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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Pandemic Effects, Actions and Updates

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: Earnings Summary and Selected Financial Data

At and for the years ended December 31,

Results of operations:

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:

Common shares:

Year-End Balances:

Financial Ratios:

Tangible common equity to tangible assets (1) 7.51 8.31 10.27

Reconciliation of Non-GAAP Financial Measures:

Adjusted net income reconciliation: (2)

Adjustments:

Provision expense related to merger 14,400 — —

Branch closure expense 944 500 —

Adjusted Diluted earnings per common share (Non-GAAP) $ 6.57 $ 5.94 $ 4.93

Tangible assets:

Tangible common equity:

Tangible average common equity:

(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.

INCOME STATEMENT ANALYSIS

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,

ASSETS

Interest-earning assets

Investment securities:

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities

(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 Variance - Tax-Equivalent Basis

Volume Rate Net (1) Volume Rate Net (1)

Interest-earning assets

Investment securities:

Interest-bearing liabilities

(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.

Comparison of 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 cash, reflecting the continued liquidity of businesses and consumers. As a result, the mix of average interest-earning assets shifted. Other interest-earning assets increased to 17% of total interest-earning assets for 2021 (compared to 15% for 2020) and investment securities increased to represent 16% of total interest-earning assets for 2021 (compared to 13% in 2020), while the percentage of loans decreased to represent 67% of total interest-earning assets for 2021 (compared to 72% in the prior 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

N/M means not meaningful.

Comparison of 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 interchange income grew $2 million (31%) to $9 million in 2021 largely due to higher volume and activity, though 2020 activity was also tempered by cautionary spending of consumers 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, partly offset by income on higher average balances from the 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

Comparison of 2021 versus 2020

Noninterest expense was $129 million, an increase of $29 million (28%) over 2020. Personnel costs increased $13 million, while non-personnel expenses combined increased $15 million over 2020. Notable contributions to the change in noninterest expense 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%) between the years, with the declining amortization on the aging intangibles of previous acquisitions, substantially offset by amortization from the new intangibles of 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.

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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: Period End Loan Composition

(in thousands) Amount % ofTotal Amount % ofTotal Amount % ofTotal

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

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default than retail-based loans, in part because the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis.

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: Loan Maturity Distribution

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

(in thousands) Loan Maturity

Percent by maturity distribution 23 % 48 % 17 % 12 % 100 %

Fixed rate loans:

Floating rate loans:

* The residential construction loans with a loan maturity after five years represent a construction to permanent loan 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 December 31,

Allowance for credit losses - loans:

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:

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)

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 %

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: Allocation of the Allowance for Credit Losses - Loans

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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 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: Nonperforming Assets

Nonperforming loans:

PPP loans — — —

Residential construction — — —

Accruing loans past due 90 days or more — — —

OREO:

Commercial real estate owned 1,549 — —

Residential real estate owned 99 — —

Performing troubled debt restructurings $ 5,443 $ 2,120 $ —

Ratios:

Nonperforming loans to total loans 0.96 % 0.34 % 0.55 %

NPAs to total loans plus OREO 1.21 % 0.47 % 0.59 %

ACL-Loans to nonperforming loans 112 % 340 % 99 %

Investment Securities Portfolio

The investment securities portfolio is intended to provide Nicolet with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All 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: Investment Securities Portfolio Maturity Distribution (1)

(1) The yield on tax-exempt investment securities is computed 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: Period End Deposit Composition

Amount % ofTotal Amount % ofTotal Amount % ofTotal

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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: Maturity Distribution of Uninsured Time Deposits

Total uninsured deposits were $2.1 billion and $1.2 billion as of 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

Liquidity Management

Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.

Given the stable core customer deposit base, fairly consistent patterns of activity in the core deposit base (including extra growth in core deposits 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

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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.

Interest Rate Sensitivity Management and Impact of Inflation

A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).

Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.

To understand and manage the impact of fluctuations in market interest rates on net interest income, Nicolet measures its overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.

Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned 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: Interest Rate Sensitivity

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

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

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 capital ratio 13.8 % 12.9 %

Common equity tier 1 capital ratio 9.9 % 11.4 %

Tier 1 leverage ratio 9.4 % 9.0 %

Bank Risk-Based Capital:

Total capital ratio 12.2 % 11.2 %

Common equity tier 1 capital ratio 11.6 % 10.5 %

Tier 1 leverage ratio 10.3 % 7.8 %

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, Lending-Related 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

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NICOLET BANKSHARES, INC.Consolidated Balance Sheets

Assets

Federal funds sold — —

Certificates of deposit in other banks 21,920 29,521

Securities available for sale (“AFS”), at fair value 921,661 539,337

Securities held to maturity (“HTM”), at amortized cost 651,803 —

Other assets held for sale 199,833 —

Allowance for credit losses - loans (“ACL-Loans”) (49,672) (32,173)

Accrued interest receivable and other assets 113,375 55,516

Liabilities and Stockholders’ Equity

Liabilities:

Short-term borrowings — —

Other liabilities held for sale 51,586 —

Accrued interest payable and other liabilities 68,729 48,332

Stockholders’ Equity:

Accumulated other comprehensive income (loss) 3,102 12,747

Preferred shares issued and outstanding — —

See accompanying Notes to Consolidated Financial Statements.

