforming loans                              44,154                     9,455                    14,122
OREO:
Commercial real estate owned                              1,549                         -                         -
Residential real estate owned                                99                         -                         -
Bank property real estate owned                          10,307                     3,608                     1,000
 Total OREO                                              11,955                     3,608                     1,000
  Total nonperforming assets (NPAs)            $         56,109          $         13,063          $         15,122
Performing troubled debt restructurings        $          5,443          $          2,120          $              -

Reports :

Nonperforming loans to total loans                         0.96  %                   0.34  %                   0.55  %
NPAs to total loans plus OREO                              1.21  %                   0.47  %                   0.59  %
NPAs to total assets                                       0.73  %                   0.29  %                   0.42  %
ACL-Loans to nonperforming loans                            112  %                    340  %                     99  %
ACL-Loans to total loans                                   1.07  %                   1.15  %                   0.54  %

Marketable securities portfolio

The investment securities portfolio is intended to provide Nicolet with adequate
liquidity, flexible asset/liability management and a source of stable income.
The portfolio is structured with minimal credit exposure to Nicolet. All
investment securities are classified at the time of purchase as available for
sale ("AFS") or held to maturity ("HTM"). In addition to the discussion that
follows, the investment securities portfolio accounting policies are described
in Note 1, "Nature of Business and Significant Accounting Policies," and
additional disclosures are included in Note 3, "Investment Securities," in the
Notes to Consolidated Financial Statements, under Part II, Item 8.

At December 31, 2021, the investment securities portfolio totaled $1.6 billion,
comprised of $922 million securities AFS and $652 million securities HTM
(representing 20% of total assets), compared to $539 million, all securities
AFS, (representing 12% of total assets) at December 31, 2020. During 2021, the
Company purchased approximately $500 million of U.S. Treasury securities
(included in U.S. government agency securities) of varying yields and durations,
which were classified as HTM, to re-invest a portion of excess cash liquidity.
In addition, the acquisitions of Mackinac and County added investment securities
totaling $104 million and $300 million, respectively, at acquisition, with a
portion of these investment securities designated as HTM at acquisition.

Nicolet also had other investments of $44 million and $28 million at December
31, 2021 and 2020, respectively, consisting of capital stock in the Federal
Reserve and the Federal Home Loan Bank ("FHLB") (required as members of the
Federal Reserve Bank System and the FHLB System), equity securities with readily
determinable fair values, and to a lesser degree equity investments in other
private companies. The FHLB and Federal Reserve investments are "restricted" in
that they can only be sold back to the respective institutions or another member
institution at par, and are thus not liquid, have no ready market or quoted
market value, and are carried at cost. The private company equity investments
have no quoted market prices, and are carried at cost less impairment charges,
if any. The other investments are evaluated periodically for impairment,
considering financial condition and other available relevant information.

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Table 11: Breakdown by maturity of the marketable securities portfolio (1)

                                                                      After One                          After Five                                                              Mortgage-                             Total                      Total
Securities AFS at                   Within                           but Within                          but Within                            After                              backed                             Amortized                     Fair
December 31, 2021                  One Year                          Five Years                           Ten Years                          Ten Years                          Securities                             Cost                       Value
 (in thousands)            Amount            Yield             Amount            Yield             Amount            Yield            Amount            Yield             Amount            Yield             Amount            Yield             Amount
U.S. government agency
securities               $    503              3.0  %       $ 175,516              0.2  %       $  16,374              2.6  %       $    113              3.1  %       $       -                -  %       $ 192,506              0.4  %       $ 191,277
State, county and
municipals                 13,035              2.5  %          97,129              2.4  %         129,514              2.2  %         72,039              3.6  %               -                -  %         311,717              2.6  %         312,737
Mortgage-backed
securities                      -                -  %               -                -  %               -                -  %              -                -  %         270,017              2.6  %         270,017              2.6  %         271,262
Corporate debt
securities                 17,138              2.6  %          60,562              3.3  %          54,892              4.5  %         10,580              4.0  %               -                -  %         143,172              3.7  %         146,385
Total amortized cost     $ 30,676              2.7  %       $ 333,207              1.0  %       $ 200,780              2.9  %       $ 82,732              3.8  %       $ 270,017              2.6  %       $ 917,412              2.3  %       $ 921,661
Total fair value and
carrying value           $ 30,916                           $ 335,452                           $ 200,089                           $ 83,942                           $ 271,262                                                               $ 921,661
                                3  %                               36  %                               22  %                               9  %                               30  %                                                                  100  %


