UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2018~~2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37700

NICOLET BANKSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)



WISCONSIN (State or Other Jurisdiction of Incorporation or Organization)	47-0871001 (I.R.S. Employer Identification No.)

111 North Washington Street Green Bay, Wisconsin (Address of Principal Executive Offices)	54301 (Zip Code)

(920) 430-1400 (Registrant’s Telephone Number, Including Area Code)

N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NCBS	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ¨	Accelerated filer x

Non-accelerated filer ¨	Smaller reporting company ¨

Emerging Growth Company x¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of ~~October~~July 31, ~~2018~~2019 there were ~~9,525,855~~9,345,621 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

Quarterly Report on Form 10-Q

June 30, 2019

TABLE OF CONTENTS



			PAGE
PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Balance Sheets ~~September 30, 2018 (unaudited) and December 31, 2017~~	3

		Consolidated Statements of Income ~~Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)~~	4

		Consolidated Statements of Comprehensive Income ~~Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)~~	5

		Consolidated ~~Statement~~Statements of Stockholders’ Equity ~~Nine Months Ended September 30, 2018 (unaudited)~~	6

		Consolidated Statements of Cash Flows ~~Nine Months Ended September 30, 2018 and 2017 (unaudited)~~	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2927

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4544

	Item 4.	Controls and Procedures	4544

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	4644

	Item 1A.	Risk Factors	4644

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4644

	Item 3.	Defaults Upon Senior Securities	4645

	Item 4.	Mine Safety Disclosures	4645

	Item 5.	Other Information	4645

	Item 6.	Exhibits	4745

		Signatures	4846

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)


	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
Assets
Cash and due from banks	$	60,346		$	86,191		$	75,074		$	85,896
Interest-earning deposits	100,066			68,008			79,846			163,630
Federal funds sold	743			734
Cash and cash equivalents	161,155			154,933			154,920			249,526
Certificates of deposit in other banks	995			1,746			5,396			993
Securities available for sale (“AFS”), at fair value	410,911			405,153			403,989			400,144
Other investments	17,479			14,837			19,841			17,997
Loans held for sale	2,593			4,666			4,699			1,639
Loans	2,143,457			2,087,925			2,203,273			2,166,181
Allowance for loan losses	(12,992		)	(12,653		)
Allowance for loan losses ("ALLL")							(13,571		)	(13,153		)
Loans, net	2,130,465			2,075,272			2,189,702			2,153,028
Premises and equipment, net	47,305			47,151			49,109			48,173
Bank owned life insurance (“BOLI”)	65,820			64,453			69,222			66,310
Goodwill and other intangibles, net	125,360			128,406			122,285			124,307
Accrued interest receivable and other assets	38,819			35,816			35,650			34,418
Total assets	$	3,000,902		$	2,932,433		$	3,054,813		$	3,096,535

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	664,788		$	631,831		$	743,380		$	753,065
Interest-bearing deposits	1,857,368			1,839,233			1,793,259			1,861,073
Total deposits	2,522,156			2,471,064			2,536,639			2,614,138
Short-term borrowings	—			—
Long-term borrowings	77,241			78,046			77,432			77,305
Accrued interest payable and other liabilities	23,602			18,444			28,594			17,740
Total liabilities	2,622,999			2,567,554			2,642,665			2,709,183

Stockholders’ Equity:
Common stock	96			98			94			95
Additional paid-in capital	251,631			263,835			234,963			247,790
Retained earnings	133,501			102,391			173,180			144,364
Accumulated other comprehensive loss	(8,057		)	(2,146		)
Accumulated other comprehensive income (loss)							3,178			(5,640		)
Total Nicolet Bankshares, Inc. stockholders’ equity	377,171			364,178			411,415			386,609
Noncontrolling interest	732			701			733			743
Total stockholders’ equity and noncontrolling interest	377,903			364,879			412,148			387,352
Total liabilities, noncontrolling interest and stockholders’ equity	$	3,000,902		$	2,932,433		$	3,054,813		$	3,096,535

Preferred shares authorized (no par value)	10,000,000			10,000,000			10,000,000			10,000,000
Preferred shares issued and outstanding	—			—			—			—
Common shares authorized (par value $0.01 per share)	30,000,000			30,000,000			30,000,000			30,000,000
Common shares outstanding	9,576,644			9,818,247			9,327,420			9,495,265
Common shares issued	9,604,160			9,849,167			9,351,359			9,524,777

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Interest income:
Loans, including loan fees	$	28,997	$	27,329	$	84,644	$	73,098	$	31,209	$	27,193	$	61,177	$	55,647
Investment securities:
Taxable	1,564		1,114		4,503		3,422		2,041		1,597		3,674		2,939
Tax-exempt	572		604		1,737		1,761		522		577		1,071		1,165
Other interest income	747		407		2,326		1,136		798		1,178		1,807		1,579
Total interest income	31,880		29,454		93,210		79,417		34,570		30,545		67,729		61,330
Interest expense:
Deposits	4,055		2,364		11,012		5,216		4,730		3,868		9,507		6,957
Short-term borrowings	—		—		8		72		—		5		—		8
Long-term borrowings	883		699		2,571		1,894		896		869		1,803		1,688
Total interest expense	4,938		3,063		13,591		7,182		5,626		4,742		11,310		8,653
Net interest income	26,942		26,391		79,619		72,235		28,944		25,803		56,419		52,677
Provision for loan losses	340		975		1,360		1,875		300		510		500		1,020
Net interest income after provision for loan losses	26,602		25,416		78,259		70,360		28,644		25,293		55,919		51,657
Noninterest income:
Trust services fee income	1,638		1,479		4,915		4,431		1,569		1,671		3,037		3,277
Brokerage fee income	1,732		1,500		5,074		4,192		2,002		1,738		3,812		3,342
Mortgage income, net	1,902		1,774		4,510		4,022		2,059		1,528		3,262		2,608
Service charges on deposit accounts	1,247		1,238		3,637		3,367		1,194		1,200		2,364		2,390
Card interchange income	1,481		1,225		4,082		3,378		1,660		1,358		3,080		2,601
BOLI income	1,019		459		1,929		1,314		880		468		1,339		910
Rent income	303		285		951		852
Asset gains (losses), net	146		1,305		1,322		2,071		7,572		972		7,744		1,176
Other income	1,181		899		3,292		2,391		1,624		1,304		3,108		2,759
Total noninterest income	10,649		10,164		29,712		26,018		18,560		10,239		27,746		19,063
Noninterest expense:
Personnel	12,983		11,488		38,149		32,404		15,358		12,674		27,895		25,166
Occupancy, equipment and office	3,660		3,559		10,901		9,613		3,757		3,454		7,507		7,241
Business development and marketing	1,334		1,113		4,139		3,359		1,579		1,463		2,860		2,805
Data processing	2,375		2,238		7,094		6,428		2,350		2,399		4,705		4,719
FDIC expense	245		205		800		582
Intangibles amortization	1,054		1,173		3,336		3,514		969		1,100		2,022		2,282
Other expense	1,393		1,086		3,718		3,598		1,714		1,361		3,497		2,880
Total noninterest expense	23,044		20,862		68,137		59,498		25,727		22,451		48,486		45,093
Income before income tax expense	14,207		14,718		39,834		36,880		21,477		13,081		35,179		25,627
Income tax expense	3,268		5,133		9,431		12,605		2,833		3,255		6,185		6,163
Net income	10,939		9,585		30,403		24,275		18,644		9,826		28,994		19,464
Less: Net income attributable to noncontrolling interest	80		74		230		228		95		89		178		150
Net income attributable to Nicolet Bankshares, Inc.	$	10,859	$	9,511	$	30,173	$	24,047	$	18,549	$	9,737	$	28,816	$	19,314

Earnings per common share:
Basic	$	1.13	$	0.97	$	3.12	$	2.58	$	1.98	$	1.01	$	3.06	$	1.99
Diluted	$	1.09	$	0.91	$	3.02	$	2.45	$	1.91	$	0.98	$	2.97	$	1.93

Weighted average common shares outstanding:
Basic	9,633,158		9,836,646		9,678,726		9,316,814		9,374,348		9,639,098		9,417,676		9,701,888
Diluted	9,949,295		10,408,683		10,004,316		9,820,724		9,692,378		9,969,854		9,710,827		10,032,304

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net income	$	10,939		$	9,585		$	30,403		$	24,275		$	18,644		$	9,826		$	28,994		$	19,464
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses) arising during the period	(1,836		)	834			(6,814		)	5,685
Reclassification adjustment for net gains included in income	—			(1,222		)	—			(1,220		)
Net unrealized holding gains (losses)													4,401			(320		)	12,112			(4,978		)
Net realized (gains) losses included in income													(19		)	—			(32		)	—
Income tax (expense) benefit	497			125			1,840			(1,741		)	(1,183		)	86			(3,262		)	1,343
Total other comprehensive income (loss)	(1,339		)	(263		)	(4,974		)	2,724			3,199			(234		)	8,818			(3,635		)
Comprehensive income	$	9,600		$	9,322		$	25,429		$	26,999		$	21,843		$	9,592		$	37,812		$	15,829

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated ~~Statement~~Statements of Stockholders’ Equity

(In thousands) (Unaudited)


	Nicolet Bankshares, Inc. Stockholders’ Equity																	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Noncontrolling Interest			Total			Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total
Balance December 31, 2017	$	98		$	263,835		$	102,391	$	(2,146	)	$	701		$	364,879
Balance, December 31, 2017																		$	98		$	263,835		$	102,391	$	(2,146	)	$	701		$	364,879
Comprehensive income:
Net income	—			—			30,173		—			230			30,403			—			—			9,577		—			61			9,638
Other comprehensive loss	—			—			—		(4,974		)	—			(4,974		)
Other comprehensive income (loss)																		—			—			—		(3,401		)	—			(3,401		)
Stock-based compensation expense	—			3,613			—		—			—			3,613			—			1,220			—		—			—			1,220
Exercise of stock options	1			1,223			—		—			—			1,224
Exercise of stock options, net																		—			427			—		—			—			427
Issuance of common stock	—			167			—		—			—			167			—			51			—		—			—			51
Purchase and retirement of common stock	(3		)	(17,207		)	—		—			—			(17,210		)	(1		)	(8,063		)	—		—			—			(8,064		)
Distribution to noncontrolling interest	—			—			—		—			(199		)	(199		)	—			—			—		—			(99		)	(99		)
Adoption of ASU 2016-01 (See Notes 1 and 5)	—			—			937		(937		)	—			—
Balance, September 30, 2018	$	96		$	251,631		$	133,501	$	(8,057	)	$	732		$	377,903
Adoption of new accounting pronouncement																		—			—			937		(937		)	—			—
Balance, March 31, 2018																		$	97		$	257,470		$	112,905	$	(6,484	)	$	663		$	364,651
Comprehensive income:
Net income																		—			—			9,737		—			89			9,826
Other comprehensive income (loss)																		—			—			—		(234		)	—			(234		)
Stock-based compensation expense																		—			1,094			—		—			—			1,094
Exercise of stock options, net																		—			535			—		—			—			535
Issuance of common stock																		—			57			—		—			—			57
Purchase and retirement of common stock																		(1		)	(4,592		)	—		—			—			(4,593		)
Distribution to noncontrolling interest																		—			—			—		—			(51		)	(51		)
Balance, June 30, 2018																		$	96		$	254,564		$	122,642	$	(6,718	)	$	701		$	371,285

Balance, December 31, 2018																		$	95		$	247,790		$	144,364	$	(5,640	)	$	743		$	387,352
Comprehensive income:
Net income																		—			—			10,267		—			83			10,350
Other comprehensive income (loss)																		—			—			—		5,619			—			5,619
Stock-based compensation expense																		—			1,108			—		—			—			1,108
Exercise of stock options, net																		—			698			—		—			—			698
Issuance of common stock																		—			148			—		—			—			148
Purchase and retirement of common stock																		(1		)	(5,681		)	—		—			—			(5,682		)
Balance, March 31, 2019																		$	94		$	244,063		$	154,631	$	(21	)	$	826		$	399,593
Comprehensive income:
Net income																		—			—			18,549		—			95			18,644
Other comprehensive income (loss)																		—			—			—		3,199			—			3,199
Stock-based compensation expense																		—			1,391			—		—			—			1,391
Exercise of stock options, net																		2			2,482			—		—			—			2,484
Issuance of common stock																		—			135			—		—			—			135
Purchase and retirement of common stock																		(2		)	(13,108		)	—		—			—			(13,110		)
Distribution to noncontrolling interest																		—			—			—		—			(188		)	(188		)
Balance, June 30, 2019																		$	94		$	234,963		$	173,180	$	3,178		$	733		$	412,148

See accompanying notes to unaudited consolidated financial statements.

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows (Unaudited)


(In thousands)	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Cash Flows From Operating Activities:
Net income	$	30,403		$	24,275		$	28,994		$	19,464
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	4,643			7,038			3,194			3,121
Provision for loan losses	1,360			1,875			500			1,020
Increase in cash surrender value of life insurance	(1,367		)	(1,314		)	(938		)	(910		)
Stock-based compensation expense	3,613			1,871			2,499			2,314
Asset (gains) losses, net	(1,322		)	(2,071		)	(7,744		)	(1,176		)
Gain on sale of loans held for sale, net	(4,026		)	(3,614		)	(3,246		)	(2,235		)
Proceeds from sale of loans held for sale	184,314			164,726			120,753			115,515
Origination of loans held for sale	(178,911		)	(164,806		)	(121,438		)	(114,926		)
Net change in:
Accrued interest receivable and other assets	(4,952		)	239			(6,595		)	(3,223		)
Accrued interest payable and other liabilities	6,798			1,733			3,135			1,054
Net cash provided by operating activities	40,553			29,952			19,114			20,018
Cash Flows From Investing Activities:
Net increase in loans	(50,703		)	(126,499		)	(34,459		)	(37,458		)
Net decrease in certificates of deposit in other banks	751			1,490
Net (increase) decrease in certificates of deposit in other banks							(4,403		)	499
Purchases of securities AFS	(57,891		)	(49,119		)	(29,087		)	(33,697		)
Proceeds from sales of securities AFS	—			10,798			13,240			—
Proceeds from calls and maturities of securities AFS	40,302			34,426			23,055			27,657
Purchases of other investments	(634		)	(3,256		)	(1,373		)	(629		)
Proceeds from sales of other investments	807			6,519			17,144			386
Purchases of BOLI							(2,000		)	—
Proceeds from redemption of BOLI	561			—			428			—
Net increase in premises and equipment	(2,974		)	(2,958		)
Net decrease in other real estate and other assets	1,486			2,470
Net cash received in business combination	—			9,119
Net cash used by investing activities	(68,295		)	(117,010		)
Net (increase) decrease in premises and equipment							(3,137		)	(814		)
Net (increase) decrease in other real estate and other assets							15			1,486
Net cash provided by (used in) investing activities							(20,577		)	(42,570		)
Cash Flows From Financing Activities:
Net increase in deposits	51,171			22,054
Net increase in short-term borrowings	—			12,900
Proceeds from long-term borrowings	—			30,000
Net increase (decrease) in deposits							(77,499		)	(15,449		)
Repayments of long-term borrowings	(1,189		)	(4,487		)	(129		)	(1,126		)
Purchase and retirement of common stock	(17,210		)	(7,462		)	(18,792		)	(12,657		)
Capitalized issuance costs, net	—			(186		)
Proceeds from issuance of common stock	167			175			283			108
Proceeds from exercise of stock options	1,224			1,064			3,182			962
Distribution to noncontrolling interest	(199		)	—			(188		)	(150		)
Net cash provided by financing activities	33,964			54,058
Net cash provided by (used in) financing activities							(93,143		)	(28,312		)
Net increase (decrease) in cash and cash equivalents	6,222			(33,000		)	(94,606		)	(50,864		)
Cash and cash equivalents:
Beginning	154,933			129,103			249,526			154,933
Ending *	$	161,155		$	96,103		$	154,920		$	104,069
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	13,294		$	7,117		$	11,091		$	8,574
Cash paid for taxes	9,325			8,805			6,340			5,325
Transfer of loans and bank premises to other real estate owned	587			828			—			537
Capitalized mortgage servicing rights	696			679			871			275
Transfer of loans from held for sale to held for investment	—			3,236
Acquisitions:
Fair value of assets acquired	$	—		$	439,000
Fair value of liabilities assumed	—			398,000
Net assets acquired	—			41,000
Initial recognition of operating lease right of use asset							5,403			—
Initial recognition of operating lease liability							5,403			—

* Cash and cash equivalents include restricted cash of ~~$7.4~~$5.8 million and ~~$2.4~~$6.8 million at ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, for the reserve balance required with the Federal Reserve Bank. At June 30, 2019, cash and cash equivalents also includes restricted cash of $950,000 pledged as collateral on interest rate swaps.