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(In thousands, except share and per share data) 2021 2020 2019

Interest income:

Investment securities:

Interest expense:

Short-term borrowings 1 66 5

Noninterest income:

Noninterest expense:

Less: 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:

Weighted average common shares outstanding:

See accompanying Notes to Consolidated Financial Statements.

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Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on securities AFS:

Net (gains) losses included in income 283 (395) 22

Total other comprehensive income (loss), net of tax (9,645) 8,329 10,058

See accompanying Notes to Consolidated Financial Statements.

47

Nicolet Bankshares, Inc. Stockholders’ Equity

Comprehensive income:

Other comprehensive income (loss) — — — 10,058 — 10,058

Stock-based compensation expense — 5,038 — — — 5,038

Exercise of stock options, net 3 8,147 — — — 8,150

Issuance of common stock — 592 — — — 592

Purchase and retirement of common stock (4) (28,456) — — — (28,460)

Distribution to noncontrolling interest — — — — (362) (362)

Comprehensive income:

Other comprehensive income (loss) — — — 8,329 — 8,329

Stock-based compensation expense — 5,700 — — — 5,700

Exercise of stock options, net — 1,474 — — — 1,474

Issuance of common stock — 581 — — — 581

Purchase and retirement of common stock (6) (42,082) — — — (42,088)

Purchase of noncontrolling interest — (5,016) — — (860) (5,876)

Distribution to noncontrolling interest — — — — (215) (215)

Adoption of new accounting pronouncement — — (6,175) — — (6,175)

Comprehensive income:

Other comprehensive income (loss) — — — (9,645) — (9,645)

Stock-based compensation expense — 7,307 — — — 7,307

Exercise of stock options, net 1 1,836 — — — 1,837

Issuance of common stock — 545 — — — 545

Purchase and retirement of common stock (8) (62,575) — — — (62,583)

See accompanying Notes to Consolidated Financial Statements.

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Cash Flows From Operating Activities:

Increase in cash surrender value of life insurance (2,380) (2,199) (1,967)

Net change in accrued interest payable and other liabilities 1,024 5,716 9,010

Cash Flows From Investing Activities:

Purchases of securities HTM (569,910) — —

Proceeds from sales of other investments 10,203 — 17,144

Proceeds from sales of other real estate and other assets 2,743 343 457

Purchase of BOLI — — (5,000)

Proceeds from redemption of BOLI — 440 1,348

Cash Flows From Financing Activities:

Net increase (decrease) in short-term borrowings — — (4,233)

Distribution to noncontrolling interest — (215) (362)

Purchase of noncontrolling interest — (8,000) —

Capitalized issuance costs, net (789) — (163)

Proceeds from issuance of common stock, net 2,382 2,055 8,742

Supplemental Disclosures of Cash Flow Information:

Transfer of loans and bank premises to other real estate owned 8,177 2,608 1,025

Acquisitions:

Common stock issued in acquisitions $ 355,378 $ — $ 79,797

* Cash and cash equivalents at December 31, 2021 included restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve. At December 31, 2020 cash and cash equivalents included restricted cash of $1.9 million pledged as collateral on interest rate swaps and no reserve balance was required with the Federal Reserve, while at December 31, 2019, cash and cash equivalents included $6.0 million for the reserve balance required with the Federal Reserve and $1.3 million was pledged as collateral on interest rate swaps.

See accompanying Notes to Consolidated Financial Statements.

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NICOLET BANKSHARES, INC.

Notes to Consolidated Financial Statements

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Banking Activities and Subsidiaries: Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) was incorporated on April 5, 2000, to serve as the holding company and sole shareholder of Nicolet National Bank (the “Bank”). The Bank opened for business on November 1, 2000. Since its opening in late 2000, Nicolet has supplemented its organic growth with branch purchase and acquisition transactions. See Note 2 for additional information on the Company’s recent acquisitions.

At December 31, 2021, the Company had three wholly owned subsidiaries, the Bank, Nicolet Advisory Services, LLC (“Nicolet Advisory”), and Nicolet Insurance Services, LLC (“Nicolet Insurance”). At December 31, 2021, the Bank wholly owns an investment subsidiary based in Nevada, a subsidiary that provides a web-based investment management platform for financial advisor trades and related activity, and an entity that owns the building in which Nicolet is headquartered, Nicolet Joint Ventures, LLC (the “JV”). The JV was owned 50% by a real estate development and investment firm (the “Firm”) through the JV until late 2020 when the Bank became the 100% owner and sole managing member of the JV. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. See Note 15 for additional related party disclosures, including details of the 50% interest purchased from the Firm.

