MMA loans

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

Nicolet Bankshares, Inc. (the "Company" or "Nicolet") is a bank holding company
headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of
traditional banking and wealth management services to individuals and businesses
in its market area and through the branch offices of its banking subsidiary,
Nicolet National Bank (the "Bank"), in Northeast and Central Wisconsin, Northern
Michigan and the upper peninsula of Michigan. In this Quarterly Report on Form
10-Q, unless the context indicates otherwise, all references to "we," "us" and
"our" refer to the Company.

Forward-Looking Statements

Statements made in this document and in any documents that are incorporated by
reference which are not purely historical are forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, including any
statements regarding descriptions of management's plans, objectives, or goals
for future operations, products or services, and forecasts of its revenues,
earnings, or other measures of performance. Forward-looking statements are based
on current management expectations and, by their nature, are subject to risks
and uncertainties. These statements are neither statements of historical fact
nor assurance of future performance and generally may be identified by the use
of words such as "believe," "expect," "anticipate," "plan," "estimate,"
"should," "will," "intend," or similar expressions. Forward-looking statements
include discussions of strategy, financial projections, guidance and estimates
(including their underlying assumptions), statements regarding plans,
objectives, expectations or consequences of various transactions or events, and
statements about our future performance, operations, products and services, and
should be viewed with caution. Shareholders should note that many factors, some
of which are discussed elsewhere in this document, could affect the future
financial results of Nicolet and could cause those results to differ materially
from those implied or anticipated by the statements. Except as required by law,
we expressly disclaim any obligations to publicly update any forward-looking
statements whether written or oral, that may be made from time to time, whether
as a result of new information, future developments or otherwise. Important
factors, many of which are beyond Nicolet's control, that could cause our actual
results and financial condition to differ materially from those indicated in the
forward-looking statements, in addition to those described in detail under Item
1A, "Risk Factors" of Nicolet's 2021 Annual Report on Form 10-K include, but are
not necessarily limited to the following:

•the COVID-19 pandemic and its continuing effects on our business (including the
diversion of management time and resources) as well as the business, customers,
employees and third-party service providers of Nicolet or any of its acquisition
targets;
•operating, legal and regulatory risks, including the effects of legislative or
regulatory developments affecting the financial industry generally or Nicolet
specifically;
•economic, market, political and competitive forces affecting Nicolet's banking
and wealth management businesses;
•changes in interest rates, monetary policy and general economic conditions,
which may impact Nicolet's net interest income;
•potential difficulties in identifying and integrating the operations of future
acquisition targets with those of Nicolet;
•the impact of purchase accounting with respect to our merger activities, or any
change in the assumptions used regarding the assets purchased and liabilities
assumed to determine their fair value;
•cybersecurity risks and the vulnerability of our network and online banking
portals, and the systems or parties with whom we contract, to unauthorized
access, computer viruses, phishing schemes, spam attacks, human error, natural
disasters, power loss and other security breaches that could adversely affect
our business and financial performance or reputation;
•changes in accounting standards, rules and interpretations and the related
impact on Nicolet's financial statements;
•compliance or operational risks related to new products, services, ventures, or
lines of business, if any, that Nicolet may pursue or implement;
•changes in monetary and tax policies;
•changes occurring in business conditions and inflation;
•our ability to attract and retain key personnel;
•examinations by our regulatory authorities, including the possibility that the
regulatory authorities may, among other things, require us to increase our
allowance for credit losses, write-down assets, or take other actions;
•risks associated with actual or potential information gatherings,
investigations or legal proceedings by customers, regulatory agencies or others;
•the potential effects of events beyond our control that may have a
destabilizing effect on financial markets and the economy, such as weather
events, natural disasters, epidemics and pandemics (including COVID-19), war or
terrorist activities, disruptions in our customers' supply chains, disruptions
in transportation, essential utility outages or trade disputes and related
tariffs;
•each of the factors and risks under Item 1A, "Risk Factors" of Nicolet's 2021
Annual Report on Form 10-K and in subsequent filings we make with the SEC; and
•risks related to our proposed merger with Charter Bankshares, Inc. ("Charter"),
including:
•possible negative impact on our stock price and future business and financial
results;
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•uncertainties while the merger is pending which could have a negative effect;
•the occurrence of any event, change or other circumstances that could give rise
to the right of one or both of the parties to terminate the Charter Merger
Agreement;
•unexpected costs associated with the merger;
•diversion of management's attention from ongoing business operations and
opportunities;
•possible inability to achieve expected synergies and operating efficiencies in
the merger within the expected timeframes or at all;
•failure to receive or satisfy required regulatory, shareholder or other
approvals, consents, waivers and/or non-objections or other conditions to the
closing, or receipt of required regulatory approvals with adverse conditions;
•the impact of, or problems arising from the integration of the two companies;
•the outcome of litigation or of matters before regulatory agencies, whether
currently existing or commencing in the future, including litigation related to
the merger;
•potential adverse reactions or changes to business or employee relationships,
including those resulting from the announcement or completion of the merger; and
•current or future adverse legislation or regulation.
•the risk that Nicolet's analysis of these risks and forces could be incorrect
and/or that the strategies developed to address them could be unsuccessful.

These factors should be considered when evaluating forward-looking statements and you should not place undue reliance on such statements.

Insight

The following discussion is management's analysis of the consolidated financial
condition as of March 31, 2022 and December 31, 2021 and results of operations
for the three-month periods ended March 31, 2022 and 2021. It should be read in
conjunction with Nicolet's audited consolidated financial statements included in
Nicolet's 2021 Annual Report on Form 10-K.

Our financial performance and certain balance sheet line items were impacted by
the timing and size of our 2021 acquisitions of Mackinac Financial Corporation
("Mackinac") on September 3, 2021 and County Bancorp, Inc. ("County") on
December 3, 2021. Certain income statement results, average balances and related
ratios for 2021 include partial contributions from Mackinac and County, each
from the respective acquisition date. Additional information on our 2021
acquisition activity is included in Note 2, "Acquisitions" in the Notes to
Unaudited Consolidated Financial Statements, under Part I, Item 1.

Proposed merger with Charter

On March 29, 2022, Nicolet entered into an Agreement and Plan of Merger with
Charter (the "Charter Merger Agreement"), a bank holding company headquartered
in Eau Claire, Wisconsin, with total assets of $1.1 billion at December 31,
2021. The merger is expected to close in the third quarter of 2022, subject to
customary closing conditions, including approval by regulators. Under the terms
of the Charter Merger Agreement, each outstanding share of Charter common stock
will be converted into the right to receive 15.458 shares of Nicolet common
stock and $475 in cash. As a result, we expect to issue approximately
1.26 million shares of Nicolet common stock and $38.8 million in cash for the
acquisition of Charter.