See accompanying notes to unaudited consolidated financial statements.

NICOLET BANKSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

General

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated balance sheets, statements of income, comprehensive income, changes in stockholders’ equity and cash flows of Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) and its subsidiaries, for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions and balances have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Critical Accounting Policies and 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 loan losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary 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 loan losses, the 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, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Recent Accounting Developments Adopted

In ~~May~~August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2017-09,~~2017-12, ~~Compensation – Stock Compensation~~Derivatives and Hedging (Topic ~~718)~~815): Targeted Improvements to Accounting for Hedging Activities. ASU ~~2017-09 applies to entities~~2017-12 expands the activities that ~~change~~qualify for hedge accounting and simplifies the terms or conditions of a share-based payment award to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification to the terms and conditions of a share-based payment award.rules for reporting hedging transactions. The updated guidance ~~was~~is effective for interim and annual reporting periods beginning after December 15, ~~2017.~~2018, with early adoption permitted. The Company adopted the updated guidance effective January 1, ~~2018~~2019 with no material impact on its consolidated financial ~~statements.~~statements, because the Company does not have any significant derivatives and does not currently apply hedge accounting to derivatives.

In ~~January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~, to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The update narrows the definition of a business by adding three principal clarifications: (1) if substantially all the fair value of the gross assets in the asset group is concentrated in either a single identifiable asset or group of similar identifiable assets the transaction does not involve a business, (2) if the asset group does not include a minimum of an input and a substantive process, it does not represent a business, and (3) if the integrated set of activities (including its inputs and processes) does not create, or have the ability to create, goods or services to customers, investment income (e.g., dividends or interest) or other revenue, it is not a business. The overall intention is to provide consistency in applying the guidance and make the definition of a business more operable. This update was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied prospectively. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

~~In November~~February 2016, the FASB issued ASU ~~2016-18,~~2016-02, ~~Statement of Cash Flows~~Leases (Topic ~~230): Restricted Cash~~ to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows to reduce diversity in practice. The amendment requires that a statement of cash flow explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included in cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the statement of cash flow. This amendment was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied retrospectively to each period presented. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements. See the consolidated statements of cash flows for additional disclosures related to this ASU.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts~~ to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on specific cash flow issues, including: debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, and distributions received from equity method investees. The amendments were effective for public business entities for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment also requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. This amendment was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities were required to apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted the updated guidance effective January 1, 2018 and recognized a cumulative-effect adjustment at adoption of approximately $0.9 million for the after tax impact of the unrealized gain on equity securities. See the consolidated statement of stockholders’ equity and Note 5 for additional disclosures related to this ASU.

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~842), with several subsequent ~~updates~~. ~~The core principle of~~updates. Topic 842 introduced a new accounting model for lessors and lessees. For lessees, almost all leases are now recognized on the ~~guidance is that an entity should recognize revenue to depict the transfer of promised goods~~balance sheet as a right-of-use ("ROU") asset and ~~services to customers in an amount that reflects the consideration to~~lease liability, unlike previous GAAP which ~~the entity expects~~required only capital leases to be ~~entitled in exchange for those goods~~recognized on the balance sheet. The accounting applied by lessors is largely unchanged from existing guidance. Topic 842 also requires additional disclosures concerning the amount, timing and ~~services. Topic 606 provides a five-step model to apply to revenue recognition, consisting~~uncertainty 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 obligationcash flows arising from leases. The updated guidance is ~~satisfied. The guidance was~~ effective for annual reporting periods beginning after December 15, ~~2017, including interim periods within~~2018, and provides a modified retrospective transition approach that ~~reporting period. The Company~~allows lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption (the "effective date" method), with the option to elect certain practical expedients. Nicolet adopted the ~~updated~~new guidance prospectively as of January 1, 2019, using the ~~modified retrospective approach~~ effective ~~January 1, 2018, with~~date method; thus, prior comparative periods have not been restated.

Upon adoption, Nicolet recognized an ROU asset and lease liability of approximately $5 million. There was no ~~material~~ impact onto its consolidated ~~financial statements.~~statements of income or cash flows compared to the prior lease accounting model. The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. As part of the adoption, Nicolet elected the package of practical expedients permitted under the transition guidance of the new standard which allowed the carry forward of the historical lease classification. Nicolet also elected the practical expedient to group lease and non-lease components as a single lease component; thus, the Company's leases include both lease (e.g., fixed payments including rent, taxes, and insurance

costs) and non-lease components (e.g., common area or other maintenance costs). See Note 10 for the new disclosures ~~related to~~required by Topic ~~606.~~

~~Operating Segment~~

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.842.

Reclassifications

Certain amounts in the ~~2017~~2018 consolidated financial statements have been reclassified to conform to the ~~2018~~2019 presentation.

Note 2 – ~~Acquisitions~~Pending Acquisition

During the third quarter of 2018, Nicolet purchased a small brokerage book of business from a retiring financial advisor in support of the Company's initiative to expand its wealth management business. As a result of this purchase, the Company recorded a customer list intangible of $290,000 which will be amortized on a straight-line basis.

On ~~April 28, 2017, the Company consummated its~~June 26, 2019, Nicolet entered into a definitive merger agreement with ~~First Menasha Bancshares,~~Choice Bancorp, Inc. ~~(“First Menasha”~~("Choice" (OTC Pink "CBKW")) pursuant to the Agreement and Plan of Merger by and between the Company and First Menasha dated November 3, 2016, (the “Merger Agreement”), whereby First Menasha was merged with and into the Company, and The First National Bank-Fox Valley, the wholly

~~owned commercial bank subsidiary of First Menasha serving the Fox Valley area of Wisconsin, was merged~~which Choice will merge with and into Nicolet ~~National Bank (the “Bank”).~~to create the largest community bank in the Oshkosh, Wisconsin marketplace. The ~~system integration was completed,~~acquisition will involve stock-for-stock consideration at a fixed exchange ratio, subject to cap and ~~five branches of First Menasha opened on May 1, 2017, as Nicolet National Bank branches, expanding its presence~~collar provisions provided for in ~~Calumet and Winnebago Counties, Wisconsin. The Company closed one of its Calumet County locations concurrently with the First Menasha merger.~~

~~The purpose of~~ the merger ~~was~~agreement. At June 30, 2019, Choice had total assets of $444 million, loans of $349 million, deposits of $312 million, and equity of $39 million. The merger is expected 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 Fox Valley area of Wisconsin.

Pursuant to the Merger Agreement, the final purchase price consisted of issuing 1,309,885 shares of the Company’s common stock (given the final stock-for-stock exchange ratio of 3.126 except for First Menasha shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $62.2 million (based on $47.52 per share, the volume weighted average closing price of the Company’s common stock over the preceding 20 trading day period) plus cash consideration of $19.3 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.

Upon consummation, the Company added $480 million in assets, $351 million in loans, $375 million in deposits, $4 million in core deposit intangible, and $41 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 First Menasha prior to the consummation date were not includedclose in the ~~accompanying consolidated financial statements. The accounting required assets purchased~~fourth quarter of 2019 and ~~liabilities assumed~~remains subject to ~~be recorded at their respective estimated fair values at the date of acquisition.~~customary closing conditions, including approval by Choice shareholders and regulatory approvals.

Note 3 – 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 shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2018		2017		2018		2017		2019		2018		2019		2018
Net income attributable to Nicolet Bankshares, Inc.	$	10,859	$	9,511	$	30,173	$	24,047	$	18,549	$	9,737	$	28,816	$	19,314

Weighted average common shares outstanding	9,633		9,837		9,679		9,317		9,374		9,639		9,418		9,702
Effect of dilutive common stock awards	316		572		325		504		318		331		293		330
Diluted weighted average common shares outstanding	9,949		10,409		10,004		9,821		9,692		9,970		9,711		10,032

Basic earnings per common share*	$	1.13	$	0.97	$	3.12	$	2.58	$	1.98	$	1.01	$	3.06	$	1.99
Diluted earnings per common share*	$	1.09	$	0.91	$	3.02	$	2.45	$	1.91	$	0.98	$	2.97	$	1.93

*Cumulative quarterly per share performance may not equal annual per share totals due to the effects of the amount and timing of capital increases. When computing earnings per share for an interim period, the denominator is based on the weighted average shares outstanding during the interim period, and not on an annualized weighted average basis. Accordingly, the sum of the earnings per share data for the quarters will not necessarily equal the year to date earnings per share data.

For the three and ~~nine~~six months ended ~~September~~June 30, 2019, options to purchase less than 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. For the three and six months ended June 30, 2018, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. ~~There was no anti-dilutive effect of options outstanding for the three and nine months ended September 30, 2017.~~

Note 4 – Stock-Based Compensation

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. These plans are administered by a committee of the Board of Directors. In February 2019, with subsequent shareholder approval, the 2011 Long-Term Incentive Plan was amended to increase the shares reserved for potential stock-based awards from 1,500,000 shares to 3,000,000 shares. At ~~September~~June 30, ~~2018,~~2019, approximately ~~144,000~~1.6 million shares were available for grant under these stock-based compensation plans.

A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants were as follows.


	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Dividend yield	—		%	—		%	—		%	—		%
Expected volatility	25		%	25		%	25		%	25		%
Risk-free interest rate	2.48		%	2.13		%	2.37		%	2.48		%
Expected average life	7 years			7 years			7 years			7 years
Weighted average per share fair value of options	$	17.60		$	15.44		$	19.23		$	17.60

~~Activity in~~

A summary of the Company’s ~~Stock Incentive Plans~~stock option activity is summarized ~~in the following tables.~~below.


Stock Options	Option Shares Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)		Option Shares Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding - December 31, 2017	1,643,255		$	39.82
Outstanding - December 31, 2018								1,581,699		$	40.77
Granted	10,000		54.06					15,000		59.55
Exercise of stock options *	(56,881	)	21.53					(137,443	)	23.15
Forfeited	(6,500	)	39.43					(3,538	)	27.43
Outstanding - September 30, 2018	1,589,874		$	40.57	7.6	$	22,429
Exercisable - September 30, 2018	543,886		$	32.00	6.4	$	12,243
Outstanding - June 30, 2019								1,455,718		$	42.65	7.1	$	28,249
Exercisable - June 30, 2019								667,418		$	38.34	6.5	$	15,833

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding ~~requirements; accordingly, 2,194~~requirements. For the six months ended June 30, 2019, 64,681 such shares were surrendered to the ~~Company during the nine months ended September 30, 2018.~~Company.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 was approximately ~~$1.8 million.~~$5.0 million and $1.4 million, respectively.

A summary of the Company’s restricted stock activity is summarized below.


Restricted Stock	Weighted Average Grant Date Fair Value		Restricted Shares Outstanding		Weighted Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding - December 31, 2017	$	34.26	30,920
Outstanding - December 31, 2018					$	39.37	29,512
Granted	55.64		7,510		61.96		4,257
Vested *	37.44		(10,911	)	44.79		(9,422	)
Forfeited	16.50		(3	)	16.50		(408	)
Outstanding - September 30, 2018	$	38.84	27,516
Outstanding - June 30, 2019					$	41.64	23,939

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, ~~1,615~~1,553 shares were surrendered during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

The Company recognized approximately ~~$3.4~~$2.2 million and ~~$1.9~~$2.3 million of stock-based compensation expense (included in personnel on the consolidated statements of income) during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, associated with its common stock awards granted to officers and employees. In addition, during the ~~third quarter~~first half of ~~2018,~~2019, the Company recognized approximately ~~$0.2~~$0.3 million of director expense (included in other expense on the consolidated statements of income) for a total restricted stock grant of ~~3,510~~4,257 shares with immediate vesting to directors. As of ~~September~~June 30, ~~2018,~~2019, there was approximately ~~$13.7~~$11.0 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately three years. The Company recognized a tax benefit of approximately $0.9 million and $0.2 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

Note 5 – Securities Available for Sale

Amortized cost and fair value of securities available for sale are summarized as follows.


	September 30, 2018								June 30, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	27,133	$	—	$	879	$	26,254	$	16,834	$	—	$	205	$	16,629
State, county and municipals	169,431		38		4,647		164,822		147,959		597		386		148,170
Mortgage-backed securities	140,427		85		4,667		135,845		150,094		2,507		772		151,829
Corporate debt securities	84,957		165		1,132		83,990		84,749		2,629		17		87,361
Total	$	421,948	$	288	$	11,325	$	410,911	$	399,636	$	5,733	$	1,380	$	403,989

December 31, 2017
(in thousands) Amortized Cost
Gross
Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
U.S. government agency securities $ 26,586
$ —
$ 377
$ 26,209
State, county and municipals 186,128
180
2,264
184,044
Mortgage-backed securities 157,705
160
2,333
155,532
Corporate debt securities 36,387
449
39
36,797
Equity securities * 1,287
1,284
—
2,571
Total $ 408,093
$ 2,073
$ 5,013
$ 405,153

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. Such securities are no longer reflected as securities AFS. As a result of this accounting change, the Company recognized a cumulative-effect adjustment at adoption from accumulated other comprehensive income to retained earnings of approximately $0.9 million in the consolidated statement of stockholders’ equity for the net of tax impact of the unrealized gain on equity securities as of the date of adoption and recognized a gain of approximately $475,000 for the nine months ended September 30, 2018, in the consolidated statements of income for the change in fair value on equity securities since adoption. In addition, the approximately $2.8 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets rather than as securities AFS. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard.