Nicolet Advisory is a registered investment advisor subsidiary that provides brokerage and investment advisory services to customers. In late 2020, to improve process efficiencies and organizational structure, the Company dissolved its wholly owned subsidiary, Brookfield Investment Partners, LLC, which provided limited investment services (transactional and strategy) to a few smaller banks, and Nicolet Advisory assumed those additional investment services contracts. Nicolet Insurance, acquired in 2021, was formed to facilitate the delivery of a crop insurance product associated with Nicolet’s agricultural lending.

Principles of Consolidation: The consolidated financial statements of the Company include the accounts of its subsidiaries. The JV underlies the noncontrolling interest reflected in the consolidated financial statements until late 2020 when the Bank purchased the remaining interest as discussed in Note 1 above under Nature of Banking Activities and Subsidiaries. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Results of operations of companies purchased, if any, are included from the date of acquisition.

Operating Segment: The consolidated income of the Company is derived principally from the Bank, which conducts lending (primarily commercial and agricultural-based loans, as well as residential and consumer loans) and deposit gathering (including other banking- and deposit-related products and services, such as ATMs, safe deposit boxes, check cashing, wires, and debit cards) to businesses, consumers and governmental units principally in its trade area of northeast and central Wisconsin, and northern Michigan and the upper peninsula of Michigan, trust services, brokerage services (delivered through the Bank and Nicolet Advisory), and the support to deliver, fund and manage all such banking and wealth management services to its customer base. The individual contribution from wealth management was not significant to the consolidated balance sheet or net income for 2021, 2020, or 2019. While the chief operating decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

Use of Estimates: Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions, and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses-loans, determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates,

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NICOLET BANKSHARES, INC.

Notes to Consolidated Financial Statements

although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

Business Combinations: The Company accounts for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The Company recognizes the full fair value of the assets acquired and liabilities assumed and immediately expenses transaction costs. If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded. Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (“bargain purchase gain”) is recorded. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. Results of operations of the acquired business are included in the statements of income from the effective date of the acquisition. Additional information regarding recent acquisitions is provided in Note 2.

Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits in other banks with original maturities of less than 90 days, if any, and federal funds sold. The Bank maintains amounts in due from banks which, at times, may exceed federally insured limits. Management monitors these correspondent relationships. The Bank has not experienced any losses in such accounts. The Bank may have restrictions on cash and due from banks as it is required to maintain certain vault cash and reserve balances with the Federal Reserve Bank to meet specific reserve requirements. At December 31, 2021 and 2020, no reserve balance was required with the Federal Reserve Bank as the Federal Reserve’s board authorized a reduction to the reserve requirement ratios to 0% effective March 26, 2020 to provide monetary stimulus in response to the economic disruptions resulting from the pandemic. In addition, cash and cash equivalents includes restricted cash of $1.9 million pledged as collateral on an interest rate swap at both December 31, 2021 and 2020.

Securities Available for Sale: Securities are classified as AFS on the consolidated balance sheets at the time of purchase and include those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities classified as AFS are carried at fair value, with unrealized gains or losses, net of related deferred income taxes, reported as increases or decreases in accumulated other comprehensive income. Realized gains or losses on sales of securities AFS (using the specific identification method) are included in the consolidated statements of income under asset gains (losses), net. Premiums and discounts are amortized or accreted into interest income over the estimated life of the related securities using the effective interest method.

Management evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income. Both the ACL and charge to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment must be recognized in net income with a corresponding adjustment to the security’s amortized cost basis rather than through the establishment on an ACL. See Note 3 for additional disclosures on AFS securities.

Securities Held to Maturity: Securities are classified as HTM on the consolidated balance sheets at the time of purchase and include those securities that the Company has both the positive intent and ability to hold to maturity. HTM securities are carried at amortized cost on the consolidated balance sheets. Premiums and discounts are amortized or accreted into interest income over the estimated life of the related securities using the effective interest method.

Management evaluates securities HTM on a quarterly basis to determine whether an ACL is necessary. In making this determination, management considers the facts and circumstances of the underlying investment securities. The ACL for HTM securities, if deemed necessary, evaluates expected credit losses on HTM securities by security type, aggregated by similar risk characteristics, and considers historical credit loss information as adjusted for current conditions and supportable forecasts. See Note 3 for additional disclosures on HTM securities.

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NICOLET BANKSHARES, INC.

Notes to Consolidated Financial Statements

Other Investments: Other investments include equity securities with readily determinable fair values, “restricted” equity securities, and private company securities. At December 31, 2021, other investments included $5.7 million of equity securities which are carried at their readily determinable fair values, $32.1 million of “restricted“ equity securities, and $6.2 million of private company securities. As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are investments in other private companies that do not have quoted market prices, which are carried at cost less impairment charges, if any. Management’s evaluation of these other investments for impairment includes consideration of the financial condition and other available relevant information of the issuer.

Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value as determined on an aggregate basis and generally consist of current production of certain fixed-rate residential first mortgages. The amount by which cost exceeds fair value is recorded as a valuation allowance and charged to earnings. Changes, if any, in the valuation allowance are included in earnings in the period in which the change occurs. As of December 31, 2021 and 2020, no valuation allowance was necessary. Loans held for sale may be sold servicing retained or servicing released, and are generally sold without recourse. The carrying value of mortgage loans sold with servicing retained is reduced by the amount allocated to the servicing right at the time of sale. Gains and losses on sales of mortgage loans held for sale are included in earnings in mortgage income, net.

Loans – Originated: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their amortized cost basis, which is the unpaid principal amount outstanding, net of deferred loan fees and costs, and any direct principal charge-off. The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and report such accrued interest as part of accrued interest receivable and other assets on the consolidated balance sheets.

Interest income is accrued on the unpaid principal balance using the simple interest method. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower’s ability to meet payment of interest or principal when due. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal, though may be placed in such status earlier based on the circumstances. Loans past due 90 days or more may continue on accrual only when they are well secured and/or in process of collection or renewal. When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income. Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is paid in full. Accrual of interest may be resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a sustained period of time. See Note 4 for additional information and disclosures on loans.

Loans – Acquired: Loans purchased in acquisition transactions are acquired loans, and are recorded at their estimated fair value on the acquisition date.

Subsequent to January 1, 2020, acquired loans that have evidence of more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At acquisition, an estimate of expected credit losses is made for PCD loans. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair value to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors, resulting in a discount or premium that is amortized to interest income. For acquired loans not deemed PCD loans at acquisition, the difference between the initial fair value mark and the unpaid principal balance are recognized in interest income over the estimated life of the loans. In addition, an initial allowance for expected credit losses is estimated and recorded as provision expense at the acquisition date. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. See Note 4 for additional information and disclosures on loans.

Prior to January 1, 2020, the Company initially classified acquired loans as either purchased credit impaired (“PCI”) loans (i.e., loans that reflect credit deterioration since origination and for which it was probable at acquisition that the Company would be unable to collect all contractually required payments) or purchased non-impaired loans (i.e., “performing acquired loans”). The

52

NICOLET BANKSHARES, INC.

Notes to Consolidated Financial Statements

Company estimated the fair value of PCI loans based on the amount and timing of expected principal, interest and other cash flows for each loan. The excess of the loan’s contractual principal and interest payments over all cash flows expected to be collected at acquisition was considered an amount that should not be accreted. These credit discounts (“nonaccretable marks”) were included in the determination of the initial fair value for acquired loans; therefore, no allowance for credit losses was recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that were not credit-based (“accretable marks”) were subsequently accreted to interest income over the estimated life of the loans. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date resulted in a move of the discount from nonaccretable to accretable, while decreases in expected cash flows after the acquisition date were recognized through the provision for credit losses.

Allowance for Credit Losses - Loans: The ACL-Loans represents management’s estimate of expected credit losses over the lifetime of the loan based on loans in the Company’s loan portfolio at the balance sheet date. The Company estimates the ACL-Loans based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL-Loans. Estimating the amount of the ACL-Loans is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change. Actual credit losses, net of recoveries, are deducted from the ACL-Loans. Loans are charged-off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL-Loans. A provision for credit losses, which is a charge against income, is recorded to bring the ACL-Loans to a level that, in management’s judgment, is appropriate to absorb expected credit losses in the loan portfolio.

Prior to January 1, 2020, the Company used an incurred loss impairment model to estimate the ACL-Loans. This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors. Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan was collateral dependent. Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.

Effective January 1, 2020, the Company uses a current expected credit loss model (“CECL”) to estimate the ACL-Loans. This methodology also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL-Loans estimate under the CECL model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements; performs an individual evaluation of PCD and other credit-deteriorated loans; calculates the historical loss rates for the segmented loan pools; applies the loss rates over the calculated life of the pooled loans; adjusts for forecasted macro-level economic conditions; and determines qualitative adjustments based on factors and conditions unique to Nicolet’s portfolio.

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 numerous factors involves significant judgment.

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 PCD and other credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent 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. Next, 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. Management also 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

53

NICOLET BANKSHARES, INC.

Notes to Consolidated Financial Statements

supportable forecasts to assess the collectability of future cash flows. See Note 4 for additional information and disclosures on the ACL-Loans.

Allocations to the ACL-Loans may be made for specific loans but the entire ACL-Loans is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized. The allowance analysis is reviewed by the Board on a quarterly basis in compliance with internal and regulatory requirements.

Credit-Related Financial Instruments: In the ordinary course of business the Company has entered into financial instruments consisting of commitments to extend credit, financial standby letters of credit, and performance standby letters of credit. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Such financial instruments are recorded in the consolidated financial statements when they are funded. See Note 14 for additional information and disclosures on credit-related financial instruments.

Allowance for Credit Losses - Unfunded Commitments: In addition to the ACL-Loans, the Company has established an allowance for unfunded commitments, included in accrued interest payable and other liabilities on the consolidated balance sheets, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. The ACL-Unfunded Commitments is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans. See Note 4 for additional information on the ACL-Unfunded Commitments.