                                                                     After One                          After Five                                                            Mortgage-                             Total                      Total
Securities HTM at                  Within                           but Within                          but Within                           After                             backed                             Amortized                     Fair
December 31, 2021                 One Year                          Five Years                          Ten Years                          Ten Years                         Securities                             Cost                       Value
 (in thousands)            Amount           Yield             Amount            Yield            Amount            Yield            Amount           Yield             Amount            Yield             Amount            Yield             Amount
U.S. government agency
securities               $     -                -  %       $ 497,070              0.7  %       $ 11,740              4.2  %       $     -                -  %       $       -                -  %       $ 508,810              0.8  %       $ 506,070
State, county and
municipals                 7,396              2.6  %           3,932              3.1  %         22,388              2.5  %         9,160              4.9  %               -                -  %          42,876              3.1  %          42,713
Mortgage-backed
securities                     -                -  %               -                -  %              -                -  %             -                -  %         100,117              2.2  %         100,117              2.2  %          99,611

Total amortized cost     $ 7,396              2.6  %       $ 501,002       
      1.0  %       $ 34,128              2.9  %       $ 9,160              4.9  %       $ 100,117              2.2  %       $ 651,803              1.2  %       $ 648,394
Total fair value and
carrying value           $ 7,394                           $ 498,252                           $ 33,993                           $ 9,144                           $  99,611                                                               $ 648,394
                               1  %                               77  %                               5  %                              1  %                               16  %                                                                  100  %

(1) Return on tax-exempt investment securities is calculated on a tax-equivalent basis using a federal tax rate of 21% adjusted for the disallowance of interest expense.

Deposits

Deposits represent Nicolet's largest source of funds. The deposit levels in 2021
and 2020 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 commercial borrowers. In addition,
Mackinac and County added deposits of $1.4 billion and $1.0 billion,
respectively, at acquisition.

Deposits levels may also be impacted by competition with other bank and nonbank
institutions, as well as with a number of non-deposit investment alternatives
available to depositors, such as mutual funds, money market funds, annuities,
and other brokerage investment products. Deposit challenges include competitive
deposit product features, price changes on deposit products given movements in
the interest rate environment and other competitive pricing pressures, and
customer preferences regarding higher-costing deposit products or non-deposit
investment alternatives. Additional disclosures on deposits are included in Note
8, "Deposits," in the Notes to Consolidated Financial Statements, under Part II,
Item 8. See Table 2 for information on average deposit balances and deposit
rates.

Table 12: Composition of the end-of-period deposit

(in thousands)                                      December 31, 2021                             December 31, 2020                             December 31, 2019
                                                                        % of                                          % of                                          % of
                                                Amount                 Total                  Amount                 Total                  Amount                 Total
Noninterest-bearing demand               $       1,975,705                 31  %       $       1,212,787                 31  %       $         819,055                 28  %
Money market and interest-bearing demand         2,834,824                 44  %               1,551,325                 40  %               1,241,642                 42  %
Savings                                            803,197                 12  %                 521,814                 13  %                 343,199                 11  %
Time                                               852,190                 13  %                 624,473                 16  %                 550,557                 19  %
  Total deposits                         $       6,465,916                100  %       $       3,910,399                100  %       $       2,954,453                100  %
Brokered transaction accounts            $         234,306                  4  %       $          46,340                  1  %       $          48,497                  1  %
Brokered time deposits                             209,857                  3  %                 278,521                  7  %                 111,694                  4  %
  Total brokered deposits                $         444,163                  7  %       $         324,861                  8  %       $         160,191                  5  %
Customer transaction accounts            $       5,379,420                 83  %       $       3,239,586                 83  %       $       2,355,399                 80  %
Customer time deposits                             642,333                 10  %                 345,952                  9  %                 438,863                 15  %
  Total customer deposits (core)         $       6,021,753                 93  %       $       3,585,538                 92  %       $       2,794,262                 95  %


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Total deposits were $6.5 billion at December 31, 2021, an increase of $2.6
billion (65%) over year-end 2020, largely due to the acquisitions of Mackinac
and County, as well as additional government stimulus and new PPP funds on
deposit. Since December 31, 2020, customer deposits (core) increased $2.4
billion to represent 93% of total deposits, and brokered deposits increased $0.1
billion to represent 7% of total deposits.

On average, deposits grew $1.1 billion (31%) between 2021 and 2020 (as detailed
in Table 2), primarily due to the timing of the acquisitions (Mackinac in
September 2021 and County in December 2021) and the liquidity objectives of our
customers in uncertain economic times. Average customer deposits (core)
increased $1.0 billion (33%), while average brokered deposits were up slightly
(6%) over the prior year.