	December 31, 2018
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	22,467	$	—	$	818	$	21,649
State, county and municipals	163,702		76		3,252		160,526
Mortgage-backed securities	134,350		328		3,034		131,644
Corporate debt securities	87,352		66		1,093		86,325
Total	$	407,871	$	470	$	8,197	$	400,144

The following table ~~represents~~presents gross unrealized losses and the related estimated fair value of investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position.


	September 30, 2018													June 30, 2019
	Less than 12 months				12 months or more				Total					Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	—	$	—	$	26,254	$	879	$	26,254	$	879	2	$	—	$	—	$	16,629	$	205	$	16,629	$	205	3
State, county and municipals	71,359		1,168		81,418		3,479		152,777		4,647		453	1,917		2		64,560		384		66,477		386		181
Mortgage-backed securities	32,929		727		93,312		3,940		126,241		4,667		212	13,180		25		64,028		747		77,208		772		166
Corporate debt securities	69,816		1,132		—		—		69,816		1,132		37	—		—		2,041		17		2,041		17		1
Total	$	174,104	$	3,027	$	200,984	$	8,298	$	375,088	$	11,325	704	$	15,097	$	27	$	147,258	$	1,353	$	162,355	$	1,380	351


	December 31, 2017													December 31, 2018
	Less than 12 months				12 months or more				Total					Less than 12 months				12 months or more					Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Fair Value		��	Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	26,209	$	377	$	—	$	—	$	26,209	$	377	2	$	—	$	—	$	21,649		$	818	$	21,649	$	818	3
State, county and municipals	110,157		1,097		49,326		1,167		159,483		2,264		465	16,136		98		130,975			3,154		147,111		3,252		440
Mortgage-backed securities	72,210		735		65,537		1,598		137,747		2,333		215	20,568		132		89,189			2,902		109,757		3,034		204
Corporate debt securities	10,172		39		—		—		10,172		39		5	51,592		677		9,757			416		61,349		1,093		33
Total	$	218,748	$	2,248	$	114,863	$	2,765	$	333,611	$	5,013	687	$	88,296	$	907	$	251,570		$	7,290	$	339,866	$	8,197	680

As of ~~September~~June 30, ~~2018,~~2019, the Company does not consider its securities AFS with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 or ~~2017.~~2018.

The amortized cost and fair value of securities AFS 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.


	September 30, 2018				June 30, 2019
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	21,592	$	21,559	$	21,526	$	21,528
Due in one year through five years	157,636		154,294		187,172		189,049
Due after five years through ten years	95,324		92,078		34,437		34,702
Due after ten years	6,969		7,135		6,407		6,881
	281,521		275,066		249,542		252,160
Mortgage-backed securities	140,427		135,845		150,094		151,829
Securities available for sale	$	421,948	$	410,911
Securities AFS					$	399,636	$	403,989

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


	Nine Months Ended September 30,					Six Months Ended June 30,
(in thousands)	2018		2017			2019			2018
Gross gains	$	—	$	1,227		$	152		$	—
Gross losses	—		(7		)	(120		)	—
Gains (losses) on sales of securities AFS, net	$	—	$	1,220		$	32		$	—
Proceeds from sales of securities AFS	$	—	$	10,798		$	13,240		$	—

Note 6 – Loans, Allowance for Loan Losses, and Credit Quality

The loan composition is summarized as follows.


	September 30, 2018					December 31, 2017					June 30, 2019					December 31, 2018
(in thousands)	Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial & industrial	$	665,754		31.1	%	$	637,337		30.5	%	$	737,928		34	%	$	684,920		32	%
Owner-occupied commercial real estate (“CRE”)	449,151			21.0		430,043			20.6		447,554			20		441,353			20
Agricultural (“AG”) production	35,727			1.7		35,455			1.7		35,765			2		35,625			2
AG real estate	52,378			2.4		51,778			2.5		53,485			2		53,444			2
CRE investment	331,312			15.5		314,463			15.1		326,820			15		343,652			16
Construction & land development	86,533			4.0		89,660			4.3		73,108			3		80,599			4
Residential construction	30,295			1.4		36,995			1.8		38,246			2		30,926			1
Residential first mortgage	357,163			16.6		363,352			17.4		345,061			16		357,841			17
Residential junior mortgage	109,692			5.1		106,027			5.1		116,433			5		111,328			5
Retail & other	25,452			1.2		22,815			1.0		28,873			1		26,493			1
Loans	2,143,457			100.0	%	2,087,925			100.0	%	2,203,273			100	%	2,166,181			100	%
Less allowance for loan losses (“ALLL”)	12,992					12,653					13,571					13,153
Loans, net	$	2,130,465				$	2,075,272				$	2,189,702				$	2,153,028
Allowance for loan losses to loans	0.61		%			0.61		%			0.62		%			0.61		%

As a further breakdown, loans are summarized by originated and acquired as follows.

September 30, 2018 December 31, 2017
(in thousands)
Originated
Amount

% of
Total

Acquired
Amount

% of
Total

Originated
Amount

% of
Total

Acquired
Amount

% of
Total
Commercial & industrial $ 551,395
38.9 % $ 114,359
15.8 % $ 488,600
39.3 % $ 148,737
17.6 %
Owner-occupied CRE 274,036
19.3
175,115
24.2
237,548
19.1
192,495
22.8
AG production 10,821
0.8
24,906
3.4
11,102
0.9
24,353
2.9
AG real estate 29,685
2.1
22,693
3.1
27,831
2.2
23,947
2.8
CRE investment 151,335
10.7
179,977
24.8
113,862
9.2
200,601
23.8
Construction & land development 63,106
4.4
23,427
3.2
56,061
4.5
33,599
4.0
Residential construction 30,245
2.1
50
0.1
33,615
2.7
3,380
0.4
Residential first mortgage 211,474
14.9
145,689
20.1
191,186
15.4
172,166
20.4
Residential junior mortgage 74,366
5.2
35,326
4.9
65,643
5.3
40,384
4.8
Retail & other 22,464
1.6
2,988
0.4
18,254
1.4
4,561
0.5
Loans 1,418,927
100.0 % 724,530
100.0 % 1,243,702
100.0 % 844,223
100.0 %
Less ALLL 11,118
1,874
10,542
2,111

Loans, net $ 1,407,809
$ 722,656
$ 1,233,160
$ 842,112

ALLL to loans 0.78 % 0.26 % 0.85 % 0.25 %

~~A roll forward of the allowance for loan losses is summarized as follows.~~

Nine Months Ended Year Ended
(in thousands) September 30, 2018 September 30, 2017 December 31, 2017
Beginning balance $ 12,653
$ 11,820
$ 11,820
Provision for loan losses 1,360
1,875
2,325
Charge-offs (1,110 ) (1,156 ) (1,604 )
Recoveries 89
71
112
Net charge-offs (1,021 ) (1,085 ) (1,492 )
Ending balance $ 12,992
$ 12,610
$ 12,653



	June 30, 2019										December 31, 2018
(in thousands)	Originated Amount			% of Total		Acquired Amount			% of Total		Originated Amount			% of Total		Acquired Amount			% of Total
Commercial & industrial	$	625,450		40	%	$	112,478		18	%	$	568,100		38	%	$	116,820		17	%
Owner-occupied CRE	306,634			19		140,920			22		283,531			19		157,822			23
AG production	11,383			1		24,382			4		11,113			1		24,512			4
AG real estate	33,907			2		19,578			3		31,374			2		22,070			3
CRE investment	165,687			10		161,133			26		171,087			12		172,565			25
Construction & land development	60,297			4		12,811			2		66,478			4		14,121			2
Residential construction	37,996			2		250			—		30,926			2		—			—
Residential first mortgage	221,613			14		123,448			20		220,368			15		137,473			20
Residential junior mortgage	88,053			6		28,380			5		78,379			5		32,949			5
Retail & other	27,115			2		1,758			—		23,809			2		2,684			1
Loans	1,578,135			100	%	625,138			100	%	1,485,165			100	%	681,016			100	%
Less ALLL	11,934					1,637					11,448					1,705
Loans, net	$	1,566,201				$	623,501				$	1,473,717				$	679,311
ALLL to loans	0.76		%			0.26		%			0.77		%			0.25		%
As a percent of total loans	72		%			28		%			69		%			31		%

Practically all 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.

~~The following tables present~~

A roll forward of the ~~balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment.~~

TOTAL – Nine Months Ended September 30, 2018
(in thousands)
Commercial
& industrial

Owner-
occupied
CRE

AG
production

AG real
estate

CRE
investment

Construction & land
development

Residential
construction

Residential
first mortgage

Residential
junior
mortgage

Retail
& other
Total
ALLL:
Beginning balance $ 4,934
$ 2,607
$ 129
$ 296
$ 1,388
$ 726
$ 251
$ 1,609
$ 488
$ 225
$ 12,653
Provision 1,043
293
(8 ) (2 ) (8 ) (230 ) (41 ) 119
(55 ) 249
1,360
Charge-offs (743 ) (64 ) —
—
(37 ) —
—
(85 ) —
(181 ) (1,110 )
Recoveries 30
12
—
—
—
—
—
3
31
13
89
Net charge-offs (713 ) (52 ) —
—
(37 ) —
—
(82 ) 31
(168 ) (1,021 )
Ending balance $ 5,264
$ 2,848
$ 121
$ 294
$ 1,343
$ 496
$ 210
$ 1,646
$ 464
$ 306
$ 12,992
As percent of ALLL 40.5 % 21.9 % 0.9 % 2.3 % 10.3 % 3.8 % 1.6 % 12.7 % 3.6 % 2.4 % 100.0 %

ALLL:
Individually evaluated $ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Collectively evaluated 5,264
2,848
121
294
1,343
496
210
1,646
464
306
12,992
Ending balance $ 5,264
$ 2,848
$ 121
$ 294
$ 1,343
$ 496
$ 210
$ 1,646
$ 464
$ 306
$ 12,992

Loans:
Individually evaluated $ 5,858
$ 1,548
$ —
$ 234
$ 2,876
$ 603
$ —
$ 2,663
$ 57
$ 12
$ 13,851
Collectively evaluated 659,896
447,603
35,727
52,144
328,436
85,930
30,295
354,500
109,635
25,440
2,129,606
Total loans $ 665,754
$ 449,151
$ 35,727
$ 52,378
$ 331,312
$ 86,533
$ 30,295
$ 357,163
$ 109,692
$ 25,452
$ 2,143,457

Less ALLL 5,264
2,848
121
294
1,343
496
210
1,646
464
306
12,992
Net loans $ 660,490
$ 446,303
$ 35,606
$ 52,084
$ 329,969
$ 86,037
$ 30,085
$ 355,517
$ 109,228
$ 25,146
$ 2,130,465

~~As a further breakdown, the ALLL~~allowance for loan losses is summarized ~~by originated and acquired~~ as follows.

Originated – Nine Months Ended September 30, 2018
(in thousands)
Commercial
& industrial

Owner-
occupied
CRE

AG
production

AG real
estate

CRE
investment

Construction
& land
development

Residential
construction

Residential
first
mortgage

Residential
junior
mortgage

Retail
& other
Total
ALLL:
Beginning balance $ 4,192
$ 2,115
$ 112
$ 235
$ 1,154
$ 628
$ 200
$ 1,297
$ 409
$ 200
$ 10,542
Provision 1,143
349
(4 ) 9
(13 ) (217 ) (25 ) 165
(43 ) 247
1,611
Charge-offs (743 ) (64 ) —
—
(37 ) —
—
(85 ) —
(178 ) (1,107 )
Recoveries 29
1
—
—
—
—
—
—
29
13
72
Net charge-offs (714 ) (63 ) —
—
(37 ) —
—
(85 ) 29
(165 ) (1,035 )
Ending balance $ 4,621
$ 2,401
$ 108
$ 244
$ 1,104
$ 411
$ 175
$ 1,377
$ 395
$ 282
$ 11,118
As percent of ALLL 41.6 % 21.6 % 1.0 % 2.2 % 9.9 % 3.7 % 1.6 % 12.4 % 3.5 % 2.5 % 100.0 %

Loans:
Individually evaluated $ 2,553
$ 328
$ —
$ —
$ 918
$ —
$ —
$ 251
$ —
$ —
$ 4,050
Collectively evaluated 548,842
273,708
10,821
29,685
150,417
63,106
30,245
211,223
74,366
22,464
1,414,877
Total loans $ 551,395
$ 274,036
$ 10,821
$ 29,685
$ 151,335
$ 63,106
$ 30,245
$ 211,474
$ 74,366
$ 22,464
$ 1,418,927

Less ALLL 4,621
2,401
108
244
1,104
411
175
1,377
395
282
11,118
Net loans $ 546,774
$ 271,635
$ 10,713
$ 29,441
$ 150,231
$ 62,695
$ 30,070
$ 210,097
$ 73,971
$ 22,182
$ 1,407,809

Acquired – Nine Months Ended September 30, 2018
(in thousands)
Commercial
& industrial

Owner-
occupied
CRE

AG
production

AG real
estate

CRE
investment

Construction
& land
development

Residential
construction

Residential
first mortgage

Residential
junior
mortgage

Retail
& other
Total
ALLL:
Beginning balance $ 742
$ 492
$ 17
$ 61
$ 234
$ 98
$ 51
$ 312
$ 79
$ 25
$ 2,111
Provision (100 ) (56 ) (4 ) (11 ) 5
(13 ) (16 ) (46 ) (12 ) 2
(251 )
Charge-offs —
—
—
—
—
—
—
—
—
(3 ) (3 )
Recoveries 1
11
—
—
—
—
—
3
2
—
17
Net charge-offs 1
11
—
—
—
—
—
3
2
(3 ) 14
Ending balance $ 643
$ 447
$ 13
$ 50
$ 239
$ 85
$ 35
$ 269
$ 69
$ 24
$ 1,874
As percent of ALLL 34.3 % 23.9 % 0.7 % 2.7 % 12.7 % 4.5 % 1.9 % 14.3 % 3.7 % 1.3 % 100.0 %

Loans:
Individually evaluated $ 3,305
$ 1,220
$ —
$ 234
$ 1,958
$ 603
$ —
$ 2,412
$ 57
$ 12
$ 9,801
Collectively evaluated 111,054
173,895
24,906
22,459
178,019
22,824
50
143,277
35,269
2,976
714,729
Total loans $ 114,359
$ 175,115
$ 24,906
$ 22,693
$ 179,977
$ 23,427
$ 50
$ 145,689
$ 35,326
$ 2,988
$ 724,530

Less ALLL 643
447
13
50
239
85
35
269
69
24
1,874
Net loans $ 113,716
$ 174,668
$ 24,893
$ 22,643
$ 179,738
$ 23,342
$ 15
$ 145,420
$ 35,257
$ 2,964
$ 722,656



	Six Months Ended						Year Ended
(in thousands)	June 30, 2019			June 30, 2018			December 31, 2018
Beginning balance	$	13,153		$	12,653		$	12,653
Provision for loan losses	500			1,020			1,600
Charge-offs	(232		)	(877		)	(1,213		)
Recoveries	150			79			113
Net (charge-offs) recoveries	(82		)	(798		)	(1,100		)
Ending balance	$	13,571		$	12,875		$	13,153

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment.