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

Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment from acquisitions were recorded at estimated fair value on the respective dates of acquisition. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Maintenance and repairs are expensed as incurred. See Note 5 for additional information on premises and equipment.

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

Building and improvements 25 – 40 years

Leasehold improvements 5 – 15 years

Furniture and equipment 3 – 10 years

Operating Leases: The Company accounts for its operating leases in accordance with ASC 842, Leases, which requires lessees to record almost all leases on the balance sheet as a right-of-use (“ROU”) asset and lease liability. The operating lease ROU asset represents the right to use an underlying asset during the lease term (included in accrued interest receivable and other assets on the consolidated balance sheets), while the operating lease liability represents the obligation to make lease payments arising from the lease (included in accrued interest payable and other liabilities on the consolidated balance sheets). The ROU asset and lease liability are recognized at lease commencement based on the present value of the remaining lease payments, considering a discount rate that represents Nicolet’s incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term and is recognized in occupancy, equipment, and office on the consolidated statements of income. See Note 5 for additional information and disclosures on operating leases.

Other Real Estate Owned (“OREO”): OREO acquired through partial or total satisfaction of loans or bank facilities no longer in use are carried at fair value less estimated costs to sell. Any write-down in the carrying value of loans or vacated bank premises at the time of transfer to OREO is charged to the ACL-Loans or to write-down of assets, respectively. OREO properties acquired in conjunction with acquisition transactions were recorded at fair value on the date of acquisition. Any subsequent write-downs to

54

NICOLET BANKSHARES, INC.

Notes to Consolidated Financial Statements

reflect current fair value, as well as gains or losses on disposition and revenues and expenses incurred to hold and maintain such properties, are treated as period costs. See Note 7 for additional information on OREO.

Goodwill and Other Intangibles: Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if certain events or circumstances occur. Other intangibles include core deposit intangibles (which represent the value of acquired customer core deposit bases) and customer list intangibles. The core deposit intangibles have an estimated finite life, are amortized on an accelerated basis over a 10-year period, and are subject to periodic impairment evaluation. The customer list intangibles have finite lives, are amortized on a straight-line basis to expense over their initial weighted average life of approximately 12 years as of acquisition, and are subject to periodic impairment evaluation. See Note 6 for additional information on goodwill and other intangibles.

Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. The Company’s annual assessments resulted in a $0.8 million impairment charge on goodwill in late 2019 for a change in business strategy, while no other impairment was indicated on the remaining goodwill and other intangibles for 2021 or 2020.

Mortgage Servicing Rights (“MSRs”): The Company sells originated residential mortgages into the secondary market and retains the right to service the loans sold. A mortgage servicing right asset (liability) is capitalized upon sale of such loans with the offsetting effect recorded as a gain (loss) on sale of loan in earnings (included in mortgage income, net), representing the then-current estimated fair value of future net cash flows expected to be realized for performing the servicing activities. MSRs when purchased (including MSRs purchased in acquisitions) are initially recorded at their then-estimated fair value. As the Company has not elected to measure any class of servicing assets under the fair value method, the Company utilizes the amortization method. MSRs are amortized in proportion to and over the period of estimated net servicing income, with the amortization charged to earnings (included in mortgage income, net). MSRs are carried at the lower of initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. Loan servicing fee income for servicing loans is typically based on a contractual percentage of the outstanding principal and is recorded as income when earned (included in mortgage income, net with less material late fees and ancillary fees related to loan servicing).

The Company periodically evaluates its MSRs for impairment. At each reporting date impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). The value of MSRs is adversely affected when mortgage interest rates decline and mortgage loan prepayments increase. A valuation allowance is established through a charge to earnings (included in mortgage income, net) to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification. If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings, though not beyond the net amortized cost carried. An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan payoff activity) is recognized as a write-down of the MSRs and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings. A direct write-down permanently reduces the carrying value of the MSRs and valuation allowance, precluding subsequent recoveries. See Note 6 for additional information on MSRs.

Loan Servicing Rights (“LSRs”): The Company acquired loan servicing rights in connection with its acquisition of County Bancorp, Inc. (“County”) on December 3, 2021 (see Note 2 for additional information on the County acquisition). The LSRs were recorded at estimated fair value upon acquisition, and are subsequently accounted for utilizing the amortization method. Thus, the LSRs are amortized in proportion to and over the period of estimated net servicing income, with the amortization charged to earnings. The LSRs are assessed for impairment at each reporting date based on estimated fair value. Impairment is determined by stratifying the rights into tranches based on predominant characteristics, such as interest rate, loan type, and investor type. A valuation allowance is established through a charge to earnings to the extent that estimated fair value is less than the carrying amount of the servicing assets for an individual tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment through either recovery or additions to the valuation allocance, with such changes reported as a component of loan servicing fees on the consolidated statements of income. Fair value in excess of the carrying amount of servicing assets is not recognized. The amortization of loan servicing rights is reflected net of loan servicing fee income. Loan servicing fee income for

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servicing loans is based on a contractual percentage of the outstanding principal and is recorded as income when earned. See Note 6 for additional information on LSRs.