At December 31, 2021, Nicolet had $113 million of time deposits that exceed the
Federal Deposit Insurance Corporation ("FDIC") insurance limit of $250,000. The
following table provides information on the maturity distribution of those time
deposits, including the portion of those time deposits in excess of the FDIC
insurance limits (over $250,000) as of December 31, 2021.

Table 13: Breakdown by maturity of uninsured term deposits

                                                                            Portion of Time Deposits
                                                   Time Deposits Over FDIC     in Excess of FDIC
(in thousands)                                        Insurance Limits          Insurance Limits
3 months or less                                  $               28,239    $              11,989
Over 3 months through 6 months                                    13,688                    4,938
Over 6 months through 12 months                                   45,988                   34,988
Over 12 months                                                    24,684                   10,934
Total                                             $              112,599    $              62,849

Total uninsured deposits were $2.1 billion and $1.2 billion from December 31, 2021 and 2020, respectively.

Other funding sources

Other funding sources include short-term borrowings (zero at both December 31,
2021 and 2020) and long-term borrowings (totaling $217 million and $54 million
at December 31, 2021 and 2020, respectively). Short-term borrowings (with an
original contractual maturity of one year or less) consist mainly of short-term
FHLB advances, customer repurchase agreements or federal funds purchased.
Long-term borrowings (with an original contractual maturity of over one year)
include FHLB advances, junior subordinated debentures, and subordinated notes.
The interest on all long-term borrowings is current.

In July 2021, the Company completed the private placement of $100 million in
fixed-to-floating rate subordinated notes due in 2031, with a fixed annual rate
of 3.125% for the first five years, and will reset quarterly thereafter to the
then current three-month Secured Overnight Financing Rate ("SOFR") plus 237.5
basis points. In addition, the Company acquired $16 million of junior
subordinated debentures and $52 million of subordinated notes as part of the
County acquisition. All FHLB advances acquired with the Mackinac and County
acquisitions were repaid in full shortly after the respective acquisition dates
given our strong core deposit base. See Note 9, "Short and Long-Term
Borrowings," of the Notes to Consolidated Financial Statements under Part II,
Item 8 for additional details. See section "Liquidity Management," for
information on available funding sources at December 31, 2021.

RISK MANAGEMENT AND CAPITAL

Cash 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
related to the pandemic and ongoing economic uncertainty, 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 December 31, 2021,
approximately 18% of the investment securities portfolio was pledged to secure
public deposits, as applicable, and for other purposes as required by law.
Additional funding sources at December 31, 2021, consist of

                                       39
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$195 million of available and unused Federal funds lines, available borrowing
capacity at the FHLB of $355 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.

Management is committed to the Parent Company being a source of strength to the
Bank and its other subsidiaries, and therefore, regularly evaluates capital and
liquidity positions of the Parent Company in light of current and projected
needs, growth or strategies. The Parent Company uses cash for normal expenses,
debt service requirements and, when opportune, for common stock repurchases or
investment in other strategic actions such as mergers or acquisitions. At
December 31, 2021, the Parent Company had $85 million in cash. Additional cash
sources available to the Parent Company include access to the public or private
markets to issue new equity, subordinated notes or other debt. Dividends from
the Bank and, to a lesser extent, stock option exercises, represent significant
sources of cash flows for the Parent Company. The Bank is required by federal
law to obtain prior approval of the OCC for payments of dividends if the total
of all dividends declared by the Bank in any year will exceed certain
thresholds, as more fully described in "Business-Regulation of the Bank -
Payment of Dividends" and in Note 17, "Regulatory Capital Requirements," in the
Notes to the Consolidated Financial Statements under Part II, Item 8. Management
does not believe that regulatory restrictions on dividends from the Bank will
adversely affect its ability to meet its cash obligations.

Cash and cash equivalents at December 31, 2021 and 2020 were approximately $595
million and $803 million, respectively. The $208 million decrease in cash and
cash equivalents since year-end 2020 included $98 million net cash provided by
operating activities (mostly earnings), more than offset by $371 million net
cash used in investing activities (primarily to purchase investment securities
and to fund loan growth) and $65 million net cash provided by financing
activities (with funds from increased deposits and the subordinated notes
issuance partly offset by the early redemption of selected debt and common stock
repurchases). Nicolet's liquidity resources were sufficient as of December 31,
2021 to fund loans, accommodate deposit trends and cycles, and to meet other
cash needs as necessary.

Management of interest rate sensitivity 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
above 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 December 31, 2021 and 2020, the
projected changes in net interest income over a one-year time horizon, versus
the baseline, are presented in Table 14 below. The results were 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.