	TOTAL – Year Ended December 31, 2017																																	TOTAL – Six Months Ended June 30, 2019
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total			Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820		$	5,271		$	2,847		$	121		$	301		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
Provision	2,419			(290		)	(21		)	11			263			(35		)	(53		)	(192		)	96			127			2,325			371			17			15			23			(19		)	(65		)	35			(79		)	66			136			500
Charge-offs	(1,442		)	—			—			—			—			(13		)	—			(8		)	(72		)	(69		)	(1,604		)	—			(13		)	—			—			—			—			—			—			(60		)	(159		)	(232		)
Recoveries	38			30			—			—			1			—			—			25			3			15			112			50			2			—			—			—			—			—			35			29			34			150
Net charge-offs	(1,404		)	30			—			—			1			(13		)	—			17			(69		)	(54		)	(1,492		)
Net (charge-offs) recoveries																																		50			(11		)	—			—			—			—			—			35			(31		)	(125		)	(82		)
Ending balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653		$	5,692		$	2,853		$	136		$	324		$	1,451		$	445		$	246		$	1,602		$	507		$	315		$	13,571
As percent of ALLL	39.0		%	20.6		%	1.0		%	2.3		%	11.0		%	5.7		%	2.0		%	12.7		%	3.9		%	1.8		%	100.0		%

As % of ALLL																																		42		%	21		%	1		%	2		%	11		%	3		%	2		%	12		%	4		%	2		%	100		%
ALLL:
Individually evaluated	$	163		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	163		$	382		$	—		$	38		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	420
Collectively evaluated	4,771			2,607			129			296			1,388			726			251			1,609			488			225			12,490			5,310			2,853			98			324			1,451			445			246			1,602			507			315			13,151
Ending balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653		$	5,692		$	2,853		$	136		$	324		$	1,451		$	445		$	246		$	1,602		$	507		$	315		$	13,571

Loans:
Individually evaluated	$	5,870		$	1,689		$	—		$	248		$	5,290		$	1,053		$	80		$	2,801		$	178		$	12		$	17,221		$	2,476		$	2,734		$	401		$	734		$	1,520		$	472		$	451		$	2,632		$	224		$	12		$	11,656
Collectively evaluated	631,467			428,354			35,455			51,530			309,173			88,607			36,915			360,551			105,849			22,803			2,070,704			735,452			444,820			35,364			52,751			325,300			72,636			37,795			342,429			116,209			28,861			2,191,617
Total loans	$	637,337		$	430,043		$	35,455		$	51,778		$	314,463		$	89,660		$	36,995		$	363,352		$	106,027		$	22,815		$	2,087,925		$	737,928		$	447,554		$	35,765		$	53,485		$	326,820		$	73,108		$	38,246		$	345,061		$	116,433		$	28,873		$	2,203,273

Less ALLL	4,934			2,607			129			296			1,388			726			251			1,609			488			225			12,653			5,692			2,853			136			324			1,451			445			246			1,602			507			315			13,571
Net loans	$	632,403		$	427,436		$	35,326		$	51,482		$	313,075		$	88,934		$	36,744		$	361,743		$	105,539		$	22,590		$	2,075,272		$	732,236		$	444,701		$	35,629		$	53,161		$	325,369		$	72,663		$	38,000		$	343,459		$	115,926		$	28,558		$	2,189,702

As a further breakdown, the ALLL is summarized by originated and acquired as follows.


	Originated – Year Ended December 31, 2017																																	Originated – Six Months Ended June 30, 2019
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total			Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449		$	4,683		$	2,439		$	110		$	255		$	1,230		$	431		$	211		$	1,400		$	408		$	281		$	11,448
Provision	2,429			(172		)	(10		)	13			261			(28		)	(66		)	(69		)	105			122			2,585			385			36			12			23			14			(49		)	1			(56		)	8			136			510
Charge-offs	(1,388		)	—			—			—			—			—			—			(8		)	(72		)	(69		)	(1,537		)	—			(13		)	—			—			—			—			—			—			—			(159		)	(172		)
Recoveries	1			24			—			—			—			—			—			2			3			15			45			50			2			—			—			—			—			—			35			27			34			148
Net charge-offs	(1,387		)	24			—			—			—			—			—			(6		)	(69		)	(54		)	(1,492		)
Net (charge-offs) recoveries																																		50			(11		)	—			—			—			—			—			35			27			(125		)	(24		)
Ending balance	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542		$	5,118		$	2,464		$	122		$	278		$	1,244		$	382		$	212		$	1,379		$	443		$	292		$	11,934
As percent of ALLL	39.8		%	20.1		%	1.1		%	2.2		%	10.9		%	6.0		%	1.9		%	12.3		%	3.9		%	1.8		%	100.0		%

As % of ALLL																																		43		%	21		%	1		%	2		%	10		%	3		%	2		%	12		%	4		%	2		%	100		%
ALLL:
Individually evaluated	$	163		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	163		$	382		$	—		$	38		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	420
Collectively evaluated	4,029			2,115			112			235			1,154			628			200			1,297			409			200			10,379			4,736			2,464			84			278			1,244			382			212			1,379			443			292			11,514
Ending balance	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542		$	5,118		$	2,464		$	122		$	278		$	1,244		$	382		$	212		$	1,379		$	443		$	292		$	11,934

Loans:
Individually evaluated	$	2,189		$	—		$	—		$	—		$	549		$	—		$	—		$	253		$	12		$	—		$	3,003		$	777		$	1,841		$	224		$	466		$	—		$	—		$	451		$	—		$	—		$	—		$	3,759
Collectively evaluated	486,411			237,548			11,102			27,831			113,313			56,061			33,615			190,933			65,631			18,254			1,240,699			624,673			304,793			11,159			33,441			165,687			60,297			37,545			221,613			88,053			27,115			1,574,376
Total loans	$	488,600		$	237,548		$	11,102		$	27,831		$	113,862		$	56,061		$	33,615		$	191,186		$	65,643		$	18,254		$	1,243,702		$	625,450		$	306,634		$	11,383		$	33,907		$	165,687		$	60,297		$	37,996		$	221,613		$	88,053		$	27,115		$	1,578,135

Less ALLL	4,192			2,115			112			235			1,154			628			200			1,297			409			200			10,542			5,118			2,464			122			278			1,244			382			212			1,379			443			292			11,934
Net loans	$	484,408		$	235,433		$	10,990		$	27,596		$	112,708		$	55,433		$	33,415		$	189,889		$	65,234		$	18,054		$	1,233,160		$	620,332		$	304,170		$	11,261		$	33,629		$	164,443		$	59,915		$	37,784		$	220,234		$	87,610		$	26,823		$	1,566,201


	Acquired – Year Ended December 31, 2017																																	Acquired – Six Months Ended June 30, 2019
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total			Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	769		$	604		$	28		$	63		$	231		$	118		$	38		$	412		$	88		$	20		$	2,371		$	588		$	408		$	11		$	46		$	240		$	79		$	—		$	246		$	64		$	23		$	1,705
Provision	(10		)	(118		)	(11		)	(2		)	2			(7		)	13			(123		)	(9		)	5			(260		)	(14		)	(19		)	3			—			(33		)	(16		)	34			(23		)	58			—			(10		)
Charge-offs	(54		)	—			—			—			—			(13		)	—			—			—			—			(67		)	—			—			—			—			—			—			—			—			(60		)	—			(60		)
Recoveries	37			6			—			—			1			—			—			23			—			—			67			—			—			—			—			—			—			—			—			2			—			2
Net charge-offs	(17		)	6			—			—			1			(13		)	—			23			—			—			—
Net (charge-offs) recoveries																																		—			—			—			—			—			—			—			—			(58		)	—			(58		)
Ending balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111		$	574		$	389		$	14		$	46		$	207		$	63		$	34		$	223		$	64		$	23		$	1,637
As percent of ALLL	35.1		%	23.3		%	0.8		%	2.9		%	11.1		%	4.6		%	2.4		%	14.8		%	3.7		%	1.3		%	100.0		%

As % of ALLL																																		35		%	24		%	1		%	3		%	13		%	4		%	2		%	13		%	4		%	1		%	100		%
ALLL:
Individually evaluated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated	742			492			17			61			234			98			51			312			79			25			2,111			574			389			14			46			207			63			34			223			64			23			1,637
Ending balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111		$	574		$	389		$	14		$	46		$	207		$	63		$	34		$	223		$	64		$	23		$	1,637

Loans:
Individually evaluated	$	3,681		$	1,689		$	—		$	248		$	4,741		$	1,053		$	80		$	2,548		$	166		$	12		$	14,218		$	1,699		$	893		$	177		$	268		$	1,520		$	472		$	—		$	2,632		$	224		$	12		$	7,897
Collectively evaluated	145,056			190,806			24,353			23,699			195,860			32,546			3,300			169,618			40,218			4,549			830,005			110,779			140,027			24,205			19,310			159,613			12,339			250			120,816			28,156			1,746			617,241
Total loans	$	148,737		$	192,495		$	24,353		$	23,947		$	200,601		$	33,599		$	3,380		$	172,166		$	40,384		$	4,561		$	844,223		$	112,478		$	140,920		$	24,382		$	19,578		$	161,133		$	12,811		$	250		$	123,448		$	28,380		$	1,758		$	625,138

Less ALLL	742			492			17			61			234			98			51			312			79			25			2,111			574			389			14			46			207			63			34			223			64			23			1,637
Net loans	$	147,995		$	192,003		$	24,336		$	23,886		$	200,367		$	33,501		$	3,329		$	171,854		$	40,305		$	4,536		$	842,112		$	111,904		$	140,531		$	24,368		$	19,532		$	160,926		$	12,748		$	216		$	123,225		$	28,316		$	1,735		$	623,501

For comparison purposes, the following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment for the prior year-end period.



	TOTAL – Year Ended December 31, 2018
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653
Provision	1,107			300			(8		)	5			119			(216		)	(40		)	117			(51		)	267			1,600
Charge-offs	(813		)	(74		)	—			—			(37		)	—			—			(85		)	—			(204		)	(1,213		)
Recoveries	43			14			—			—			—			—			—			5			35			16			113
Net (charge-offs) recoveries	(770		)	(60		)	—			—			(37		)	—			—			(80		)	35			(188		)	(1,100		)
Ending balance	$	5,271		$	2,847		$	121		$	301		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
As % of ALLL	40		%	22		%	1		%	2		%	11		%	4		%	2		%	12		%	4		%	2		%	100		%
ALLL:
Individually evaluated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated	5,271			2,847			121			301			1,470			510			211			1,646			472			304			13,153
Ending balance	$	5,271		$	2,847		$	121		$	301		$	1,470		$	510		$	211		$	1,646		$	472		$	304		$	13,153
Loans:
Individually evaluated	$	2,927		$	1,506		$	—		$	222		$	1,686		$	603		$	—		$	2,750		$	233		$	12		$	9,939
Collectively evaluated	681,993			439,847			35,625			53,222			341,966			79,996			30,926			355,091			111,095			26,481			2,156,242
Total loans	$	684,920		$	441,353		$	35,625		$	53,444		$	343,652		$	80,599		$	30,926		$	357,841		$	111,328		$	26,493		$	2,166,181
Less ALLL	5,271			2,847			121			301			1,470			510			211			1,646			472			304			13,153
Net loans	$	679,649		$	438,506		$	35,504		$	53,143		$	342,182		$	80,089		$	30,715		$	356,195		$	110,856		$	26,189		$	2,153,028

As a further breakdown, the ALLL is summarized by originated and acquired as follows.



	Originated – Year Ended December 31, 2018
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542
Provision	1,262			385			(2		)	20			113			(197		)	11			187			(31		)	266			2,014
Charge-offs	(813		)	(64		)	—			—			(37		)	—			—			(85		)	—			(201		)	(1,200		)
Recoveries	42			3			—			—			—			—			—			1			30			16			92
Net (charge-offs) recoveries	(771		)	(61		)	—			—			(37		)	—			—			(84		)	30			(185		)	(1,108		)
Ending balance	$	4,683		$	2,439		$	110		$	255		$	1,230		$	431		$	211		$	1,400		$	408		$	281		$	11,448
As % of ALLL	41		%	21		%	1		%	2		%	11		%	4		%	2		%	12		%	4		%	2		%	100		%
ALLL:
Individually evaluated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated	4,683			2,439			110			255			1,230			431			211			1,400			408			281			11,448
Ending balance	$	4,683		$	2,439		$	110		$	255		$	1,230		$	431		$	211		$	1,400		$	408		$	281		$	11,448
Loans:
Individually evaluated	$	227		$	321		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	548
Collectively evaluated	567,873			283,210			11,113			31,374			171,087			66,478			30,926			220,368			78,379			23,809			1,484,617
Total loans	$	568,100		$	283,531		$	11,113		$	31,374		$	171,087		$	66,478		$	30,926		$	220,368		$	78,379		$	23,809		$	1,485,165
Less ALLL	4,683			2,439			110			255			1,230			431			211			1,400			408			281			11,448
Net loans	$	563,417		$	281,092		$	11,003		$	31,119		$	169,857		$	66,047		$	30,715		$	218,968		$	77,971		$	23,528		$	1,473,717



	Acquired – Year Ended December 31, 2018
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111
Provision	(155		)	(85		)	(6		)	(15		)	6			(19		)	(51		)	(70		)	(20		)	1			(414		)
Charge-offs	—			(10		)	—			—			—			—			—			—			—			(3		)	(13		)
Recoveries	1			11			—			—			—			—			—			4			5			—			21
Net (charge-offs) recoveries	1			1			—			—			—			—			—			4			5			(3		)	8
Ending balance	$	588		$	408		$	11		$	46		$	240		$	79		$	—		$	246		$	64		$	23		$	1,705
As % of ALLL	34		%	24		%	1		%	3		%	14		%	5		%	—		%	14		%	4		%	1		%	100		%
ALLL:
Individually evaluated	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated	588			408			11			46			240			79			—			246			64			23			1,705
Ending balance	$	588		$	408		$	11		$	46		$	240		$	79		$	—		$	246		$	64		$	23		$	1,705
Loans:
Individually evaluated	$	2,700		$	1,185		$	—		$	222		$	1,686		$	603		$	—		$	2,750		$	233		$	12		$	9,391
Collectively evaluated	114,120			156,637			24,512			21,848			170,879			13,518			—			134,723			32,716			2,672			671,625
Total loans	$	116,820		$	157,822		$	24,512		$	22,070		$	172,565		$	14,121		$	—		$	137,473		$	32,949		$	2,684		$	681,016
Less ALLL	588			408			11			46			240			79			—			246			64			23			1,705
Net loans	$	116,232		$	157,414		$	24,501		$	22,024		$	172,325		$	14,042		$	—		$	137,227		$	32,885		$	2,661		$	679,311

The following table presents nonaccrual loans by portfolio segment in total and then as a further breakdown by originated or acquired.