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Table 1: Summary of revenues and selected financial data

                                                                            At or for the Three Months Ended
(In thousands, except per share data)        3/31/2022            12/31/2021           9/30/2021            6/30/2021            3/31/2021
Results of operations:
Net interest income                        $    53,795          $    53,559          $    35,184          $    35,571          $    33,641
Provision for credit losses                        300                8,400                6,000                    -                  500
Noninterest income                              15,943               16,064               13,996               20,178               17,126
Noninterest expense                             37,550               39,408               33,061               30,747               26,081
Income before income tax expense                31,888               21,815               10,119               25,002               24,186
Income tax expense                               7,724                5,510                2,295                6,718                5,947
Net income                                 $    24,164          $    16,305          $     7,824          $    18,284          $    18,239
Earnings per common share:
Basic                                      $      1.77          $      1.29          $      0.75          $      1.85          $      1.82
Diluted                                    $      1.70          $      1.25          $      0.73          $      1.77          $      1.75
Common Shares:
Basic weighted average                          13,649               12,626               10,392                9,902                9,998
Diluted weighted average                        14,215               13,049               10,776               10,326               10,403
Outstanding (period end)                        13,457               13,994               11,952                9,843                9,988
Period-End Balances:
Loans                                      $ 4,683,315          $ 4,621,836

$3,533,198 $2,820,331 $2,846,351
Provision for credit losses – loans

             49,906               49,672               38,399               32,561               32,626
Total assets                                 7,320,212            7,695,037            6,407,820            4,587,347            4,543,804
Deposits                                     6,231,120            6,465,916            5,428,774            3,939,022            3,900,594
Stockholders' equity (common)                  836,310              891,891              729,278              559,395              550,046
Book value per common share                      62.15                63.73                61.01                56.83                55.07
Tangible book value per common share (2)         37.03                39.47                38.43                39.18                37.60
Financial Ratios: (1)
Return on average assets                          1.30  %              0.96  %              0.59  %              1.62  %              1.64  %
Return on average common equity                  11.38                 8.24                 5.10                13.31                13.58
Return on average tangible common equity
(2)                                              18.75                13.19                 7.62                19.46                20.01
Stockholders' equity to assets                   11.42                11.59                11.38                12.19                12.11
Tangible common equity to tangible assets
(2)                                               7.14                 7.51                 7.48                 8.74                 8.60
Reconciliation of Non-GAAP Financial
Measures:
Adjusted net income reconciliation: (3)
Net income (GAAP)                          $    24,164          $    16,305 

$7,824 $18,284 $18,239
Adjustments: Provision charge related to the merger

                  -                8,400                6,000                    -                    -
Assets (gains) losses, net                      (1,313)                (465)               1,187               (4,192)                (711)
Merger-related expense                              98                2,202                2,793                  656                    -
Branch closure expense                               -                    -                  944                    -                    -
Adjustments subtotal                            (1,215)              10,137               10,924               (3,536)                (711)
Tax on Adjustments (25% effective tax
rate)                                             (304)               2,534                2,731                 (884)                (178)
Adjustments, net of tax                           (911)               7,603                8,193               (2,652)                (533)
Adjusted net income (Non-GAAP)             $    23,253          $    23,908          $    16,017          $    15,632          $    17,706
Adjusted diluted earnings per common share
(Non-GAAP)                                 $      1.64          $      1.83          $      1.49          $      1.51          $      1.70
Tangible assets: (2)
Total assets                               $ 7,320,212          $ 7,695,037

$6,407,820 $4,587,347 $4,543,804
Good will and other intangible assets, net

            338,068              339,492              269,954              173,711              174,501
Tangible assets                            $ 6,982,144          $ 7,355,545 

$6,137,866 $4,413,636 $4,369,303
Tangible equity: (2) Equity (ordinary)

              $   836,310          $   891,891 

$729,278 $559,395 $550,046
Good will and other intangible assets, net

            338,068              339,492              269,954              173,711              174,501
Tangible common equity                     $   498,242          $   552,399 

$459,324 $385,684 $375,545
Tangible average equity: (2) Average equity (ordinary) $861,319 $784,666

$608,946 $550,974 $544,541
Average goodwill and other intangible assets, net

                                            338,694              294,051              201,748              174,026              174,825
Average tangible common equity             $   522,625          $   490,615 

$407,198 $376,948 $369,716


(1) Income statement-related ratios for partial-year periods are annualized.
(2) The ratios of tangible book value per common share, return on average
tangible common equity, and tangible common equity to tangible assets are
non-GAAP financial measures that exclude goodwill and other intangibles, net.
These financial ratios have been included as management considers them to be
useful metrics with which to analyze and evaluate our financial condition and
capital strength. See section "Non-GAAP Financial Measures" below.
(3) The adjusted net income measure is a non-GAAP financial measure that
provides information that management believes is useful to investors in
understanding our operating performance and trends and also aids investors in
the comparison of our financial performance to the financial performance of peer
banks. See section "Non-GAAP Financial Measures" below.
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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 sheets 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 factors 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.

Performance Summary

Net income was $24 million for the three months ended March 31, 2022, compared
to $16 million for the three months ended December 31, 2021 and $18 million for
the three months ended March 31, 2021. Earnings per diluted common share was
$1.70 for first quarter 2022, compared to $1.25 for fourth quarter 2021 and
$1.75 for first quarter 2021. Annualized return on average assets was 1.30%,
0.96% and 1.64%, for first quarter 2022, fourth quarter 2021 and first quarter
2021 respectively. Our performance in first quarter 2022 reflects our focus on
relationships rather than transactions and all revenue lines working together to
serve our customers.

•At March 31, 2022, assets were $7.3 billion, a decrease of $375 million (5%)
from December 31, 2021, including $200 million of assets related to the sale of
the Birmingham branch in January 2022, as well as lower cash and cash
equivalents from the decline in deposits. Compared to March 31, 2021, assets
increased $2.8 billion (61%) largely due to the acquisitions of Mackinac and
County.

•At March 31, 2022, loans were $4.7 billion, an increase of $61 million from
December 31, 2021, due to growth in the loan portfolio (up $77 million or 6.8%
annualized, primarily in agricultural and commercial and industrial loans),
partly offset by continued reductions in PPP loans from loan forgiveness (down
$16 million). Compared to March 31, 2021, loans increased $1.8 billion (65%),
largely due to the Mackinac and County acquisitions. Quarter average loans grew
$736 million (19%) over fourth quarter 2021 and grew $1.9 billion (66%) over
first quarter 2021. For additional information regarding loans, see "BALANCE
SHEET ANALYSIS - Loans."

•Total deposits were $6.2 billion at March 31, 2022, down $235 million from
December 31, 2021, due to the repricing of acquired deposits to current market
rates. Compared to March 31, 2021, deposits increased $2.3 billion (60%),
largely due to the Mackinac and County acquisitions. Quarter average deposits
grew $638 million (11%) over fourth quarter 2021 and grew $2.5 billion (65%)
over first quarter 2021. For additional information regarding deposits, see
"BALANCE SHEET ANALYSIS - Deposits."