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

Stock-based Compensation: Stock-based payments to employees, including grants of restricted stock or stock options, are valued at fair value of the award on the date of grant and expensed on a straight-line basis as compensation expense over the applicable vesting period. A Black-Scholes model is utilized to estimate the fair value of stock options and the quoted market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. See Note 11 for additional information on stock-based compensation.

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

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

The Company may also recognize a liability for unrecognized tax benefits from uncertainty in income tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. At December 31, 2021, the Company determined it had no significant uncertainty in income tax positions. Interest and penalties related to unrecognized tax benefits are classified as income tax expense. See Note 13 for additional information on income taxes.

Earnings per Common Share: Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares adjusted for the dilutive effect of outstanding common stock awards, if any. See Note 20 for additional information on earnings per common share.

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

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

Revenue Recognition: Accounting principles (Revenue from Contracts with Customers, Topic 606) require that an entity recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the

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Notes to Consolidated Financial Statements

entity expects to be entitled in exchange for those goods and services. The guidance includes a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when or as the performance obligation is satisfied. See Note 21 for additional information on revenue recognition.

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

Reclassifications: Certain amounts in the 2020 and 2019 consolidated financial statements have been reclassified to conform to the 2021 presentation.

NOTE 2. ACQUISITIONS

Completed Acquisitions:

County Bancorp, Inc. (“County”): On December 3, 2021, Nicolet completed its merger with County, pursuant to the terms of the Agreement and Plan of Merger dated June 22, 2021 (the “County Merger Agreement”), at which time County merged with and into Nicolet, and Investors Community Bank, the wholly owned bank subsidiary of County, was merged with and into the Bank.

Pursuant to the County Merger Agreement, each share of County common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the shareholder, either cash of $37.18 or 0.48 shares of Nicolet common stock, subject to proration procedures such that 1,237,000 shares of County common stock were exchanged for cash, and the remaining shares were exchanged for Nicolet common stock. As a result, Nicolet issued approximately 2.4 million shares of Nicolet common stock for stock consideration of $176 million and cash consideration of $48 million, or a total purchase price of $224 million. With the County merger, Nicolet became the premier agriculture lender throughout Wisconsin.

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Notes to Consolidated Financial Statements

A summary of the assets acquired and liabilities assumed in the County transaction, as of the acquisition date, including the preliminary purchase price allocation was as follows.

Assets Acquired:

Cash and cash equivalents $ 20 $ — $ 20

Premises and equipment 21 (4) 17

Core deposit intangible — 7 7

Loan servicing rights 20 — 20

Other assets 6 (2) 4

Liabilities Assumed:

Other liabilities 8 — 8

Net assets acquired $ 155

Purchase Price:

Nicolet common stock issued (in shares) 2,366,243

Value of Nicolet common stock consideration $ 176

Cash consideration paid 48

Total purchase price $ 224

Write-off prior investment in County (1)

Preliminary goodwill $ 70

The Company purchased loans through the acquisition of County for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (purchased credit deteriorated loans or “PCD” loans). The carrying amount of these loans at acquisition was as follows.

(In thousands) December 3, 2021

Purchase price of PCD loans at acquisition $ 64,948

Allowance for credit losses on PCD loans at acquisition 3,262

Par value of PCD acquired loans at acquisition $ 68,210

The Company accounted for the County acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of County prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Due to the timing of the merger, the purchase price allocation and estimated fair value measurements remain preliminary. Goodwill arising as a result of the County acquisition is not deductible for tax purposes. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction over the next few months, within one year of the merger. Therefore, adjustments to the purchase price allocation and estimated fair value may occur.

Mackinac Financial Corporation (“Mackinac”): On September 3, 2021, Nicolet completed its merger with Mackinac, pursuant to the terms of the Agreement and Plan of Merger dated April 12, 2021 (the “Mackinac Merger Agreement”), at which time Mackinac merged with and into Nicolet, and mBank, the wholly owned bank subsidiary of Mackinac, was merged with and into the Bank.

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Notes to Consolidated Financial Statements

Pursuant to the Mackinac Merger Agreement, Mackinac shareholders received fixed consideration of 0.22 shares of Nicolet common stock and $4.64 in cash for each share of Mackinac common stock owned (approximating 20% in cash and 80% in stock), resulting in the issuance of 2.3 million shares of Nicolet common stock for stock consideration of $180 million and cash consideration of $49 million, or a total purchase price of $229 million. The Mackinac merger expands Nicolet prominently into Northern Michigan and the Upper Peninsula of Michigan, and adds to Nicolet’s presence in upper northeastern Wisconsin.

A summary of the assets acquired and liabilities assumed in the Mackinac transaction, as of the acquisition date, including the preliminary purchase price allocation was as follows.