	Total Nonaccrual Loans										Total Nonaccrual Loans
(in thousands)	September 30, 2018			% of Total		December 31, 2017			% of Total		June 30, 2019			% of Total		December 31, 2018			% of Total
Commercial & industrial	$	5,803		57.0	%	$	6,016		46.0	%	$	2,673		35	%	$	2,816		52	%
Owner-occupied CRE	474			4.6		533			4.1		2,462			32		673			12
AG production	—			—		—			—		401			5		—			—
AG real estate	175			1.7		186			1.4		427			6		164			3
CRE investment	1,381			13.6		4,531			34.6		175			2		210			4
Construction & land development	80			0.8		—			—		—			—		80			1
Residential construction	28			0.3		80			0.6		451			6		1			—
Residential first mortgage	1,973			19.4		1,587			12.1		739			10		1,265			23
Residential junior mortgage	268			2.6		158			1.2		314			4		262			5
Retail & other	—			—		4			—		8			—		—			—
Nonaccrual loans	$	10,182		100.0	%	$	13,095		100.0	%	$	7,650		100	%	$	5,471		100	%
Percent of total loans	0.5		%			0.6		%			0.3		%			0.2		%


	September 30, 2018										December 31, 2017										June 30, 2019										December 31, 2018
(in thousands)	Originated Amount			% of Total		Acquired Amount			% of Total		Originated Amount			% of Total		Acquired Amount			% of Total		Originated Amount			% of Total		Acquired Amount			% of Total		Originated Amount			% of Total		Acquired Amount			% of Total
Commercial & industrial	$	2,729		55.9	%	$	3,074		58.0	%	$	2,296		70.0	%	$	3,720		37.9	%	$	953		23	%	$	1,720		51	%	$	352		25	%	$	2,464		61	%
Owner-occupied CRE	360			7.4		114			2.2		86			2.6		447			4.6		1,841			43		621			18		362			26		311			8
AG production	—			—		—			—		—			—		—			—		224			5		177			5		—			—		—			—
AG real estate	—			—		175			3.3		—			—		186			1.9		216			5		211			6		—			—		164			4
CRE investment	918			18.8		463			8.7		549			16.8		3,982			40.6		—			—		175			5		—			—		210			5
Construction & land development	—			—		80			1.5		—			—		—			—		—			—		—			—		—			—		80			2
Residential construction	28			0.6		—			—		—			—		80			0.8		451			11		—			—		1			—		—			—
Residential first mortgage	777			15.9		1,196			22.5		331			10.1		1,256			12.8		472			11		267			8		629			45		636			15
Residential junior mortgage	66			1.4		202			3.8		12			0.4		146			1.4		98			2		216			7		65			4		197			5
Retail & other	—			—		—			—		4			0.1		—			—		—			—		8			—		—			—		—			—
Nonaccrual loans	$	4,878		100.0	%	$	5,304		100.0	%	$	3,278		100.0	%	$	9,817		100.0	%	$	4,255		100	%	$	3,395		100	%	$	1,409		100	%	$	4,062		100	%
Percent of nonaccrual loans	47.9		%			52.1		%			25.0		%			75.0		%			56		%			44		%			26		%			74		%

The following tables present past due loans by portfolio segment.


	September 30, 2018												June 30, 2019
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total			30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	30		$	5,803		$	659,921		$	665,754		$	344		$	2,673		$	734,911		$	737,928
Owner-occupied CRE	—			474			448,677			449,151			—			2,462			445,092			447,554
AG production	—			—			35,727			35,727			—			401			35,364			35,765
AG real estate	48			175			52,155			52,378			—			427			53,058			53,485
CRE investment	—			1,381			329,931			331,312			—			175			326,645			326,820
Construction & land development	104			80			86,349			86,533			71			—			73,037			73,108
Residential construction	212			28			30,055			30,295			841			451			36,954			38,246
Residential first mortgage	638			1,973			354,552			357,163			383			739			343,939			345,061
Residential junior mortgage	31			268			109,393			109,692			536			314			115,583			116,433
Retail & other	61			—			25,391			25,452			122			8			28,743			28,873
Total loans	$	1,124		$	10,182		$	2,132,151		$	2,143,457		$	2,297		$	7,650		$	2,193,326		$	2,203,273
Percent of total loans	0.1		%	0.4		%	99.5		%	100.0		%	0.1		%	0.3		%	99.6		%	100.0		%


	December 31, 2017												December 31, 2018
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total			30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	211		$	6,016		$	631,110		$	637,337		$	—		$	2,816		$	682,104		$	684,920
Owner-occupied CRE	671			533			428,839			430,043			557			673			440,123			441,353
AG production	30			—			35,425			35,455			19			—			35,606			35,625
AG real estate	—			186			51,592			51,778			35			164			53,245			53,444
CRE investment	—			4,531			309,932			314,463			180			210			343,262			343,652
Construction & land development	76			—			89,584			89,660			—			80			80,519			80,599
Residential construction	587			80			36,328			36,995			—			1			30,925			30,926
Residential first mortgage	1,039			1,587			360,726			363,352			758			1,265			355,818			357,841
Residential junior mortgage	14			158			105,855			106,027			12			262			111,054			111,328
Retail & other	4			4			22,807			22,815			10			—			26,483			26,493
Total loans	$	2,632		$	13,095		$	2,072,198		$	2,087,925		$	1,571		$	5,471		$	2,159,139		$	2,166,181
Percent of total loans	0.1		%	0.6		%	99.3		%	100.0		%	0.1		%	0.2		%	99.7		%	100.0		%

A description of the loan risk categories used by the Company follows.

Grades 1-4, Pass: Credits exhibit adequate cash flows, appropriate management and financial ratios within industry norms and/or are supported by sufficient collateral. Some credits in these rating categories may require a need for monitoring but elements of concern are not severe enough to warrant an elevated rating.

Grade 5, Watch: Credits with this rating are adequately secured and performing but are being monitored due to the presence of various short-term weaknesses which may include unexpected, short-term adverse financial performance, managerial problems, potential impact of a decline in the entire industry or local economy and delinquency issues. Loans to individuals or loans supported by guarantors with marginal net worth or collateral may be included in this rating category.

Grade 6, Special Mention: Credits with this rating have potential weaknesses that, without the Company’s attention and correction may result in deterioration of repayment prospects. These assets are considered Criticized Assets. Potential weaknesses may include adverse financial trends for the borrower or industry, repeated lack of compliance with Company requests, increasing debt to net worth, serious management conditions and decreasing cash flow.

Grade 7, Substandard: Assets with this rating are characterized by the distinct possibility the Company will sustain some loss if deficiencies are not corrected. All foreclosures, liquidations, and nonaccrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

Grade 8, Doubtful: Assets with this rating exhibit all the weaknesses as one rated Substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable.

Grade 9, Loss: Assets in this category are considered uncollectible. Pursuing any recovery or salvage value is impractical but does not preclude partial recovery in the future.

The following tables present total loans by risk categories.


	September 30, 2018																			June 30, 2019
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total			Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	630,681		$	20,123		$	2,725		$	12,225		$	—	$	—	$	665,754		$	702,261		$	20,234		$	2,413		$	13,020		$	—	$	—	$	737,928
Owner-occupied CRE	412,146			28,643			2,234			6,128			—		—		449,151			418,203			16,027			2,464			10,860			—		—		447,554
AG production	30,195			2,892			2,342			298			—		—		35,727			26,000			5,096			1,622			3,047			—		—		35,765
AG real estate	45,288			3,483			3,026			581			—		—		52,378			40,983			6,645			2,367			3,490			—		—		53,485
CRE investment	321,138			7,086			1,006			2,082			—		—		331,312			322,209			2,569			890			1,152			—		—		326,820
Construction & land development	81,296			5,141			16			80			—		—		86,533			73,040			52			16			—			—		—		73,108
Residential construction	30,267			—			—			28			—		—		30,295			37,795			—			—			451			—		—		38,246
Residential first mortgage	352,778			1,388			520			2,477			—		—		357,163			340,609			1,360			1,264			1,828			—		—		345,061
Residential junior mortgage	109,394			17			—			281			—		—		109,692			116,092			17			—			324			—		—		116,433
Retail & other	25,452			—			—			—			—		—		25,452			28,865			—			—			8			—		—		28,873
Total loans	$	2,038,635		$	68,773		$	11,869		$	24,180		$	—	$	—	$	2,143,457		$	2,106,057		$	52,000		$	11,036		$	34,180		$	—	$	—	$	2,203,273
Percent of total	95.1		%	3.2		%	0.6		%	1.1		%	—		—		100.0		%	95.6		%	2.4		%	0.5		%	1.5		%	—		—		100.0		%


	December 31, 2017																			December 31, 2018
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total			Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	597,854		$	12,999		$	16,129		$	10,355		$	—	$	—	$	637,337		$	649,475		$	16,145		$	6,178		$	13,122		$	—	$	—	$	684,920
Owner-occupied CRE	397,357			23,340			6,442			2,904			—		—		430,043			405,198			22,776			6,569			6,810			—		—		441,353
AG production	30,431			4,000			—			1,024			—		—		35,455			29,363			3,302			2,351			609			—		—		35,625
AG real estate	44,321			4,873			—			2,584			—		—		51,778			46,248			3,246			2,983			967			—		—		53,444
CRE investment	299,926			8,399			190			5,948			—		—		314,463			334,080			6,792			—			2,780			—		—		343,652
Construction & land development	86,011			2,758			17			874			—		—		89,660			75,365			5,138			16			80			—		—		80,599
Residential construction	36,915			—			—			80			—		—		36,995			30,926			—			—			—			—		—		30,926
Residential first mortgage	358,067			1,868			683			2,734			—		—		363,352			353,239			1,406			510			2,686			—		—		357,841
Residential junior mortgage	105,736			117			—			174			—		—		106,027			111,037			17			—			274			—		—		111,328
Retail & other	22,811			—			—			4			—		—		22,815			26,493			—			—			—			—		—		26,493
Total loans	$	1,979,429		$	58,354		$	23,461		$	26,681		$	—	$	—	$	2,087,925		$	2,061,424		$	58,822		$	18,607		$	27,328		$	—	$	—	$	2,166,181
Percent of total	94.8		%	2.8		%	1.1		%	1.3		%	—		—		100.0		%	95.1		%	2.7		%	0.9		%	1.3		%	—		—		100.0		%

The following tables present impaired loans.



	Total Impaired Loans – June 30, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	2,476	$	7,253	$	382	$	3,196	$	969
Owner-occupied CRE	2,734		3,069		—		2,812		127
AG production	401		404		38		402		4
AG real estate	734		734		—		735		—
CRE investment	1,520		1,525		—		1,523		5
Construction & land development	472		472		—		497		—
Residential construction	451		451		—		451		—
Residential first mortgage	2,632		2,798		—		2,672		73
Residential junior mortgage	224		224		—		227		—
Retail & other	12		15		—		12		3
Total	$	11,656	$	16,945	$	420	$	12,527	$	1,181
Originated impaired loans	$	3,759	$	3,855	$	420	$	3,829	$	97
Acquired impaired loans	7,897		13,090		—		8,698		1,084
Total	$	11,656	$	16,945	$	420	$	12,527	$	1,181

Total Impaired Loans – September 30, 2018
(in thousands)
Recorded
Investment

Unpaid Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest Income
Recognized
Commercial & industrial $ 5,858
$ 9,737
$ —
$ 6,389
$ 534
Owner-occupied CRE 1,548
2,010
—
1,614
113
AG production —
6
—
—
1
AG real estate 234
293
—
238
14
CRE investment 2,876
3,792
—
2,988
294
Construction & land development 603
1,506
—
603
16
Residential construction —
—
—
—
—
Residential first mortgage 2,663
3,122
—
2,734
159
Residential junior mortgage 57
360
—
62
19
Retail & other 12
13
—
12
1
Total $ 13,851
$ 20,839
$ —
$ 14,640
$ 1,151

Originated impaired loans $ 4,050
$ 4,050
$ —
$ 4,453
$ 213
Acquired impaired loans 9,801
16,789
—
10,187
938
Total $ 13,851
$ 20,839
$ —
$ 14,640
$ 1,151


	Total Impaired Loans – December 31, 2017										Total Impaired Loans – December 31, 2018
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	5,870	$	10,063	$	163	$	6,586	$	718	$	2,927	$	6,736	$	—	$	4,041	$	660
Owner-occupied CRE	1,689		2,256		—		1,333		132		1,506		1,833		—		1,659		137
AG production	—		10		—		—		—		—		—		—		—		—
AG real estate	248		307		—		233		26		222		281		—		238		26
CRE investment	5,290		8,102		—		5,411		465		1,686		2,484		—		1,606		163
Construction & land development	1,053		1,053		—		813		57		603		1,506		—		603		21
Residential construction	80		983		—		91		27		—		—		—		—		—
Residential first mortgage	2,801		3,653		—		2,177		180		2,750		2,907		—		2,478		176
Residential junior mortgage	178		507		—		154		17		233		262		—		62		15
Retail & other	12		14		—		12		1		12		12		—		12		1
Total	$	17,221	$	26,948	$	163	$	16,810	$	1,623	$	9,939	$	16,021	$	—	$	10,699	$	1,199

Originated impaired loans	$	3,003	$	3,003	$	163	$	2,964	$	241	$	548	$	548	$	—	$	899	$	154
Acquired impaired loans	14,218		23,945		—		13,846		1,382		9,391		15,473		—		9,800		1,045
Total	$	17,221	$	26,948	$	163	$	16,810	$	1,623	$	9,939	$	16,021	$	—	$	10,699	$	1,199

Total purchased credit impaired loans (in aggregate since the Company’s 2013 acquisitions) were initially recorded at a fair value of $43.6 million on their respective acquisition dates, net of an initial $34.4 million ~~non-accretable~~nonaccretable mark and a zero accretable mark. At ~~September~~June 30, ~~2018, $9.8~~2019, $7.9 million of the $43.6 million remain in impaired loans.