•The net interest margin was 3.23% for first quarter 2022, 8 bps lower than the
comparable 2021 period, with the earning asset yield down 15 bps, the cost of
funds favorably lower 12 bps, and the net free funds unfavorably lower 5 bps.
Net interest income increased $20.2 million (60%) over first quarter 2021,
largely due to the acquisitions of Mackinac and County during the second half of
2021. For additional information regarding net interest income, see "INCOME
STATEMENT ANALYSIS - Net Interest Income."

•Noninterest income was $15.9 million for first quarter 2022, a decrease of $1.2
million (7%) compared to $17.1 million for first quarter 2021. For additional
information regarding noninterest income, see "INCOME STATEMENT ANALYSIS -
Noninterest Income."

• Non-interest expenses have been $37.6 million for the first quarter of 2022, an increase of
$11.5 million (44%) compared to the first quarter of 2021. Personnel costs increased $6.1 million (40%), while combined non-staff spending increased $5.4 million
(49%) compared to the first quarter of 2021. For more information on non-interest expenses, see “INCOME STATEMENT ANALYSIS – Non-interest expenses”.

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INCOME STATEMENT ANALYSIS

Net Interest Income

Tax-equivalent net interest income is a non-GAAP measure, but is a preferred
industry measurement of net interest income (and its use in calculating a net
interest margin) as it enhances the comparability of net interest income arising
from taxable and tax-exempt sources. The tax-equivalent adjustments bring
tax-exempt interest to a level that would yield the same after-tax income by
applying the effective Federal corporate tax rates to the underlying assets.
Tables 2 and 3 present information to facilitate the review and discussion of
selected average balance sheet items, tax-equivalent net interest income,
interest rate spread and net interest margin.


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

For the three months ended March, 31st,

                                                             2022                                                            2021
                                      Average                                  Average                Average                                  Average
(in thousands)                        Balance            Interest             Yield/Rate              Balance            Interest             Yield/Rate
ASSETS
Interest-earning assets
Commercial PPP Loans               $    13,503          $  1,377                    40.79  %       $   206,498          $  3,951                     7.65  %
All other commercial loans           3,907,241            41,820                     4.28  %         2,125,844            24,441                     4.60  %
Total commercial loans               3,920,744            43,197                     4.41  %         2,332,342            28,392                     4.87  %
Retail-based loans                     768,040             8,137                     4.24  %           493,322             5,493                     4.46  %
  Total loans, including loan fees
(1)(2)                               4,688,784            51,334                     4.38  %         2,825,664            33,885                     4.80  %
Investment securities:
Taxable                              1,386,593             5,127                     1.48  %           382,455             1,814                     1.90  %
Tax-exempt (2)                         189,031             1,031                     2.18  %           145,887               774                     2.12  %
    Total investment securities      1,575,624             6,158                     1.57  %           528,342             2,588                     1.96  %
Other interest-earning assets          446,783               817                     0.73  %           735,597               655                     0.36  %
Total non-loan earning assets        2,022,407             6,975                     1.38  %         1,263,939             3,243                     1.03  %
Total interest-earning assets        6,711,191          $ 58,309                     3.48  %         4,089,603          $ 37,128                     3.63  %
Other assets, net                      808,445                                                         425,324
Total assets                       $ 7,519,636                                                     $ 4,514,927
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings                            $   821,452          $    105                     0.05  %       $   535,914          $     80                     0.06  %
Interest-bearing demand              1,052,076               701                     0.27  %           673,398               759                     0.46  %
Money market accounts ("MMA")        1,540,506               323                     0.09  %           857,258               124                     0.06  %
Core time deposits                     595,864               508                     0.35  %           329,378               878                     1.08  %
Total interest-bearing core
deposits                             4,009,898             1,637                     0.17  %         2,395,948             1,841                     0.31  %
Brokered deposits                      459,460               555                     0.49  %           316,589             1,081                     1.38  %
Total interest-bearing deposits      4,469,358             2,192                     0.20  %         2,712,537             2,922                     0.44  %
Other interest-bearing liabilities     214,557             1,931                     3.60  %            51,695               313                     2.42  %
Total interest-bearing liabilities   4,683,915             4,123                     0.35  %         2,764,232             3,235                     0.47  %
Noninterest-bearing demand           1,923,186                                                       1,162,668
Other liabilities                       51,216                                                          43,486
Stockholders' equity                   861,319                                                         544,541
Total liabilities and
stockholders' equity               $ 7,519,636                                                     $ 4,514,927
Net interest income and rate
spread                                                  $ 54,186                     3.13  %                            $ 33,893                     3.16  %
Tax-equivalent adjustment & net
free funds                                                   391                     0.10  %                                 252                     0.15  %
Net interest income and net
interest margin                                         $ 53,795                     3.23  %                            $ 33,641                     3.31  %


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

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Table 3: Volume/Rate Difference – Tax Equivalent

                                                           For the Three 

Months ended March 31, 2022

                                                                  Compared 

for March 31, 2021:

                                                             Increase (Decrease) Due to Changes in
(in thousands)                                         Volume                  Rate               Net (1)
Interest-earning assets
Commercial PPP Loans                              $       (6,531)         $     3,957          $    (2,574)
All other commercial loans                                24,256               (6,877)              17,379
Total commercial loans                                    17,725               (2,920)              14,805
Retail-based loans                                         2,911                 (267)               2,644
  Total loans, including loan fees (2) (3)                20,636               (3,187)              17,449
Investment securities:
Taxable                                                    3,198                  115                3,313
Tax-exempt (3)                                               235                   22                  257
  Total investment securities                              3,433                  137                3,570
Other interest-earning assets                                 66                   96                  162
 Total non-loan earning assets                             3,499                  233                3,732
Total interest-earning assets                     $       24,135          $    (2,954)         $    21,181
Interest-bearing liabilities
Savings                                           $           38          $       (13)         $        25
Interest-bearing demand                                      326                 (384)                 (58)
MMA                                                          127                   72                  199
Core time deposits                                           448                 (818)                (370)
  Total interest-bearing core deposits                       939               (1,143)                (204)
Brokered deposits                                            358                 (884)                (526)
Total interest-bearing deposits                            1,297               (2,027)                (730)
Other interest-bearing liabilities                         1,571                   47                1,618
Total interest-bearing liabilities                         2,868               (1,980)                 888
Net interest income                               $       21,267          $      (974)         $    20,293


(1)The change in interest due to both rate and volume has been allocated in
proportion to the relationship of dollar amounts of change in each.
(2)Nonaccrual loans and loans held for sale are included in the daily average
loan balances outstanding.
(3)The yield on tax-exempt loans and tax-exempt investment securities is
computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted
for the disallowance of interest expense.


The Federal Reserve increased short-term interest rates 25 bps in mid-March
2022. Prior to this, short-term interest rates remained steady since March 2020.
With this recent interest rate increase, the short end (up to two years) of the
yield curve has begun to steepen. Margins remain depressed from the pressures of
a low interest rate environment, though interest income dollars continue to rise
on favorable asset volumes and proactive expense reduction measures.