Assets Acquired:

Cash and cash equivalents $ 448 $ — $ 448

Investment securities 104 — 104

ACL-Loans (6) 4 (2)

Premises and equipment 24 (3) 21

Other intangibles 4 3 7

Liabilities Assumed:

Net assets acquired $ 147

Purchase Price:

Nicolet common stock issued (in shares) 2,337,230

Value of Nicolet common stock consideration $ 180

Cash consideration paid 49

Total purchase price $ 229

Write-off prior investment in Mackinac (2)

Preliminary goodwill $ 84

The Company purchased loans through the acquisition of Mackinac for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (PCD loans). The carrying amount of these loans at acquisition was as follows.

(In thousands) September 3, 2021

Purchase price of PCD loans at acquisition $ 10,605

Allowance for credit losses on PCD loans at acquisition 1,896

Par value of PCD acquired loans at acquisition $ 12,501

The Company accounted for the Mackinac acquisition under the acquisition method of accounting, and thus, the financial position and results of operations of Mackinac prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition. The estimated fair value was determined with the assistance of third party valuations, appraisals, and third party advisors. Due to the timing of the merger, the purchase price allocation and estimated fair value measurements remain preliminary. Goodwill arising as a result of the Mackinac acquisition is not deductible for tax purposes. Management will continue

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Notes to Consolidated Financial Statements

to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction over the next few months, within one year of the merger. Therefore, adjustments to the purchase price allocation and estimated fair value may occur.

Summary Unaudited Pro Forma Information:The following unaudited pro forma information is presented for illustrative purposes only, and gives effect to the acquisitions of County and Mackinac as if the acquisitions had occurred on January 1, 2019, the beginning of the earliest period presented. The pro forma information should not be relied upon as being indicative of the historical results of operations the companies would have had if the acquisitions had occurred before such periods or the future results of operations that the companies will experience as a result of the mergers. The pro forma information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related expenses, or other factors that may result as a consequence of the mergers and, accordingly, does not attempt to predict or suggest future results.

Years Ended

Diluted earnings per common share $ 5.91 $ 5.21 $ 5.13

Advantage Community Bancshares, Inc. (“Advantage”): On August 21, 2020, Nicolet completed its merger with Advantage, pursuant to the terms of the definitive merger agreement dated March 2, 2020, whereby Advantage merged with and into Nicolet, and Advantage Community Bank, the wholly owned bank subsidiary of Advantage, was merged with and into the Bank. Advantage’s four branches in Dorchester, Edgar, Mosinee, and Wausau opened as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and the Wausau area. Due to the small size of the transaction, terms of the all-cash deal were not disclosed.

Upon consummation, Advantage added total assets of approximately $172 million (representing 4% of Nicolet’s then pre-merger asset size), loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, and goodwill of $12 million.

Choice Bancorp, Inc. (“Choice”): On November 8, 2019, the Company consummated its merger with Choice, pursuant to the terms of the Agreement and Plan of Merger dated June 26, 2019, (the “Choice Merger Agreement”), whereby Choice (at 12% of Nicolet’s then pre-merger asset size) was merged with and into Nicolet, and Choice Bank, the wholly owned bank subsidiary of Choice, was merged with and into the Bank. The system integration was completed, and the two branches of Choice opened on November 12, 2019, as Nicolet National Bank branches, expanding its presence in the Oshkosh marketplace. The Company closed its legacy Oshkosh location concurrently with the consummation of the Choice merger.

The purpose of the merger was to continue Nicolet’s interest in strategic growth, consistent with its plan to improve profitability through efficiency, leverage the strengths of each bank across the combined customer base, and add shareholder value. With the merger, Nicolet became the leading community bank to serve the Oshkosh marketplace.

Pursuant to the Choice Merger Agreement, the final purchase price consisted of issuing 1,184,102 shares of the Company’s common stock (given the final stock-for-stock exchange ratio of 0.497, and not exchanging the Choice shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $79.8 million (based on $67.39 per share, the volume weighted average closing price of the Company’s common stock over the preceding 30 trading day period) plus cash consideration of $1.7 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.

Upon consummation, Choice added $457 million in assets, including $348 million in loans, $289 million in deposits, $1.7 million in core deposit intangible, and $45 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Choice prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition.

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Notes to Consolidated Financial Statements

Terminated Acquisition:

Commerce Financial Holdings, Inc. (“Commerce”): On February 17, 2020, Nicolet entered into a definitive merger agreement (“Merger Agreement”) with Commerce pursuant to which Nicolet would acquire Commerce and its wholly owned bank subsidiary, Commerce State Bank. On May 18, 2020, Nicolet and Commerce announced a mutual agreement to terminate their Merger Agreement. Nicolet paid Commerce $0.5 million and surrendered its $0.1 million of Commerce common stock.

NOTE 3. INVESTMENT SECURITIES

Investment securities are classified as AFS or HTM on the consolidated balance sheets at the time of purchase. AFS securities include those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, and are carried at fair value on the consolidated balance sheets. HTM securities include those securities which the Company has both the positive intent and ability to hold to maturity, and are carried at amortized cost on the consolidated balance sheets. See Note 1 for the Company’s accounting policy on investment securities.