Nonaccretable discount on purchased credit impaired loans:	Six Months Ended						Year Ended
(in thousands)	June 30, 2019			June 30, 2018			December 31, 2018
Balance at beginning of period	$	6,408		$	9,471		$	9,471
Accretion to loan interest income	(1,524		)	(1,580		)	(1,976		)
Transferred to accretable	—			(56		)	(990		)
Disposals of loans	—			—			(97		)
Balance at end of period	$	4,884		$	7,835		$	6,408

~~Non-accretable discount on purchased credit impaired (“PCI”) loans~~:

Nine Months Ended Year Ended
(in thousands) September 30, 2018 September 30, 2017 December 31, 2017
Balance at beginning of period $ 9,471
$ 14,327
$ 14,327
Acquired balance, net —
8,352
8,352
Accretion to loan interest income (1,872 ) (5,925 ) (7,995 )
Transferred to accretable (513 ) —
(1,936 )
Disposals of loans (97 ) (1,121 ) (3,277 )
Balance at end of period $ 6,989
$ 15,633
$ 9,471

Troubled Debt Restructurings

At ~~September~~June 30, ~~2018,~~2019, there were ~~five~~six loans classified as troubled debt restructurings with a current outstanding balance of ~~$0.7~~$1.4 million (including performing TDRs of $0.5 million and the remainder on nonaccrual) and pre-modification balance of ~~$2.7~~$2.1 million. In comparison, at December 31, ~~2017,~~2018, there were ~~eight~~four loans classified as troubled debt restructurings with an outstanding balance of ~~$5.6~~$0.6 million and pre-modification balance of ~~$6.9~~$2.7 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. As of ~~September~~June 30, ~~2018,~~2019, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights

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 quarterly assessment indicated no impairment charge on goodwill, core deposit intangibles or customer list intangibles was required for the year ended December 31, ~~2017~~2018 or the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. A summary of goodwill and other intangibles was as follows.


	Nine Months Ended		Year Ended		Six Months Ended		Year Ended
(in thousands)	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Goodwill	$	107,366	$	107,366	$	107,366	$	107,366
Core deposit intangibles	13,488		16,477		10,794		12,562
Customer list intangibles	4,506		4,563		4,125		4,379
Other intangibles	17,994		21,040		14,919		16,941
Goodwill and other intangibles, net	$	125,360	$	128,406	$	122,285	$	124,307

Goodwill: Goodwill was $107.4 million at both ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017. During 2017, goodwill increased due to the First Menasha acquisition. See Note 2 for additional information on the First Menasha acquisition.~~2018.

Other intangible assets: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. During 2018, customer list intangibles increased due to the purchase of a brokerage book of business, while during 2017, core deposit intangibles increased due to the First Menasha acquisition and customer list intangibles increased due to a modification to the contingent earn-out payment on the financial advisor business acquired in 2016, fixing the previously variable earn-out payment on a portion of the purchase price. See Note 2 for additional information on Nicolet's acquisitions.



	Six Months Ended			Year Ended
(in thousands)	June 30, 2019			December 31, 2018
Core deposit intangibles:
Gross carrying amount	$	29,015		$	29,015
Accumulated amortization	(18,221		)	(16,453		)
Net book value	$	10,794		$	12,562
Additions during the period	$	—		$	—
Amortization during the period	$	1,768		$	3,915
Customer list intangibles:
Gross carrying amount	$	5,523		$	5,523
Accumulated amortization	(1,398		)	(1,144		)
Net book value	$	4,125		$	4,379
Additions during the period	$	—		$	290
Amortization during the period	$	254		$	474

Nine Months Ended Year Ended
(in thousands) September 30, 2018 December 31, 2017
Core deposit intangibles:
Gross carrying amount $ 29,015
$ 29,015
Accumulated amortization (15,527 ) (12,538 )
Net book value $ 13,488
$ 16,477
Additions during the period $ —
$ 3,670
Amortization during the period $ 2,989
$ 4,294

Customer list intangibles:
Gross carrying amount $ 5,523
$ 5,233
Accumulated amortization (1,017 ) (670 )
Net book value $ 4,506
$ 4,563
Additions during the period $ 290
$ 870
Amortization during the period $ 347
$ 401

Mortgage servicing rights: Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. ~~Activity~~A summary of the changes in the mortgage servicing rights asset was as follows.


	Nine Months Ended			Year Ended			Six Months Ended			Year Ended
(in thousands)	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Mortgage servicing rights (MSR) asset:
Mortgage servicing rights ("MSR") asset:
MSR asset at beginning of year	$	3,187		$	1,922		$	3,749		$	3,187
Capitalized MSR	696			876			871			1,203
MSR asset acquired	—			874
Amortization during the period	(464		)	(485		)	(387		)	(641		)
MSR asset at end of period	$	3,419		$	3,187		$	4,233		$	3,749
Fair value of MSR asset at end of period	$	4,304		$	4,097		$	6,506		$	6,347
Residential mortgage loans serviced for others	$	560,607		$	518,419		$	663,360		$	603,446
Net book value of MSR asset to loans serviced for others	0.61		%	0.61		%	0.64		%	0.62		%

The Company periodically evaluates its mortgage servicing rights asset for impairment. At each reporting date, impairment is assessed based on an estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans ~~serviced~~ (predominantly loan type and note interest rate). No valuation allowance or impairment charge was recorded for the year ended December 31, ~~2017~~2018 or the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. See Note 9 for additional information on the fair value of the MSR asset.

The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of ~~the September~~June 30, ~~2018.~~2019. The actual amortization expense the Company recognizes in any given period may be significantly different depending upon acquisition or sale activities, changes in interest rates, prepayment speeds, market conditions, regulatory requirements and events or circumstances that indicate the carrying amount of an asset may not be recoverable.


(in thousands)	Core deposit intangibles		Customer list intangibles		MSR asset		Core deposit intangibles		Customer list intangibles		MSR asset
Year ending December 31,
2018 (remaining three months)	$	926	$	127	$	161
2019	3,337		507		643
2019 (remaining six months)							$	1,569	$	253	$	395
2020	2,657		507		814		2,657		507		773
2021	2,167		507		381		2,167		507		623
2022	1,735		507		381		1,735		507		623
2023							1,273		483		520
2024							841		449		324
Thereafter	2,666		2,351		1,039		552		1,419		975
Total	$	13,488	$	4,506	$	3,419	$	10,794	$	4,125	$	4,233

Note 8 – Short and Long-Term Borrowings

Short-Term Borrowings:

The Company did not have any short-term borrowings (borrowing with an original maturity of one year or less) outstanding at ~~September~~June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

Long-Term Borrowings:

The components of long-term borrowings (borrowing with an original maturity greater than one year) were as follows.


(in thousands)	September 30, 2018		December 31, 2017		June 30, 2019			December 31, 2018
FHLB advances	$	35,317	$	36,509	$	35,122		$	35,252
Junior subordinated debentures	29,976		29,616		30,335			30,096
Subordinated notes	11,948		11,921		11,975			11,957
Total long-term borrowings	$	77,241	$	78,046	$	77,432		$	77,305
Percent of fixed rate long-term borrowings					69		%	69		%
Percent of floating rate long-term borrowings					31		%	31		%

FHLB Advances: The FHLB advances bear fixed rates, require interest-only monthly payments, and have maturity dates through 2022. The weighted average rate of the FHLB advances was 1.72% ~~and 1.71%~~ at ~~September~~both June 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018.

Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair market value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017, $28.8~~2018, $29.2 million and ~~$28.5~~$28.9 million, respectively, qualify as Tier 1 capital.

Junior Subordinated Debentures
(in thousands)
Maturity
Date
Par
9/30/2018
Unamortized
Discount

9/30/2018
Carrying
Value

12/31/2017
Carrying
Value
2004 Nicolet Bankshares Statutory Trust(1)
7/15/2034 $ 6,186
$ —
$ 6,186
$ 6,186
2005 Mid-Wisconsin Financial Services, Inc.(2)
12/15/2035 10,310
(3,421 ) 6,889
6,739
2006 Baylake Corp.(3)
9/30/2036 16,598
(4,179 ) 12,419
12,242
2004 First Menasha Bancshares, Inc.(4)
3/17/2034 5,155
(673 ) 4,482
4,449
Total $ 38,249
$ (8,273 ) $ 29,976
$ 29,616



		Junior Subordinated Debentures
(in thousands)	Maturity Date	Par		6/30/2019 Unamortized Discount			6/30/2019 Carrying Value		12/31/2018 Carrying Value
2004 Nicolet Bankshares Statutory Trust ⁽¹⁾	7/15/2034	$	6,186	$	—		$	6,186	$	6,186
2005 Mid-Wisconsin Financial Services, Inc. ⁽²⁾	12/15/2035	10,310		(3,272		)	7,038		6,939
2006 Baylake Corp. ⁽³⁾	9/30/2036	16,598		(4,002		)	12,596		12,478
2004 First Menasha Bancshares, Inc. ⁽⁴⁾	3/17/2034	5,155		(640		)	4,515		4,493
Total		$	38,249	$	(7,914	)	$	30,335	$	30,096


(1)	The interest rate is 8.00% fixed.


(2)	The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were ~~3.76%~~3.84% and ~~3.02%~~4.22% as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.


(3)	The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were ~~3.75%~~3.67% and ~~3.04%~~4.15% as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.


(4)	The debentures, assumed in April 2017 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 2.79%, adjusted quarterly. The interest rates were ~~5.12%~~5.20% and ~~4.39%~~5.58% as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Subordinated Notes: In 2015, the Company placed an aggregate of $12 million in subordinated Notes in private placements with certain accredited investors. All Notes were issued with 10-year maturities, have a fixed annual interest rate of 5% payable quarterly, are callable on or after the fifth anniversary of their respective issuances dates, and qualify for Tier 2 capital for regulatory purposes. ~~The carrying value of these subordinated Notes was $11.9 million at both September 30, 2018 and December 31, 2017.~~

Note 9 – Fair Value Measurements

Fair value represents the estimated price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price concept), and is a market-based measurement versus an entity-specific measurement.

The Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are:

Level 1 – quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date

Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity

In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. This assessment of the significance of an input requires management judgment.

Recurring basis fair value measurements:

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented.

(in thousands) Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis: Total Level 1 Level 2 Level 3
September 30, 2018
U.S. government agency securities $ 26,254
$ —
$ 26,254
$ —
State, county and municipals 164,822
—
164,756
66
Mortgage-backed securities 135,845
—
135,845
—
Corporate debt securities 83,990
—
75,552
8,438
Securities AFS $ 410,911
$ —
$ 402,407
$ 8,504
Other investments (equity securities) * $ 2,778
$ 2,778
$ —
$ —

December 31, 2017
U.S. government agency securities $ 26,209
$ —
$ 26,209
$ —
State, county and municipals 184,044
—
183,386
658
Mortgage-backed securities 155,532
—
155,529
3
Corporate debt securities 36,797
—
28,307
8,490
Equity securities * 2,571
2,571
—
—
Securities AFS $ 405,153
$ 2,571
$ 393,431
$ 9,151

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. As a result, the approximately $2.8 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets instead of in securities AFS at December 31, 2017. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard and see Note 5 for additional information on the impact to securities AFS.



(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3
June 30, 2019
U.S. government agency securities	$	16,629	$	—	$	16,629	$	—
State, county and municipals	148,170		—		148,105		65
Mortgage-backed securities	151,829		—		151,829		—
Corporate debt securities	87,361		—		79,523		7,838
Securities AFS	$	403,989	$	—	$	396,086	$	7,903
Other investments (equity securities)	$	3,258	$	3,258	$	—	$	—
December 31, 2018
U.S. government agency securities	$	21,649	$	—	$	21,649	$	—
State, county and municipals	160,526		—		160,460		66
Mortgage-backed securities	131,644		—		131,644		—
Corporate debt securities	86,325		—		77,901		8,424
Securities AFS	$	400,144	$	—	$	391,654	$	8,490
Other investments (equity securities)	$	2,650	$	2,650	$	—	$	—

The following is a description of the valuation methodologies used by the Company for the securities AFS and equity securities measured at fair value on a recurring basis, as noted in the tables above. Where quoted market prices on securities exchanges are available, the investments are classified as Level 1. Level 1 investments primarily include exchange-traded equity securities. If quoted market prices are not available, fair value is generally determined using prices obtained from independent pricing vendors who use pricing models (with typical inputs including benchmark yields, reported trades for similar securities, issuer spreads or relationship to other benchmark quoted securities), or discounted cash flows, and are classified as Level 2. Examples of these investments include U.S. government agency securities, mortgage-backed securities, obligations of state, county and municipals, and certain corporate debt securities. Finally, in certain cases where there is limited activity or less transparency around inputs to the estimated fair value, investments are classified within Level 3 of the hierarchy. Examples of these include private municipal bonds and corporate debt securities, which include trust preferred security investments. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on the internal analysis on these securities.

The following table presents the changes in the Level 3 securities AFS measured at fair value on a recurring basis.


(in thousands)	Nine Months Ended			Year Ended			Six Months Ended			Year Ended
Level 3 Fair Value Measurements:	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Balance at beginning of year	$	9,151		$	9,108		$	8,490		$	9,151
Acquired balance	—			189
Paydowns/Sales/Settlements	(647		)	(146		)	(587		)	(661		)
Balance at end of period	$	8,504		$	9,151		$	7,903		$	8,490

Nonrecurring basis fair value measurements:

The following table presents the Company’s assets measured at fair value on a nonrecurring basis, ~~for the periods presented,~~ aggregated by level in the fair value hierarchy within which those measurements fall.


(in thousands)			Fair Value Measurements Using								Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
September 30, 2018
June 30, 2019
Impaired loans	$	13,851	$	—	$	—	$	13,851	$	11,236	$	—	$	—	$	11,236
Other real estate owned (“OREO”)	1,281		—		—		1,281		300		—		—		300
MSR asset	4,304		—		—		4,304		6,506		—		—		6,506

December 31, 2017
December 31, 2018
Impaired loans	$	17,058	$	—	$	—	$	17,058	$	9,939	$	—	$	—	$	9,939
OREO	1,294		—		—		1,294		420		—		—		420
MSR asset	4,097		—		—		4,097		6,347		—		—		6,347

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value.

Financial instruments:

The carrying amounts and estimated fair values of the Company’s financial instruments are shown below.


September 30, 2018
June 30, 2019											June 30, 2019
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	161,155	$	161,155	$	161,155	$	—	$	—		$	154,920	$	154,920	$	154,920	$	—	$	—
Certificates of deposit in other banks	995		995		—		995		—			5,396		5,378		—		5,378		—
Securities AFS	410,911		410,911		—		402,407		8,504			403,989		403,989		—		396,086		7,903
Other investments, including equity securities	17,479		17,479		2,778		13,117		1,584			19,841		19,841		3,258		13,224		3,359
Loans held for sale	2,593		2,643		—		2,643		—			4,699		4,783		—		4,783		—
Loans, net	2,130,465		2,103,456		—		—		2,103,456			2,189,702		2,200,767		—		—		2,200,767
BOLI	65,820		65,820		65,820		—		—			69,222		69,222		69,222		—		—
MSR asset	3,419		4,304		—		—		4,304			4,233		6,506		—		—		6,506

Financial liabilities:
Deposits	$	2,522,156	$	2,523,832	$	—	$	—	$	2,523,832		$	2,536,639	$	2,537,128	$	—	$	—	$	2,537,128
Long-term borrowings	77,241		76,198		—		35,300		40,898			77,432		76,671		—		35,254		41,417


December 31, 2017
December 31, 2018											December 31, 2018
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	154,933	$	154,933	$	154,933	$	—	$	—		$	249,526	$	249,526	$	249,526	$	—	$	—
Certificates of deposit in other banks	1,746		1,746		—		1,746		—			993		993		—		993		—
Securities AFS	405,153		405,153		2,571		393,431		9,151			400,144		400,144		—		391,654		8,490
Other investments	14,837		14,837		—		13,142		1,695
Other investments, including equity securities												17,997		17,997		2,650		13,189		2,158
Loans held for sale	4,666		4,750		—		4,750		—			1,639		1,662		—		1,662		—
Loans, net	2,075,272		2,068,382		—		—		2,068,382			2,153,028		2,139,322		—		—		2,139,322
BOLI	64,453		64,453		64,453		—		—			66,310		66,310		66,310		—		—
MSR asset	3,187		4,097		—		—		4,097			3,749		6,347		—		—		6,347

Financial liabilities:
Deposits	$	2,471,064	$	2,469,456	$	—	$	—	$	2,469,456		$	2,614,138	$	2,614,995	$	—	$	—	$	2,614,995
Long-term borrowings	78,046		77,029		—		36,510		40,519			77,305		75,923		—		34,907		41,016

The carrying value of certain assets and liabilities such as cash and cash equivalents, ~~bank owned life insurance, short-term borrowings,~~BOLI, and nonmaturing deposits, approximate their estimated fair value. For those financial instruments not previously disclosed, the following is a description of the valuation methodologies used.