Tax-equivalent net interest income was $54.2 million for the first three months
of 2022, comprised of net interest income of $53.8 million ($20.2 million or 60%
higher than the first three months of 2021), and a $0.4 million tax-equivalent
adjustment. The $20.3 million increase in tax-equivalent net interest income was
attributable to net favorable volumes (which added $21.3 million, mostly from
higher interest-earning asset volumes added with the Mackinac and County
acquisitions, as well as organic loan growth and strategic investment purchases)
and net unfavorable rates (which decreased net interest income $1.0 million from
the continued pressure of a low interest rate environment).

Average interest-earning assets increased to $6.7 billion, up $2.6 billion (64%)
over the 2021 comparable period, primarily due to the acquisitions of Mackinac
and County (in September 2021 and December 2021, respectively). Between the
comparable first quarter periods, average loans increased $1.9 billion (66%),
mostly due to the Mackinac and County acquisitions, which added loans of $0.9
billion and $1.0 billion, respectively, at acquisition. In addition, organic
loan growth was strong, and replaced the reduction in PPP loans from continued
loan forgiveness. Average investment securities increased $1.0 billion between
the comparable first quarter periods, partly due to the acquisitions of Mackinac
and County, and partly due to 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 declined
$0.3 billion with the additional assets added with the 2021 acquisitions, more
than offset by the re-investment of excess cash liquidity noted above. As a
result, the mix of average interest-earning assets shifted to 70% loans, 23%
investments and 7% other interest-earning assets (mostly cash) for first quarter
2022, compared to 69%, 13% and 18%, respectively, for first quarter 2021.

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Average interest-bearing liabilities were $4.7 billion for first quarter 2022,
an increase of $1.9 billion (69%) over first quarter 2021, primarily due to the
acquisitions of Mackinac and County. Average interest-bearing core deposits
increased $1.6 billion and average brokered deposits increased $143 million
between the comparable first quarter periods largely due to the Mackinac and
County acquisitions. Other interest-bearing liabilities grew $163 million
between the comparable first quarter periods, partly due to the private
placement of $100 million in fixed-to-floating rate subordinated notes in July
2021, and partly due to wholesale funding acquired with the Mackinac and County
acquisitions. The mix of average interest-bearing liabilities was 86% core
deposits, 10% brokered deposits and 4% other funding for the first quarter 2022,
compared to 87%, 11% and 2%, respectively, for the first quarter 2021.

Between the comparable first quarter periods, the interest rate spread decreased
3 bps. The first quarter 2022 interest-earning asset yield declined 15 bps to
3.48%, reflecting the decline in the average yield of loans and investment
securities, as well as the changing mix of interest-earning assets (mostly the
reduction in cash due to the re-investment of excess cash liquidity noted
above). The loan yield declined 42 bps to 4.38% between the comparable first
quarter periods, largely due to the impact of the low interest rate environment
and competitive pricing pressures on new, renewed, and variable rate loans,
while the yield on investment securities declined 39 bps to 1.57%, also
attributable to the low interest rate environment, as well as the strategic
re-investment of cash into lower yielding U.S. Treasury securities. The 2022
cost of funds declined 12 bps to 0.35%, largely from lower rates on core
interest-bearing deposits and brokered deposits. The contribution from net free
funds decreased 5 bps, due mostly to the reduced value in the low interest rate
environment, though offset partly by the 53% increase in average net free funds
(largely from higher average noninterest-bearing demand deposits and
stockholders' equity) between the first quarter periods. As a result, the
tax-equivalent net interest margin was 3.23% for first quarter 2022, down 8 bps
compared to 3.31% for first quarter 2021.

Tax-equivalent interest income was $58.3 million for first quarter 2022, up
$21.2 million from first quarter 2021, comprised of $24.1 million higher
volumes, partly offset by lower average rates. Interest income on loans
increased $17.4 million over first quarter 2021, mostly due to higher average
balances from the Mackinac and County acquisitions, as well as organic loan
growth. Between the comparable first quarter periods, interest income on
investment securities grew $3.6 million, also attributable to the Mackinac and
County acquisitions, as well as the re-investment of excess cash liquidity
(noted above). Interest expense increased to $4.1 million for first quarter
2022, up $0.9 million compared to first quarter 2021, comprised of $2.9 million
higher volumes, partly offset by $2.0 million from lower overall cost of funds.
Interest expense on deposits decreased $0.7 million (25%) from first quarter
2021 given higher average interest-bearing deposit balances at a lower cost as
product rate changes were made during 2021 in the low rate environment, and
brokered deposits cost less largely from maturities of higher-costing term
brokered funds procured under competitive conditions in mid-2020 during the
pandemic. Interest expense on other interest-bearing liabilities increased
between the comparable first quarter periods, mostly due to higher average
balances from the July 2021 subordinated notes issuance, as well as wholesale
funding acquired with the 2021 acquisitions.

Provision for credit losses

The provision for credit losses has been $0.3 million for the three months ended
March 31, 2022compared to $0.5 million for the three months ended March 31, 2021with the total amount of the provision related to the ACL loans for the two periods.

The provision for credit losses is predominantly a function of Nicolet's
methodology and judgment as to qualitative and quantitative factors used to
determine the appropriateness of the ACL-Loans and unfunded commitments. The
appropriateness of the ACL-Loans is affected by changes in the size and
character of the loan portfolio, changes in levels of collateral dependent and
other nonperforming loans, historical losses and delinquencies in each portfolio
segment, the risk inherent in specific loans, concentrations of loans to
specific borrowers or industries, existing and future economic conditions, the
fair value of underlying collateral, and other factors which could affect
expected credit losses. The ACL for unfunded commitments is affected by many of
the same factors as the ACL-Loans, as well as funding assumptions relative to
lines of credit. See also Note 6, "Loans, Allowance for Credit Losses - Loans,
and Credit Quality" of the Notes to Unaudited Consolidated Financial Statements
under Part I, Item 1, for additional disclosures. For additional information
regarding asset quality and the ACL-Loans, see "BALANCE SHEET ANALYSIS - Loans,"
"- Allowance for Credit Losses - Loans," and "- Nonperforming Assets."

                                       37
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Noninterest Income

Table 4: Noninterest Income

                                                                    Three Months Ended March 31,
(in thousands)                                    2022                 2021            $ Change             % Change
Trust services fee income                    $    2,011            $   1,775          $    236                     13  %
Brokerage fee income                              3,688                2,793               895                     32
Mortgage income, net                              3,253                7,230            (3,977)                   (55)
Service charges on deposit accounts               1,477                1,091               386                     35
Card interchange income                           2,581                1,927               654                     34
BOLI income                                         933                  527               406                     77
LSR income, net                                    (382)                   -              (382)                      N/M
Other income                                      1,069                1,072                (3)                     -
Subtotal                                         14,630               16,415            (1,785)                   (11)
Asset gains (losses), net                         1,313                  711               602                       N/M
Total noninterest income                     $   15,943            $  17,126          $ (1,183)                    (7) %
Trust services fee income & Brokerage fee
income combined                              $    5,699            $   4,568          $  1,131                     25  %
N/M means not meaningful.