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Table 14: Sensitivity to interest rates

                                      December 31, 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               (0.1) %                 4.0  %
200 bps increase in interest rates               (0.3) %                 

8.1%


Actual results may differ from these simulated results due to timing, magnitude
and frequency of interest rate changes, as well as changes in market conditions
and their impact on customer behavior and management strategies.

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

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 for
shareholder return.

Capital balances and changes in capital are presented in the Consolidated
Statements of Changes in Stockholders' Equity in Part II, Item 8. Further
discussion of capital components is included in Note 12, "Stockholders' Equity,"
and a summary of dividend restrictions, as well as regulatory capital amounts
and ratios for Nicolet and the Bank is presented in Note 17, "Regulatory Capital
Requirements," of the Notes to Consolidated Financial Statements under Part II,
Item 8.

The Company's and the Bank's regulatory capital ratios remain well above minimum
regulatory ratios, including the capital conservation buffer. At December 31,
2021, the Bank's regulatory capital ratios qualify the Bank as well-capitalized
under the prompt-corrective action framework. This strong base of capital has
allowed Nicolet to be opportunistic in the current environment and in strategic
growth. For a discussion of the regulatory restrictions applicable to the
Company and the Bank, see section "Business-Regulation of Nicolet" and
"Business-Regulation of the Bank," included within Part I, Item 1. A summary of
Nicolet's and the Bank's regulatory capital amounts and ratios, as well as
selected capital metrics are presented in Table 15.

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Table 15: Capital

($ in thousands)                                           December 31, 2021         December 31, 2020
Company Stock Repurchases: *
Common stock repurchased during the year (dollars)        $         61,464          $         40,544
Common stock repurchased during the year (shares)                  793,064                   646,748
Company Risk-Based Capital:
Total risk-based capital                                  $        793,410          $        406,325
Tier 1 risk-based capital                                          604,199                   385,068
Common equity Tier 1 capital                                       567,095                   361,162
Total capital ratio                                                   13.8  %                   12.9  %
Tier 1 capital ratio                                                  10.5  %                   12.2  %
Common equity tier 1 capital ratio                                     9.9  %                   11.4  %
Tier 1 leverage ratio                                                  9.4  %                    9.0  %
Bank Risk-Based Capital:
Total risk-based capital                                  $        700,869          $        351,081
Tier 1 risk-based capital                                          664,688                   329,824
Common equity Tier 1 capital                                       664,688                   329,824
Total capital ratio                                                   12.2  %                   11.2  %
Tier 1 capital ratio                                                  11.6  %                   10.5  %
Common equity tier 1 capital ratio                                    11.6  %                   10.5  %
Tier 1 leverage ratio                                                 10.3  %                    7.8  %

* Reflects only common shares repurchased pursuant to Board authorizations.


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. Through an ongoing repurchase program, the Board has
authorized the repurchase of Nicolet's common stock as an alternative use of
capital. During 2021, $61 million was used to repurchase and cancel
approximately 793,000 shares at a weighted average price per share of $77.50. At
December 31, 2021, there remained $69 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.

Off-balance sheet arrangements, loan commitments and contractual obligations

Nicolet is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. At December
31, 2021, interest rate lock commitments to originate residential mortgage loans
held for sale of $50 million (included in the commitments to extend credit) and
forward commitments to sell residential mortgage loans held for sale of $1
million are considered derivative instruments. Further information and
discussion of these commitments is included in Note 14, "Commitments and
Contingencies" of the Notes to Consolidated Financial Statements, under Part II,
Item 8.

The table below outlines the principal amounts and timing of Nicolet's
contractual obligations. The amounts presented below exclude amounts due for
interest, if applicable, and include any unamortized premiums / discounts or
other similar carrying value adjustments. As of December 31, 2021, Nicolet had
the following contractual obligations. Further discussion of the nature of each
obligation is included in the referenced note of the Notes to Consolidated
Financial Statements, under Part II, Item 8.