Certificates of deposits in other banks: Fair values are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a Level 2 measurement.

Other investments: The valuation methodologies utilized for exchange-traded equity securities are discussed under “Recurring basis fair value measurements” above. The carrying amount of Federal Reserve Bank ~~Bankers Bank, Federal Agricultural Mortgage Corporation,~~ and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by

analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.

Loans held for sale: The fair value estimation process for the loans held for sale portfolio is segregated by loan type. The estimated fair value was based on what secondary markets are currently offering for portfolios with similar characteristics and represents a Level 2 measurement.

Loans, net: For variable-rate loans that reprice frequently and with no significant change in credit risk or other optionality, fair values are based on carrying values. Fair values for all other loans are estimated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. Collateral-dependent impaired loans are included in loans, net. The fair value of loans is considered to be a Level 3 measurement due to internally developed discounted cash flow measurements.

Deposits: The fair value of deposits with no stated maturity (such as demand deposits, savings, interest and ~~non-interest~~noninterest checking, and money market accounts) is, by definition, equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market place on certificates of similar remaining maturities. Use of internal discounted cash flows provides a Level 3 fair value measurement.

Long-term borrowings: The fair value of the FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement. The fair values of the junior subordinated debentures and subordinated notes utilize a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.

Lending-related commitments and derivative financial instruments: At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the estimated fair value of letters of credit, ~~and~~interest rate lock commitments on residential mortgage loans, outstanding mandatory commitments to sell residential mortgage loans into the secondary market, ~~was insignificant.~~and mirror interest rate swap agreements were not significant.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Company’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.

Note 10 – ~~Revenue Recognition~~Operating Leases

As of January 1, ~~2018,~~2019, the Company adopted ASU ~~2014-09~~2016-02 (Topic ~~606)~~842) on a prospective basis using the ~~modified retrospective approach.~~effective date method. The adoption of the ~~guidance had no~~new standard did not have a material impact on ~~the measurement, timing, or recognition of revenue;~~Nicolet's financial statements; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

~~Topic 606 does not apply~~The operating lease ROU asset represents the right to ~~revenue associated with financial instruments, including revenue~~use an underlying asset during the lease term, while the operating lease liability represents the obligation to make lease payments arising from ~~loans~~the lease. The ROU asset and ~~securities. In addition, certain noninterest income categories such as gains or losses associated with mortgage servicing rights, derivatives, and income from bank owned life insurance~~lease liability are ~~not within~~recognized at lease commencement based on the scope of the new guidance. The main types of revenue contracts within the scope of Topic 606 include trust services income, brokerage fee income, service charges on deposit accounts, card interchange income, and certain other noninterest income. These contracts are discussed in detail below:

~~Trust services and brokerage fee income~~: A contract between the Company and its customers to provide fiduciary and / or investment administration services on trust accounts and brokerage accounts in exchange for a fee. Trust services and brokerage fee income is based upon the month-end marketpresent value of the ~~assets under management and the applicable fee~~remaining lease payments, considering a discount rate ~~which~~that represents Nicolet's incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the period the underlying trust or brokerage account is serviced (generally on a monthly basis). Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

~~Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds~~lease term and is ~~generally terminable~~recognized in occupancy, equipment, and office on the consolidated statements of income.

Nicolet leases space under non-cancelable operating lease agreements for certain bank and nonbank branch facilities with remaining lease terms of 2 to 7 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at ~~will by either party. This contract permits~~ the ~~customer to access the funds on deposit~~then fair market rental rates. The lease asset and ~~request additional services~~liability considers renewal options when they are reasonably certain of being exercised.

A summary of net lease cost and selected other information related to operating leases was as follows.



	Six Months Ended
($ in thousands)	June 30, 2019
Net lease cost:
Operating lease cost	$	501
Variable lease cost	113
Net lease cost	$	614
Selected other operating lease information:
Weighted average remaining lease term (years)	5
Weighted average discount rate	2.5		%

The following table summarizes the ~~deposit account. Service charges on deposit accounts consist~~maturity of account analysis fees (net fees earned on analyzed business and public checking accounts), monthly service charges, nonsufficient fund (“NSF”) charges, and other deposit account related charges. The Company’s performance obligation for account analysis fees and monthly service charges is generally satisfied, and the related revenue recognized, over the period in which the service is provided (typically on a monthly basis); while NSF charges and other deposit account related charges are largely transactional based and the related revenue is recognized at the time the service is provided.remaining lease liabilities.

~~Card interchange income~~: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. The performance obligation is completed and the fees are recognized as the service is provided (i.e., when the customer uses a debit or credit card).

~~Other noninterest income~~: Other noninterest income includes several items, such as wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, management fee income, and consulting fees. These fees are generally recognized at the time the service is provided.



(in thousands)
Year ending December 31,
2019 (remaining six months)	$	566
2020	1,129
2021	1,017
2022	961
2023	718
2024	613
Thereafter	151
Total future minimum lease payments	5,155
Less: amount representing interest	(129		)
Present value of net future minimum lease payments	$	5,026

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nicolet Bankshares, Inc. (the “Company” or “Nicolet”) is a bank holding company headquartered in Green Bay, Wisconsin. Nicolet provides a diversified range of traditional banking and wealth management services to individuals and businesses in its market area and through the branch offices of its banking subsidiary, Nicolet National Bank (the “Bank”), in northeastern and central Wisconsin and in Menominee, Michigan.

Forward-Looking Statements

Statements made in this document and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management’s plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include, but are not necessarily limited to the following:

operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;

economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;

changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;

potential difficulties in integrating the operations of Nicolet with those of ~~acquired entities, if any;~~Choice following the merger;

compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and

the risk that Nicolet’s analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.

Overview

The following discussion is management’s analysis of the consolidated financial condition as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 and results of operations for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018. It should be read in conjunction with Nicolet’s audited consolidated financial statements included in Nicolet’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

The timing of Nicolet’s April 2017 acquisition of First Menasha Bancshares, Inc. (“First Menasha”), at approximately 20% of pre-merger assets at the time of acquisition, impacts financial comparisons to 2017 periods. Certain income statement results, average balances and related ratios for 2018 include the full contribution of First Menasha operations, versus five months of contribution of First Menasha in the comparable nine-month period of 2017 . The first half of 2017 also included non-recurring other direct merger and integration pre-tax expenses of $0.5 million. See Note 2, “Acquisitions,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional information on this acquisition.2018.

Performance Summary

Table 1: Earnings Summary and Selected Financial Data


	At or for the Three Months Ended															At or for the Nine Months Ended						At or for the Three Months Ended															At or for the Six Months Ended
(In thousands, except per share data)	9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017			9/30/2018			9/30/2017			6/30/2019			3/31/2019			12/31/2018			9/30/2018			6/30/2018			6/30/2019			6/30/2018
Results of operations:
Interest income	$	31,880		$	30,545		$	30,785		$	29,836		$	29,454		$	93,210		$	79,417		$	34,570		$	33,159		$	32,327		$	31,880		$	30,545		$	67,729		$	61,330
Interest expense	4,938			4,742			3,911			3,329			3,063			13,591			7,182			5,626			5,684			5,298			4,938			4,742			11,310			8,653
Net interest income	26,942			25,803			26,874			26,507			26,391			79,619			72,235			28,944			27,475			27,029			26,942			25,803			56,419			52,677
Provision for loan losses	340			510			510			450			975			1,360			1,875			300			200			240			340			510			500			1,020
Net interest income after provision for loan losses	26,602			25,293			26,364			26,057			25,416			78,259			70,360			28,644			27,275			26,789			26,602			25,293			55,919			51,657
Noninterest income	10,649			10,239			8,824			8,621			10,164			29,712			26,018			18,560			9,186			9,797			10,649			10,239			27,746			19,063
Noninterest expense	23,044			22,451			22,642			21,858			20,862			68,137			59,498			25,727			22,759			21,621			23,044			22,451			48,486			45,093
Income before income tax expense	14,207			13,081			12,546			12,820			14,718			39,834			36,880			21,477			13,702			14,965			14,207			13,081			35,179			25,627
Income tax expense	3,268			3,255			2,908			3,662			5,133			9,431			12,605			2,833			3,352			4,015			3,268			3,255			6,185			6,163
Net income	10,939			9,826			9,638			9,158			9,585			30,403			24,275			18,644			10,350			10,950			10,939			9,826			28,994			19,464
Net income attributable to noncontrolling interest	80			89			61			55			74			230			228			95			83			87			80			89			178			150
Net income attributable to Nicolet Bankshares, Inc.	$	10,859		$	9,737		$	9,577		$	9,103		$	9,511		$	30,173		$	24,047		$	18,549		$	10,267		$	10,863		$	10,859		$	9,737		$	28,816		$	19,314
Earnings per common share:
Basic	$	1.13		$	1.01		$	0.98		$	0.93		$	0.97		$	3.12		$	2.58		$	1.98		$	1.09		$	1.14		$	1.13		$	1.01		$	3.06		$	1.99
Diluted	$	1.09		$	0.98		$	0.94		$	0.88		$	0.91		$	3.02		$	2.45		$	1.91		$	1.05		$	1.11		$	1.09		$	0.98		$	2.97		$	1.93
Common Shares:
Basic weighted average	9,633			9,639			9,765			9,805			9,837			9,679			9,317			9,374			9,461			9,526			9,633			9,639			9,418			9,702
Diluted weighted average	9,949			9,970			10,225			10,368			10,409			10,004			9,821			9,692			9,758			9,814			9,949			9,970			9,711			10,032
Outstanding (period end)	9,577			9,643			9,699			9,818			9,799			9,577			9,799			9,327			9,431			9,495			9,577			9,643			9,327			9,643
Period-End Balances:
Loans	$	2,143,457		$	2,128,624		$	2,100,597		$	2,087,925		$	2,051,122		$	2,143,457		$	2,051,122		$	2,203,273		$	2,189,688		$	2,166,181		$	2,143,457		$	2,128,624		$	2,203,273		$	2,128,624
Allowance for loan losses	12,992			12,875			12,765			12,653			12,610			12,992			12,610			13,571			13,370			13,153			12,992			12,875			13,571			12,875
Securities available-for-sale, at fair value	410,911			401,975			401,130			405,153			408,217			410,911			408,217			403,989			407,693			400,144			410,911			401,975			403,989			401,975
Goodwill and other intangibles, net	125,360			126,124			127,224			128,406			129,588			125,360			129,588			122,285			123,254			124,307			125,360			126,124			122,285			126,124
Total assets	3,000,902			2,922,151			3,223,935			2,932,433			2,845,730			3,000,902			2,845,730			3,054,813			3,041,091			3,096,535			3,000,902			2,922,151			3,054,813			2,922,151
Deposits	2,522,156			2,455,536			2,765,090			2,471,064			2,366,951			2,522,156			2,366,951			2,536,639			2,538,486			2,614,138			2,522,156			2,455,536			2,536,639			2,455,536
Stockholders’ equity	377,171			370,584			363,988			364,178			360,426			377,171			360,426			411,415			398,767			386,609			377,171			370,584			411,415			370,584
Book value per common share	39.38			38.43			37.53			37.09			36.78			39.38			36.78			44.11			42.28			40.72			39.38			38.43			44.11			38.43
Tangible book value per common share(2)	26.29			25.35			24.41			24.01			23.56			26.29			23.56			31.00			29.21			27.62			26.29			25.35			31.00			25.35
Average Balances:
Loans	$	2,134,448		$	2,117,828		$	2,114,345		$	2,066,974		$	2,035,277		$	2,122,280		$	1,842,695		$	2,189,070		$	2,179,420		$	2,142,870		$	2,134,448		$	2,117,828		$	2,184,272		$	2,116,096
Interest-earning assets	2,664,316			2,742,976			2,584,070			2,531,066			2,505,073			2,664,081			2,291,588			2,702,357			2,734,936			2,693,752			2,664,316			2,742,976			2,718,557			2,663,962
Goodwill and other intangibles, net																						122,841			123,892			124,930			125,798			126,646			123,363			127,220
Total assets	2,971,247			3,044,466			2,896,533			2,852,400			2,825,542			2,971,022			2,580,126			3,022,383			3,047,068			2,996,553			2,971,247			3,044,466			3,034,658			2,970,908
Deposits	2,497,439			2,583,112			2,436,103			2,385,821			2,377,229			2,505,776			2,175,360			2,514,226			2,556,927			2,518,378			2,497,439			2,583,112			2,535,459			2,510,013
Interest-bearing liabilities	1,931,119			2,084,361			1,925,443			1,835,375			1,854,339			1,980,329			1,721,362			1,892,775			1,946,210			1,867,327			1,931,119			2,084,361			1,919,345			2,005,341
Goodwill and other intangibles, net	125,798			126,646			127,801			128,980			129,158			126,741			110,886
Stockholders’ equity	375,507			364,988			366,002			361,455			358,228			368,867			323,273			404,345			391,027			379,846			375,507			364,988			397,723			365,492
Financial Ratios*:
Financial Ratios:⁽¹⁾
Return on average assets	1.45		%	1.28		%	1.34		%	1.27		%	1.34		%	1.36		%	1.25		%	2.46		%	1.37		%	1.44		%	1.45		%	1.28		%	1.91		%	1.31		%
Return on average common equity	11.47			10.70			10.61			9.99			10.53			10.94			9.95			18.40			10.65			11.35			11.47			10.70			14.61			10.66
Return on average tangible common equity(2)	17.25			16.39			16.31			15.53			16.47			16.66			15.14			26.43			15.59			16.91			17.25			16.39			21.18			16.35
Average equity to average assets	12.64			11.99			12.64			12.67			12.68			12.42			12.53			13.38			12.83			12.68			12.64			11.99			13.11			12.30
Stockholders' equity to assets	12.57			12.68			11.29			12.42			12.67			12.57			12.67			13.47			13.11			12.49			12.57			12.68			13.47			12.68
Tangible equity to tangible assets	8.76			8.74			7.65			8.41			8.50			8.76			8.50
Tangible common equity to tangible assets ⁽²⁾																						9.86			9.44			8.83			8.76			8.74			9.86			8.74
Net interest margin	4.02			3.77			4.20			4.21			4.24			3.99			4.27			4.28			4.05			3.98			4.02			3.77			4.16			3.98
Net loan charge-offs to average loans	0.04			0.08			0.08			0.08			0.19			0.06			0.08			0.02			(0.00		)	0.01			0.04			0.08			0.01			0.08
Nonperforming loans to total loans	0.48			0.51			0.56			0.63			0.70			0.48			0.70			0.35			0.40			0.25			0.48			0.51			0.35			0.51
Nonperforming assets to total assets	0.38			0.41			0.40			0.49			0.55			0.38			0.55			0.26			0.30			0.19			0.38			0.41			0.26			0.41
Efficiency ratio																						64.01			61.91			58.03			61.08			63.49			63.00			63.38
Effective tax rate	23.00			24.88			23.18			28.56			34.88			23.68			34.18			13.19			24.46			26.83			23.00			24.88			17.58			24.05
Selected Items:
Interest income from resolving PCI loans (rounded)	$	300		$	100		$	1,500		$	2,100		$	2,100		$	1,900		$	5,900		$	1,300		$	200		$	100		$	300		$	100		$	1,500		$	1,600
Tax-equivalent adjustment on net interest income	285			289			298			584			594			872			1,785			263			272			278			285			289			535			587
Tax expense (benefit) on stock-based compensation	—			—			(159		)	(1,678		)	(15		)	(159		)	(176		)
Tax expense of tax reform items	—			—			—			896			—			—			—
Tax benefit on stock-based compensation																						(739		)	(144		)	(23		)	—			—			(883		)	(159		)

*(1) Income statement-related ratios for partial-year periods are annualized.