Noninterest income was $15.9 million for first quarter 2022, a decrease of $1.2
million (7%) compared to $17.1 million for first quarter 2021. The subtotal of
noninterest income before net asset gains (losses) declined $1.8 million (11%)
between the comparable three-month periods, with lower net mortgage income
partly offset by growth in most other noninterest income categories.

Trust services fee income and brokerage fee income combined were $5.7 million,
up $1.1 million (25%) over first quarter 2021, consistent with the growth in
accounts and assets under management, though tempered slightly by market
declines at the end of the quarter.

Mortgage income represents net gains received from the sale of residential real
estate loans into the secondary market, capitalized mortgage servicing rights
("MSR"), servicing fees net of MSR amortization, fair value marks on the
mortgage interest rate lock commitments and forward commitments ("mortgage
derivatives"), and MSR valuation changes, if any. Net mortgage income of $3.3
million, decreased $4.0 million (55%) between the comparable three-month
periods, predominantly on slowing mortgage activity from the rising rate
environment. Gains on sales and capitalized gains combined decreased $4.9
million, while net servicing fees increased $0.1 million (with higher income on
the larger portfolio serviced for others, partially offset by an increase in MSR
amortization), and MSR impairment was down $1.1 million on slower paydown
activity. See also "Lending-Related Commitments" and Note 7, "Goodwill and Other
Intangibles and Servicing Rights" of the Notes to Unaudited Consolidated
Financial Statements under Part I, Item 1, for additional disclosures on the MSR
asset.

Service charges on deposit accounts were up $0.4 million to $1.5 million for the
three months ended March 31, 2022, due to the larger deposit base from the 2021
acquisitions.

Card exchange revenue increased $0.7 million (34%) between comparable three-month periods due to higher volume and activity.

BOLI revenue increased $0.4 million between the comparable three-month periods, attributable to higher average BOLI balances acquired with the 2021 acquisitions.

Loan servicing rights ("LSR") income includes agricultural loan servicing fees
net of the related LSR amortization. Nicolet is not adding new loans to this
servicing portfolio; thus, the LSR amortization is currently outpacing the loan
servicing fees. See also Note 7, "Goodwill and Other Intangibles and Servicing
Rights" of the Notes to Unaudited Consolidated Financial Statements under Part
I, Item 1, for additional information on the LSR asset.

Other income from $1.1 million for the three months ended March 31, 2022 was little changed from the comparable 2021 period, including new revenue from crop insurance sales (related to the county acquisition) offset by the unfavorable change in fair value of compensation plan assets deferred ineligible due to recent market declines. See also “Non-interest expense” for a discussion of the change in the offsetting fair value of non-qualifying deferred compensation plan liabilities.

Net asset gains of $1.3 million for first quarter 2022 were primarily
attributable to gains on sales of other real estate owned (mostly closed bank
branch locations) and market gains on equity securities, while net asset gains
of $0.7 million for first quarter 2021 were primarily attributable to favorable
fair value marks on equity securities.
                                       38
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Noninterest Expense

Table 5: Noninterest Expense

                                                                     Three Months Ended March 31,
($ in thousands)                                   2022                 2021             Change              % Change
Personnel                                     $   21,191            $  15,116          $  6,075                     40  %
Occupancy, equipment and office                    6,944                4,137             2,807                     68
Business development and marketing                 1,831                  989               842                     85
Data processing                                    3,387                2,658               729                     27
Intangibles amortization                           1,424                  852               572                     67
FDIC assessments                                     480                  595              (115)                   (19)
Merger-related expense                                98                    -                98                       N/M
Other expense                                      2,195                1,734               461                     27
Total noninterest expense                     $   37,550            $  26,081          $ 11,469                     44  %
Non-personnel expenses                        $   16,359            $  10,965          $  5,394                     49  %
Average full-time equivalent ("FTE")
employees                                            833                  558               275                     49  %
N/M means not meaningful.



Noninterest expense was $37.6 million, an increase of $11.5 million (44%) over
first quarter 2021. Personnel costs increased $6.1 million (40%), while
non-personnel expenses combined increased $5.4 million (49%) compared to first
quarter 2021.

Personnel expense was $21.2 million for the three months ended March 31, 2022,
an increase of $6.1 million from the comparable period in 2021. Salary expense
increased $5.2 million (57%) over first quarter 2021, reflecting higher salaries
from the larger employee base (with average full-time equivalent employees up
49%, mostly due to the 2021 acquisitions) as well as merit increases between the
years. Fringe benefits increased $1.2 million (47%) over first quarter 2021,
mostly due to the larger employee base. Personnel expense was also impacted by
the change in the fair value of nonqualified deferred compensation plan
liabilities from the recent market declines. See also "Noninterest Income" for
discussion on the offsetting fair value change to the nonqualified deferred
compensation plan assets.

Occupancy, equipment and office expense was $6.9 million for first quarter 2022,
up $2.8 million (68%) compared to first quarter 2021, largely due to the
expanded branch network with the Mackinac and County acquisitions, as well as
additional expense for software and technology solutions.

Business development and marketing expense was $1.8 million, up $0.8 million
(85%), between the comparable first quarter periods, largely due to the higher
travel and entertainment expenses, as well as additional marketing donations,
promotions, and media to support our expanded branch and community base.

Data processing expense was $3.4 million, up $0.7 million (27%) between the
comparable three-month periods, mostly due to volume-based increases in core
processing charges, including the larger operating base following the Mackinac
and County acquisitions.

Intangibles amortization increased $0.6 million between the comparable first
quarter periods due to higher amortization from the intangibles added with the
2021 acquisitions.

Other expense was $2.2 million, up $0.5 million (27%) between the comparable
three-month periods, mostly due to an increase in director fees (reflective of
the additional complexity of a larger company, including the addition of two new
directors with the 2021 acquisitions), higher professional fees, costs to carry
closed bank branches, and overall higher expenses related to our larger
operating base.


Income Taxes

The income tax expense was $7.7 million (effective tax rate of 24.2%) for the first quarter of 2022, compared to $5.9 million (effective tax rate of 24.6%) for the comparable period of 2021.

                                       39
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ANALYSIS OF THE BALANCE SHEET

At March 31, 2022, period end assets were $7.3 billion, a decrease of $0.4
billion (5%) from December 31, 2021, including $200 million of assets related to
the sale of the Birmingham branch in January 2022, as well as lower cash and
cash equivalents from the decline in deposits. Total loans increased $61 million
from December 31, 2021, due to growth in the loan portfolio (up $77 million or
6.8% annualized, primarily in agricultural and commercial and industrial loans),
partly offset by continued reductions in PPP loans from loan forgiveness (down
$16 million). Total deposits of $6.2 billion at March 31, 2022, decreased $0.2
billion from December 31, 2021, due to the repricing of acquired deposits to
current market rates. Total stockholders' equity was $836 million at March 31,
2022, a decrease of $56 million since December 31, 2021, mostly due to stock
repurchase activity and unfavorable changes in the fair value of securities AFS,
partly offset by current quarter earnings.