Table 16: Contractual obligations

 (in thousands)                        Note                                                Maturity by Years
                                     Reference             Total             1 or less             1-3                3-5              Over 5
Time deposits                            8             $   852,190          $ 534,767          $ 273,955          $ 42,276          $   1,192
Long-term borrowings                     9                 216,915             10,000                  -             5,000            201,915
Operating leases                         5                   9,456              2,033              2,945             2,036              2,442
Total long-term contractual
obligations                                            $ 1,078,561          $ 546,800          $ 276,900          $ 49,312          $ 205,549


Critical Accounting Estimates

The consolidated financial statements of Nicolet are prepared in conformity with
U.S. generally accepted accounting principles ("GAAP") and follow general
practices within the industry in which it operates. This preparation requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the consolidated financial statements and accompanying notes. These
estimates, assumptions and judgments are based on information available as of
the date of the consolidated financial statements; accordingly, as this
information changes, actual results could differ from the estimates, assumptions
and judgments reflected in the consolidated financial statements. Certain
policies inherently have a greater reliance on the use of estimates,

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assumptions and judgments and, as such, have a greater possibility of producing
results that could be materially different than originally reported. Estimates
that are particularly susceptible to significant change include the valuation of
loan acquisition transactions, as well as the determination of the allowance for
credit losses and income taxes and, therefore, are critical accounting policies.
In addition to the discussion that follows, the accounting policies related to
these estimates are further described in Note 1, "Nature of Business and
Significant Accounting Policies," in the Notes to Consolidated Financial
Statements, under Part II, Item 8.

Business combinations and valuation of loans acquired in business combinations

We account for acquisitions under Financial Accounting Standards Board ("FASB")
ASC Topic 805, Business Combinations, which requires the use of the acquisition
method of accounting. Assets acquired and liabilities assumed in a business
combination are recorded at the estimated fair value on their purchase date. As
provided for under GAAP, management has up to 12 months following the date of
the acquisition to finalize the fair values of acquired assets and assumed
liabilities, where it was not possible to estimate the acquisition date fair
value upon consummation. Management finalized the fair values of acquired assets
and assumed liabilities within this 12-month period and management currently
considers such values to be the Day 1 Fair Values for the acquisition
transactions.

In particular, the valuation of acquired loans involves significant estimates,
assumptions and judgment based on information available as of the acquisition
date. Loans acquired in a business combination transaction are evaluated either
individually or in pools of loans with similar characteristics; including
consideration of a credit component. A number of factors are considered in
determining the estimated fair value of purchased loans including, among other
things, the remaining life of the acquired loans, estimated prepayments,
estimated loss ratios, estimated value of the underlying collateral, estimated
holding periods, contractual interest rates compared to market interest rates,
and net present value of cash flows expected to be received.

Allowance for Credit Losses – Loans

Management's evaluation process used to determine the appropriateness of the
ACL-Loans is subject to the use of estimates, assumptions, and judgment. The
evaluation process involves gathering and interpreting many qualitative and
quantitative factors which could affect probable credit losses. Because
interpretation and analysis involves judgment, current economic or business
conditions can change, and future events are inherently difficult to predict,
the anticipated amount of estimated credit losses and therefore the
appropriateness of the ACL-Loans could change significantly. Effective January
1, 2020, the Company changed its methodology for accounting for the allowance
for credit losses-loans due to the adoption of a new accounting standard, which
requires use of a lifetime expected credit losses model versus the historical
incurred credit losses model. See Note 1, "Nature of Business and Significant
Accounting Policies," in the Notes to Consolidated Financial Statements, under
Part II, Item 8 for the impact of this change on accounting policies.

The allocation methodology applied by Nicolet is designed to assess the
appropriateness of the ACL-Loans and includes allocations for individually
evaluated credit-deteriorated loans and loss factor allocations for all
remaining loans, with a component primarily based on historical loss rates and a
component primarily based on other qualitative and environmental factors. The
methodology includes evaluation and consideration of several factors, including
but not limited to: management's ongoing review and grading of the loan
portfolio, evaluation of facts and issues related to specific loans,
consideration of historical loan loss and delinquency experience on each
portfolio segment, trends in past due and nonaccrual loans, the risk
characteristics of specific loans or various loan segments, changes in the size
and character of the loan portfolio, concentrations of loans to specific
borrowers or industries, the fair value of underlying collateral, existing
economic conditions, and other qualitative and quantitative factors which could
affect expected credit losses. In addition, with adoption of CECL in 2020, the
model also now considers reasonable and supportable forecasts to assess the
collectability of future cash flows. While management uses the best information
available to make its evaluation, future adjustments to the ACL-Loans may be
necessary if there are significant changes in economic conditions (both existing
and forecast) or circumstances underlying the collectability of loans. Because
each of the criteria used is subject to change, the allocation of the ACL-Loans
is made for analytical purposes and is not necessarily indicative of the trend
of future credit losses in any particular loan category. The ACL-Loans is
available to absorb losses from any segment of the loan portfolio. Management
believes the ACL-Loans is appropriate at December 31, 2021. The allowance
analysis is reviewed by the board of directors on a quarterly basis in
compliance with regulatory requirements.

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

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Income taxes

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

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

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