During 2021, the Company purchased approximately $500 million of 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, a portion of the investment securities acquired with County and Mackinac were designated as HTM at acquisition. The amortized cost and fair value of securities available for sale and held to maturity are summarized as follows.

Securities AFS:

Securities HTM:

Corporate debt securities — — — — — %

Securities AFS:

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Notes to Consolidated Financial Statements

Investment securities with a carrying value of $277 million and $146 million as of December 31, 2021 and 2020, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on investment securities totaled $4.6 million and $2.3 million at December 31, 2021 and 2020, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

Management evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. As of December 31, 2021 and 2020, no allowance for credit losses on securities AFS was recognized. There were no other-than-temporary impairment charges recognized in earnings on securities AFS during 2019.

Management evaluates securities HTM on a quarterly basis to determine whether an allowance for credit losses is necessary. In making this determination, management considers the facts and circumstances of the underlying investment securities. The U.S. government agency securities include U.S. Treasury Notes which are guaranteed by the U.S. government. For the state, county and municipal securities, management considers issuer bond ratings, historical loss rates by bond ratings, whether issuers continue to make timely principal and interest payments per the contractual terms of the investment securities, internal forecasts, and whether or not such investment securities provide insurance, other credit enhancement, or are pre-refunded by the issuers. For the mortgage-backed securities, all such securities were issued by U.S. government agencies and corporations, which are currently explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. Therefore, management determined no allowance for credit losses was necessary for the securities HTM.

The following tables present gross unrealized losses and the related estimated fair value of investment securities for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time the individual securities have been in a continuous unrealized loss position.

Less than 12 months 12 months or more Total

Securities AFS:

Securities HTM:

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Notes to Consolidated Financial Statements

Less than 12 months 12 months or more Total

Securities AFS:

The amortized cost and fair value of investment securities by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; as this is particularly inherent in mortgage-backed securities, these securities are not included in the maturity categories below. See Note 18 for additional information on the Company’s fair value measurements.

As of December 31, 2021 Securities AFS Securities HTM

(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value

Proceeds and realized gains / losses from the sale of securities AFS were as follows.

Years Ended December 31,

Gains (losses) on sales of securities AFS, net $ (283) $ 395 $ (22)

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Notes to Consolidated Financial Statements

NOTE 4. LOANS, ALLOWANCE FOR CREDIT LOSSES - LOANS, AND CREDIT QUALITY

Loans:

The loan composition was as follows.

(in thousands) Amount % of Total Amount % of Total

ACL-Loans to loans 1.07 % 1.15 %

Accrued interest on loans totaled $11 million and $7 million at December 31, 2021 and December 31, 2020, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note 1 for the Company’s accounting policy on loans and the allowance for credit losses.

Allowance for Credit Losses-Loans:

The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.

A roll forward of the allowance for credit losses - loans was as follows.

Years Ended December 31,

Adoption of CECL — 8,488 —

Initial PCD ACL — 797 —

Total impact for adoption of CECL — 9,285 —

ACL on PCD loans acquired 5,159 — —

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Notes to Consolidated Financial Statements

The following table presents the balance and activity in the ACL-Loans by portfolio segment.

ACL-Loans *

* The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.

For comparison purposes, the following table presents the balance and activity in the ACL-Loans by portfolio segment for the prior year-end period.

ACL-Loans *

Initial PCD ACL 797 — — — — — — — — 797

The ACL-Loans was estimated using the current expected credit loss model. See Note 1 for the Company’s accounting policy on loans and the allowance for credit losses.

Allowance for Credit Losses-Unfunded Commitments:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded Commitments of $2.4 million at December 31, 2021, classified in accrued interest payable and other liabilities on the consolidated balance sheets. See Note 1 for the Company’s accounting policy on the allowance for credit losses-unfunded commitments.

Provision for Credit Losses:

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments (including, loans, investment securities, and off-balance sheet credit exposures) after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. See Note 3 for additional information regarding the ACL related to investment securities. The following table presents the components of the provision for credit losses.

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Notes to Consolidated Financial Statements

Years Ended December 31,

Provision for credit losses on:

Unfunded commitments 2,400 — —

Investment securities — — —

Collateral Dependent Loans:

A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.

December 31, 2021 Collateral Type

PPP loans — — — — — —

Residential construction — — — — — —

Residential junior mortgage — — — — — —

Retail & other — — — — — —

December 31, 2020 Collateral Type

PPP loans — — — — — —

Construction & land development 308 — 308 308 — —

Residential construction — — — — — —

Residential first mortgage — — — — — —

Residential junior mortgage — — — — — —

Retail & other — — — — — —

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Notes to Consolidated Financial Statements

Past Due and Nonaccrual Loans:

The following tables present past due loans by portfolio segment.

Percent of total loans — % 0.4 % 99.6 % 100.0 %