Compared to March 31, 2021, assets were $7.3 billion, up $2.8 billion (61%) from
March 31, 2021, largely due to the acquisitions of Mackinac and County in second
half 2021. Total loans increased $1.8 billion and total deposits increased $2.3
billion from March 31, 2021, also largely due to the acquisitions of Mackinac
and County. Stockholders' equity increased $286 million from March 31, 2021,
primarily due to common stock issued in the Mackinac and County acquisitions and
2021 net income, partially offset by stock repurchases over the year and
negative net fair value investment changes.


Loans

In addition to the discussion that follows, see also Note 6, "Loans, Allowance
for Credit Losses - Loans, and Credit Quality," in the Notes to Unaudited
Consolidated Financial Statements under Part I, Item 1, for additional
disclosures on loans. For additional information regarding the allowance for
credit losses and nonperforming assets see also "BALANCE SHEET ANALYSIS -
Allowance for Credit Losses - Loans" and "BALANCE SHEET ANALYSIS - Nonperforming
Assets."

Nicolet services a diverse customer base throughout Northeast and Central
Wisconsin, Northern Michigan and the Upper Peninsula of Michigan. We concentrate
on originating loans in our local markets and assisting current loan customers.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas.

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

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

                                                 March 31, 2022                                    December 31, 2021                                    March 31, 2021
(in thousands)                          Amount                 % of Total                   Amount                  % of Total                 Amount                 % of Total
Commercial & industrial            $    1,063,300                        23  %       $       1,042,256                        23  %       $      957,901                        34  %
Owner-occupied CRE                        794,946                        17                    787,189                        17                 520,274                        18
Agricultural                              826,364                        18                    794,728                        17                 107,009                         4
Commercial                              2,684,610                        58                  2,624,173                        57               1,585,184                        56
CRE investment                            807,602                        17                    818,061                        18                 490,053                        17
Construction & land development           211,640                         4                    213,035                         5                 137,670                         5
Commercial real estate                  1,019,242                        21                  1,031,096                        23                 627,723                        22
Commercial-based loans                  3,703,852                        79                  3,655,269                        80               2,212,907                        78
Residential construction                   72,660                         2                     70,353                         1                  39,586                         1
Residential first mortgage                721,107                        15                    713,983                        15                 456,197                        16
Residential junior mortgage               133,817                         3                    131,424                         3                 107,641                         4
Residential real estate                   927,584                        20                    915,760                        19                 603,424                        21
Retail & other                             51,879                         1                     50,807                         1                  30,020                         1
Retail-based loans                        979,463                        21                    966,567                        20                 633,444                        22
Total loans                        $    4,683,315                       100  %       $       4,621,836                       100  %       $    2,846,351                       100  %


As noted in Table 6 above, the loan portfolio at March 31, 2022, was 79%
commercial-based and 21% retail-based. Commercial-based loans are considered to
have more inherent risk of default than retail-based loans, in part because of
the broader list of factors that could impact a commercial borrower negatively.
In addition, the commercial balance per borrower is typically larger than that
for retail-based loans, implying higher potential losses on an individual
customer basis. Credit risk on commercial-based loans is largely influenced by
general economic conditions and the resulting impact on a borrower's operations
or on the value of underlying collateral, if any.

                                       40
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At March 31, 2022, loans were $4.7 billion, $61 million higher than December 31,
2021, due to growth in the loan portfolio (up $77 million or 6.8% annualized,
primarily in agricultural and commercial and industrial loans), partly offset by
continued reductions in PPP loans from loan forgiveness (down $16 million).
Commercial and industrial loans continue to be the largest segment of Nicolet's
portfolio and represented 23% of the total portfolio at March 31, 2022.

Residential real estate loans of $928 million grew $12 million from year-end
2021, to represent 20% of total loans at March 31, 2022. Residential first
mortgage loans include conventional first-lien home mortgages, while residential
junior mortgage loans consist mainly of home equity lines and term loans secured
by junior mortgage liens. As part of our management of residential mortgage
loans, the majority of Nicolet's long-term, fixed-rate residential first
mortgage loans are sold in the secondary market with servicing rights retained.
Nicolet's mortgage loans are typically of high quality and have historically had
low net charge-off rates.

Personal and other loans increased $1 million as of the end of 2021, and represented approximately 1% of the total loan portfolio, and mainly comprises short-term loans and other personal installment loans not secured by real estate.

Allowance for Credit Losses – Loans

In addition to the following discussion, see also Note 6, “Loans, Allowance for Credit Losses – Loans and Credit Quality”, in the Notes to the Unaudited Consolidated Financial Statements in Part I, Item 1, for additional information on the provision for credit losses. credit losses.

Credit risks within the loan portfolio are inherently different for each loan
type as summarized under "BALANCE SHEET ANALYSIS - Loans." A discussion of the
loan portfolio credit risk can be found in the "Loans" section in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's 2021 Annual Report on Form 10-K. Credit risk is
controlled and monitored through the use of lending standards, a thorough review
of potential borrowers, and ongoing review of loan payment performance. Active
asset quality administration, including early problem loan identification and
timely resolution of problems, aids in the management of credit risk and
minimization of loan losses. For additional information regarding nonperforming
assets see also "BALANCE SHEET ANALYSIS - Nonperforming Assets."

The ACL-Loans represents management's estimate of expected credit losses in the
Company's loan portfolio at the balance sheet date. To assess the
appropriateness of the ACL-Loans, 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 numerous
factors involves significant judgment; therefore, management considers the
ACL-Loans a critical accounting estimate.

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. 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 factors mentioned above. Consideration is given
to those current qualitative or environmental factors that are likely to cause
estimated credit losses as of the evaluation date to differ from the historical
loss experience of each loan segment. Lastly, management considers reasonable
and supportable forecasts to assess the collectability of future cash flows.

At March 31, 2022, the ACL-Loans was $50 million (representing 1.07% of period
end loans) compared to $50 million at December 31, 2021 and $33 million at March
31, 2021. The ACL-Loans was minimally changed from year-end 2021 given solid
asset quality trends which offset current period loan growth. The increase in
the ACL-Loans from March 31, 2021 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, annualized) remain negligible. The
components of the ACL-Loans are detailed further in Table 7 below.


                                       41
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Table 7: Allowance for Credit Losses – Loans

                                                          Three Months Ended                      Year Ended
(in thousands)                                   March 31, 2022         March 31, 2021         December 31, 2021
ACL-Loans:
Balance at beginning of period                  $      49,672          $      32,173          $         32,173
ACL on PCD loans acquired                                   -                      -                     5,159
Provision for credit losses                               300                    500                    12,500
Charge-offs                                              (100)                   (94)                     (513)
Recoveries                                                 34                     47                       353
Net (charge-offs) recoveries                              (66)                   (47)                     (160)
Balance at end of period                        $      49,906          $      32,626          $         49,672
Net loan (charge-offs) recoveries:
Commercial & industrial                         $          20          $         (13)         $             50
Owner-occupied CRE                                        (36)                     -                         -
Agricultural                                                -                      -                       (48)
CRE investment                                              -                     (4)                       (2)
Construction & land development                             -                      -                         -
Residential construction                                    -                      -                         -
Residential first mortgage                                  4                     10                       (93)
Residential junior mortgage                                 -                      2                         4
Retail & other                                            (54)                   (42)                      (71)
Total net (charge-offs) recoveries              $         (66)         $         (47)         $           (160)

Reports :

ACL-Loans to total loans                                 1.07  %                1.15  %                   1.07  %
Net charge-offs to average loans, annualized             0.01  %                0.01  %                   0.01  %



Nonperforming Assets

As part of its overall credit risk management process, management is committed
to an aggressive problem loan identification philosophy. This philosophy has
been implemented through the ongoing monitoring and review of all pools of risk
in the loan portfolio to ensure that problem loans are identified early and the
risk of loss is minimized. Management continues to actively work with customers
and monitor credit risk from the ongoing disruptions related to the pandemic, as
well as economic, political, and social turmoil. See also Note 6, "Loans,
Allowance for Credit Losses - Loans, and Credit Quality" of the Notes to
Unaudited Consolidated Financial Statements under Part I, Item 1, for further
disclosures on credit quality. For additional information see also "BALANCE
SHEET ANALYSIS - Loans" and "BALANCE SHEET ANALYSIS - Allowance for Credit
Losses-Loans."

Nonperforming loans are considered one indicator of potential future loan
losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or
more past due but still accruing interest. Loans are generally placed on
nonaccrual status when contractually past due 90 days or more as to interest or
principal payments. Additionally, whenever management becomes aware of facts or
circumstances that may adversely impact the collectability of principal or
interest on loans, it is management's practice to place such loans on nonaccrual
status immediately. Nonperforming assets include nonperforming loans and other
real estate owned ("OREO"). At March 31, 2022, nonperforming assets were $49
million and represented 0.68% of total assets, compared to $56 million or 0.73%
of total assets at December 31, 2021.

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 $49 million (1.0% of
loans) and $53 million (1.1% of loans) at March 31, 2022 and December 31, 2021,
respectively. Potential problem loans require a heightened management review of
the pace at which a credit may deteriorate, the duration of asset quality
stress, and uncertainty around the magnitude and scope of economic stress that
may be felt by Nicolet's customers and on underlying real estate values.

                                       42
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Table 8: Non-performing assets

(in thousands)                                  March 31, 2022          December 31, 2021         March 31, 2021
Nonperforming loans:
Commercial & industrial                        $        1,849          $          1,908          $        2,842
Owner-occupied CRE                                      5,007                     4,220                   1,563
Agricultural                                           23,570                    28,367                   2,087
Commercial                                             30,426                    34,495                   6,492
CRE investment                                          3,914                     4,119                   1,436
Construction & land development                         1,054                     1,071                     327
Commercial real estate                                  4,968                     5,190                   1,763
Commercial-based loans                                 35,394                    39,685                   8,255
Residential construction                                    -                         -                       -
Residential first mortgage                              3,919                     4,132                     527
Residential junior mortgage                               242                       243                     116
Residential real estate                                 4,161                     4,375                     643
Retail & other                                            115                        94                      67
Retail-based loans                                      4,276                     4,469                     710
Total nonaccrual loans                                 39,670                    44,154                   8,965
Accruing loans past due 90 days or more                     -                         -                       -
Total nonperforming loans                      $       39,670          $         44,154          $        8,965
Nonaccrual loans (included above) covered by
guarantees                                     $        4,675          $          6,776          $        1,416
OREO:
Commercial real estate owned                   $          797          $          1,549          $          302
Residential real estate owned                               -                        99                       -
Bank property real estate owned                         9,019                    10,307                   3,495
Total OREO                                              9,816                    11,955                   3,797
Total nonperforming assets                     $       49,486          $         56,109          $       12,762
Performing troubled debt restructurings        $        1,714          $          5,443          $        2,120
Ratios:
Nonperforming loans to total loans                       0.85  %                   0.96  %                 0.31  %
Nonperforming assets to total loans plus OREO            1.05  %                   1.21  %                 0.45  %
Nonperforming assets to total assets                     0.68  %                   0.73  %                 0.28  %
ACL-Loans to nonperforming loans                          126  %                    112  %                  364  %



Deposits

Deposits represent Nicolet's largest source of funds. Total deposits of $6.2
billion at March 31, 2022, decreased $235 million from December 31, 2021, due to
the repricing of acquired deposits to current market rates, as well as the usual
cyclical decline in demand deposit accounts. Core customer deposits decreased
$200 million, while brokered deposits decreased $35 million. Compared to March
31, 2021, total deposits increased $2.3 billion (60%), largely due to the
Mackinac and County acquisitions. The deposit composition is presented in Table
9 below.

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Table 9: Composition of end-of-period deposits

                                                    March 31, 2022                                   December 31, 2021                                   March 31, 2021
(in thousands)                             Amount                 % of Total                  Amount                  % of Total                Amount                 % of Total
Noninterest-bearing demand            $    1,912,995                       31  %       $       1,975,705                       31  %       $    1,216,477                       31  %
Money market and interest-bearing
demand                                     2,740,024                       44  %               2,834,824                       44  %            1,576,041                       40  %
Savings                                      841,369                       13  %                 803,197                       12  %              572,225                       15  %
Time                                         736,732                       12  %                 852,190                       13  %              535,851                       14  %
Total deposits                        $    6,231,120                      100  %       $       6,465,916                      100  %       $    3,900,594                      100  %
Brokered transaction accounts         $      228,079                        4  %       $         234,306                        4  %       $       35,615                        1  %
Brokered and listed time deposits            180,823                        3  %                 209,857                        3  %              225,402                        6  %
Total brokered deposits               $      408,902                        7  %       $         444,163                        7  %       $      261,017                        7  %
Customer transaction accounts         $    5,266,309                       84  %       $       5,379,420                       83  %       $    3,329,128                       85  %
Customer time deposits                       555,909                        9  %                 642,333                       10  %              310,449                        8  %
Total customer deposits (core)        $    5,822,218                       93  %       $       6,021,753                       93  %       $    3,639,577                       93  %



Lending-Related Commitments

From March 31, 2022 and December 31, 2021Nicolet had off-balance sheet commitments related to the following loans.

Table 10: Commitments

(in thousands)                           March 31, 2022       December 31, 2021
Commitments to extend credit            $     1,432,989      $        1,433,881
Financial standby letters of credit              14,884                  

13,562

Performance standby letters of credit             7,773                   

7,336


Interest rate lock commitments to originate residential mortgage loans held for
sale (included above in commitments to extend credit) and forward commitments to
sell residential mortgage loans held for sale are considered derivative
instruments ("mortgage derivatives") and the notional amounts represented $31
million and $26 million, respectively, at March 31, 2022. In comparison,
interest rate lock commitments to originate residential mortgage loans held for
sale and forward commitments to sell residential mortgage loans held for sale
represented $50 million and $1 million, respectively, at December 31, 2021. The
net fair value of these mortgage derivatives combined was a gain of $122,000 at
March 31, 2022 compared to a gain of $149,000 at December 31, 2021.


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, and
satisfy other operating requirements.

Funds are available from a number of basic banking activity sources including,
but not limited to, the core deposit base; repayment and maturity of loans;
investment securities calls, maturities, and sales; and procurement of
additional brokered deposits or other wholesale funding. At March 31, 2022,
approximately 24% of the $1.5 billion investment securities portfolio was
pledged to secure public deposits, as applicable, and for other purposes as
required by law. Additional funding sources at March 31, 2022, consist of
available and unused Federal funds lines, borrowing capacity at the FHLB of $373
million, and borrowing capacity in the brokered deposit market.

Management is committed to the Parent Company being a source of strength to the
Bank and its other subsidiaries, and therefore, regularly evaluates capital and
liquidity positions of the Parent Company in light of current and projected
needs, growth or strategies. The Parent Company uses cash for normal expenses,
debt service requirements, and when opportune, for common stock repurchases,
repayment of debt, or investment in other strategic actions such as mergers or
acquisitions. At March 31, 2022, the Parent Company had $27 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.
During 2021, Nicolet completed the private placement of $100 million in
fixed-to-floating rate subordinated notes (the "Notes") due in 2031. (See Note
8, "Short and Long-Term Borrowings" of the Notes to Unaudited Consolidated
Financial Statements under Part I, Item 1, for additional information on the
Notes). Dividends from the Bank and, to a lesser extent, stock option exercises,
also represent significant sources of cash flows for the Parent Company.

Cash and cash equivalents at March 31, 2022 and December 31, 2021 have been $396 million and $595 million, respectively. The decrease in cash and cash equivalents since the end of 2021 includes $22 million net cash from operating activities

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(mostly earnings), $71 million net cash provided by investing activities (with
net cash received from the Birmingham branch sale exceeding cash payments to
fund loan growth and net investment purchases), and $292 million net cash used
in financing activities (mostly deposit growth and common stock repurchases).
Management believes its liquidity resources were sufficient as of March 31, 2022
to fund loans, accommodate deposit cycles and trends, 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 our financial strategy and risk management,
we attempt to understand and manage the impact of fluctuations in market
interest rates on our 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, we measure our 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, we assessed the impact on net interest income in the
event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to
the change in prime rate) over a one-year time horizon to a static (flat)
balance sheet. The results provided include the liquidity measures mentioned
earlier and reflect the changed interest rate environment. The interest rate
scenarios are used for analytical purposes only and do not necessarily represent
management's view of future market interest rate movements. Based on financial
data at March 31, 2022 and December 31, 2021, the projected changes in net
interest income over a one-year time horizon, versus the baseline, are presented
in Table 11 below. The results are within Nicolet's guidelines of not greater
than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table 11: Sensitivity to interest rates

                                        March 31, 2022      December 31, 

2021

200 bps decrease in interest rates              (1.2) %                (0.3) %
100 bps decrease in interest rates              (0.8) %                (0.3) %
100 bps increase in interest rates              (0.6) %                (0.1) %
200 bps increase in interest rates              (1.2) %                

(0.3)%


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 for
banking products and the credit health of the Bank's customer base.


Capital

Management regularly reviews the adequacy of its capital to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The capital position and strategies are
actively reviewed in light of perceived business risks associated with current
and prospective earning levels, liquidity, asset quality, economic conditions in
the markets served, and level of returns available to shareholders. Management
intends to maintain an optimal capital and leverage mix for growth and
shareholder return. For details on the change in capital see "BALANCE SHEET
ANALYSIS."

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The Company's and the Bank's regulatory capital ratios remain above minimum
regulatory ratios, including the capital conservation buffer. At March 31, 2022,
the Bank's regulatory capital ratios qualify the Bank as well-capitalized under
the prompt-corrective action framework. This strong base of capital has allowed
Nicolet to be opportunistic in the current environment and in strategic growth.
A summary of the Company's and the Bank's regulatory capital amounts and ratios,
as well as selected capital metrics are presented in the following table.

Table 12: Capital

                                                            At or for the Three            At or for the
                                                               Months Ended                  Year Ended
($ in thousands)                                              March 31, 2022             December 31, 2021
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)      $          54,420             $          61,464
Common stock repurchased during the period (full shares)            593,713                       793,064
Company Risk-Based Capital:
Total risk-based capital                                  $         769,472             $         793,410
Tier 1 risk-based capital                                           576,239                       604,199
Common equity Tier 1 capital                                        538,919                       567,095
Total capital ratio                                                    13.7     %                    13.8  %
Tier 1 capital ratio                                                   10.3     %                    10.5  %
Common equity tier 1 capital ratio                                      9.6     %                     9.9  %
Tier 1 leverage ratio                                                   8.0     %                     9.4  %
Bank Risk-Based Capital:
Total risk-based capital                                  $         727,620             $         700,869
Tier 1 risk-based capital                                           687,232                       664,688
Common equity Tier 1 capital                                        687,232                       664,688
Total capital ratio                                                    13.0     %                    12.2  %
Tier 1 capital ratio                                                   12.3     %                    11.6  %
Common equity tier 1 capital ratio                                     12.3     %                    11.6  %
Tier 1 leverage ratio                                                   9.6     %                    10.3  %

* Reflects common shares repurchased pursuant to Board authorizations for the common share repurchase program.


In managing capital for optimal return, we evaluate capital sources and uses,
pricing and availability of our stock in the market, and alternative uses of
capital (such as the level of organic growth or acquisition opportunities) in
light of strategic plans. During first quarter 2022, $54 million was utilized to
repurchase and cancel 593,713 shares of common stock, at an average per share
cost of $91.66, pursuant to our common stock repurchase program. Subsequently,
on April 19, 2022, the Company's board authorized an increase to the program of
$40 million. Including this additional authorization, there remains $55 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.

Critical accounting estimates

In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
valuation of loan acquisition transactions, as well as the determination of the
allowance for credit losses and income taxes. A discussion of these estimates
can be found in the "Critical Accounting Estimates" section in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's 2021 Annual Report on Form 10-K. There have been no
changes in the Company's determination of critical accounting policies since
December 31, 2021.

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