(2) The ratios of tangible book value per common share, return on average tangible common equity, and tangible common equity to tangible assets exclude goodwill and other intangibles, net. These financial ratios have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength.

Net income was ~~$30.2~~$28.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$6.1~~$9.5 million or ~~25%~~49% over ~~$24.0~~$19.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Earnings per diluted common share was ~~$3.02~~$2.97 for the first ~~nine~~six months of ~~2018, 23%~~2019, 54% higher than ~~$2.45~~$1.93 for the comparable 2018 period.

During second quarter 2019, Nicolet sold approximately 80% of its equity investment in UFS, LLC, a data processing and e-banking entity, and recognized a $7.4 million after-tax gain (included in noninterest income under asset gains) and recorded $2.75 million ($2.0 million after-tax) in personnel expense for retirement-related compensation declared. Consistent with our philosophy of aligning outcomes to customers, shareholders, and employees, the board approved these retirement-related compensation actions to benefit all employees following the recognition of the gain on the equity investment sale. Combined, net of taxes, these actions impacted net income favorably by $5.4 million and diluted earnings per common share by $0.55.

Net interest income was $56.4 million for the first ~~nine~~six months of ~~2017. Annualized return~~2019, up $3.7 million or 7% over first half 2018. Interest income grew $6.4 million (despite $1.0 million lower aggregate discount income on purchased loans), aided by a higher mix of average interest-earning assets in loans and the elevated rate environment on new, renewed and variable rate loans. Interest expense increased $2.7 million primarily due to rising rates. Net interest margin was 4.16% for the six months ended June 30, 2019, compared to 3.98% for the six months ended June 30, 2018. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

Noninterest income was $27.7 million for first ~~nine months~~half 2019, up $8.7 million or 46% over the comparable 2018 period, mostly due to the $7.4 million gain on the equity investment sale noted above. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

Noninterest expense was $48.5 million, $3.4 million or 8% higher than first half 2018, mostly due to the retirement-related compensation actions in second quarter 2019 noted above. Personnel costs increased $2.7 million, and non-personnel expenses combined increased $0.7 million or 3% over first half 2018. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

Asset quality remains sound. Nonperforming assets were $8.0 million, representing 0.26% of total assets at June 30, 2019, up modestly from 0.19% at December 31, 2018 and ~~2017 was 1.36% and 1.25%, respectively.~~down favorably from 0.41% at June 30, 2018. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

At ~~September~~June 30, ~~2018,~~2019, assets were ~~$3.0~~$3.1 billion, ~~an increase~~a decrease of ~~$68~~$42 million ~~(2%~~(1%) from December 31, ~~2017~~2018 (largely due to a $95 million decrease in cash and cash equivalents exceeding a $37 million increase in loans) and an increase of ~~$155~~$133 million (5%) from ~~September~~June 30, ~~2017.~~2018 (mostly due to a $51 million increase in cash and cash equivalents and $75 million increase in loans).

At ~~September~~June 30, ~~2018,~~2019, loans were ~~$2.1~~$2.2 billion, 3%2% higher than December 31, ~~2017~~2018 and 5%4% higher than ~~September~~June 30, ~~2017.~~2018. On an average, ~~basis,~~ loans grew ~~$280~~$68 million or ~~15%~~3% over ~~the~~ first ~~nine months of 2017, largely attributable to the timing of the 2017 acquisition (which added $351 million in April 2017).~~half 2018. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

Total deposits were $2.5 billion at ~~September~~June 30, 2019, a decrease of 3% from December 31, 2018 2%and 3% higher than ~~December 31, 2017 and 7%~~June 30, 2018. Average deposits were $25 million or 1% higher than ~~September 30, 2017. On an average basis, deposits grew $330 million or 15% over the~~ first ~~nine months~~half 2018 (which included a $0.1 billion impact of ~~2017, largely attributable to the timing of the 2017 acquisition (which added $375 million in April 2017) and~~carrying a $0.3 billion short-term transaction deposit of a ~~long-standing~~large commercial customer ~~held in 2018~~ from late March to ~~mid-June.~~mid-June 2018). For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

Net interest income increased $7.4 million or 10% over the first nine months of 2017. Interest income grew $13.8 million (despite $4.0 million lower discount income on resolved purchased credit impaired loans), aided by a 16% increase in average interest-earning assets and the elevated rate environment on new, renewed and variable rate loans. Interest expense increased $6.4 million primarily due to rising rates on a larger deposit base. Net interest margin was 3.99% for the nine months ended September 30, 2018, compared to 4.27% last year. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

Noninterest income grew $3.7 million or 14% over the first nine months of 2017, with all categories except net asset gains up year-over-year. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

Noninterest expense increased $8.6 million or 15% over the first nine months of 2017, mostly due to the expanded workforce and larger operating base. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

Income tax expense for the first nine months of 2018 benefited from the lower corporate tax rate effective in 2018, due to the passage of the Tax Cuts and Jobs Act in December 2017. Income tax expense included a $0.2 million tax benefit for the tax impact of stock option exercises for both nine-month periods. As a result, the effective tax rate was 23.7% for the first nine months of 2018 and 34.2% for the first nine months of 2017.

Asset quality remains sound. Nonperforming assets declined to $11.5 million, representing 0.38% of total assets at September 30, 2018, down favorably from 0.49% at December 31, 2017 and 0.55% at September 30, 2017. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

INCOME STATEMENT ANALYSIS

Net Interest Income

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

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


	For the Nine Months Ended September 30,												For the Six Months Ended June 30,
	2018						2017						2019						2018
(in thousands)	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
Loans, including loan fees (1)(2)	$	2,122,280	$	84,786	5.28	%	$	1,842,695	$	73,377	5.26	%	$	2,184,272	$	61,270	5.59	%	$	2,116,096	$	55,741	5.25	%
Investment securities:
Taxable	255,763		4,503		2.35	%	236,275		3,422		1.93	%	268,663		3,674		2.73	%	251,204		2,939		2.34	%
Tax-exempt (2)	151,643		2,467		2.17	%	160,815		3,267		2.71	%	137,576		1,513		2.20	%	153,724		1,658		2.16	%
Other interest-earning assets	134,395		2,326		2.29	%	51,803		1,136		2.92	%	128,046		1,807		2.81	%	142,938		1,579		2.20	%
Total non-loan earning assets	541,801		9,296		2.28	%	448,893		7,825		2.32	%	534,285		6,994		2.62	%	547,866		6,176		2.25	%
Total interest-earning assets	2,664,081		$	94,082	4.67	%	2,291,588		$	81,202	4.69	%	2,718,557		$	68,264	5.00	%	2,663,962		$	61,917	4.63	%
Other assets, net	306,941						288,538						316,101						306,946
Total assets	$	2,971,022					$	2,580,126					$	3,034,658					$	2,970,908
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY												LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	282,606	$	818	0.39	%	$	249,099	$	271	0.15	%	$	305,449	$	752	0.50	%	$	277,927	$	504	0.37	%
Interest-bearing demand	545,980		3,361		0.82	%	419,266		1,590		0.51	%	495,878		2,549		1.04	%	550,631		2,171		0.79	%
Money market (“MMA”)	650,485		2,897		0.60	%	581,277		1,165		0.27	%
Money market accounts (“MMA”)													569,167		1,986		0.70	%	678,719		1,918		0.57	%
Core time deposits	323,570		3,481		1.44	%	288,524		1,568		0.73	%	401,849		4,059		2.04	%	310,696		2,009		1.30	%
Brokered deposits	99,818		455		0.61	%	120,782		622		0.69	%	69,634		161		0.47	%	109,158		355		0.66	%
Total interest-bearing deposits	1,902,459		11,012		0.77	%	1,658,948		5,216		0.42	%	1,841,977		9,507		1.04	%	1,927,131		6,957		0.73	%
Other interest-bearing liabilities	77,870		2,579		4.38	%	62,414		1,966		4.17	%	77,368		1,803		4.64	%	78,210		1,696		4.32	%
Total interest-bearing liabilities	1,980,329		13,591		0.92	%	1,721,362		7,182		0.56	%	1,919,345		11,310		1.19	%	2,005,341		8,653		0.87	%
Noninterest-bearing demand	603,317						516,412						693,482						582,882
Other liabilities	18,509						19,079						24,108						17,193
Stockholders’ equity	368,867						323,273						397,723						365,492
Total liabilities and stockholders’ equity	$	2,971,022					$	2,580,126					$	3,034,658					$	2,970,908
Net interest income and rate spread			$	80,491	3.75	%			$	74,020	4.13	%			$	56,954	3.81	%			$	53,264	3.76	%
Tax-equivalent adjustment			$	872					$	1,785					$	535					$	587
Net interest margin					3.99	%					4.27	%					4.16	%					3.98	%


(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% ~~for 2018 periods and 34% for 2017 periods~~ and adjusted for the disallowance of interest expense.

Table 2: Average Balance Sheet and Net Interest Income Analysis –- Tax-Equivalent Basis (Continued)


	For the Three Months Ended September 30,													For the Three Months Ended June 30,
	2018							2017						2019						2018
(in thousands)	Average Balance			Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Interest-earning assets
Loans, including loan fees (1)(2)	$	2,134,448		$	29,045	5.35	%	$	2,035,277	$	27,420	5.29	%	$	2,189,070	$	31,257	5.66	%	$	2,117,828	$	27,241	5.10	%
Investment securities:
Taxable	264,733			1,564		2.36	%	248,579		1,114		1.79	%	269,072		2,041		3.03	%	257,537		1,597		2.48	%
Tax-exempt (2)	147,547			809		2.19	%	160,965		1,107		2.75	%	133,862		737		2.20	%	151,163		818		2.16	%
Other interest-earning assets	117,588			747		2.51	%	60,252		407		2.69	%	110,353		798		2.87	%	216,448		1,178		2.16	%
Total non-loan earning assets	529,868			3,120		2.35	%	469,796		2,628		2.23	%	513,287		3,576		2.78	%	625,148		3,593		2.29	%
Total interest-earning assets	2,664,316			$	32,165	4.75	%	2,505,073		$	30,048	4.72	%	2,702,357		$	34,833	5.11	%	2,742,976		$	30,834	4.46	%
Other assets, net	306,931							320,469						320,026						301,490
Total assets	$	2,971,247						$	2,825,542					$	3,022,383					$	3,044,466
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY													LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	291,811		$	313	0.43	%	$	268,552	$	129	0.19	%	$	311,029	$	392	0.50	%	$	282,656	$	286	0.41	%
Interest-bearing demand	536,830			1,191		0.88	%	441,409		758		0.68	%	478,447		1,228		1.03	%	539,744		1,098		0.82	%
MMA	594,937			979		0.65	%	606,737		622		0.41	%	559,355		976		0.70	%	765,741		1,195		0.63	%
Core time deposits	348,899			1,472		1.67	%	297,318		595		0.79	%	406,427		2,100		2.07	%	317,594		1,143		1.44	%
Brokered deposits	81,441			100		0.49	%	172,200		260		0.60	%	60,115		34		0.23	%	100,426		146		0.59	%
Total interest-bearing deposits	1,853,918			4,055		0.87	%	1,786,216		2,364		0.53	%	1,815,373		4,730		1.05	%	2,006,161		3,868		0.77	%
Other interest-bearing liabilities	77,201		��	883		4.49	%	68,123		699		4.04	%	77,402		896		4.59	%	78,200		874		4.43	%
Total interest-bearing liabilities	1,931,119			4,938		1.01	%	1,854,339		3,063		0.65	%	1,892,775		5,626		1.19	%	2,084,361		4,742		0.91	%
Noninterest-bearing demand	643,521							591,013						698,853						576,951
Other liabilities	21,100							21,962						26,410						18,166
Stockholders’ equity	375,507							358,228						404,345						364,988
Total liabilities and stockholders’ equity	$	2,971,247						$	2,825,542					$	3,022,383					$	3,044,466
Net interest income and rate spread				$	27,227	3.74	%			$	26,985	4.07	%			$	29,207	3.92	%			$	26,092	3.55	%
Tax-equivalent adjustment				$	285					$	594					$	263					$	289
Net interest margin						4.02	%					4.24	%					4.28	%					3.77	%


(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% ~~for 2018 periods and 34% for 2017 periods~~ and adjusted for the disallowance of interest expense.

Table 3: Volume/Rate Variance –- Tax-Equivalent Basis


	For the Three Months Ended September 30, 2018 Compared to September 30, 2017:									For the Nine Months Ended September 30, 2018 Compared to September 30, 2017:									For the Three Months Ended June 30, 2019 Compared to June 30, 2018:									For the Six Months Ended June 30, 2019 Compared to June 30, 2018:
	Increase (Decrease) Due to Changes in									Increase (Decrease) Due to Changes in									Increase (Decrease) Due to Changes in									Increase (Decrease) Due to Changes in
(in thousands)	Volume			Rate			Net (1)			Volume			Rate			Net (1)			Volume			Rate			Net ⁽¹⁾			Volume			Rate			Net ⁽¹⁾
Interest-earning assets
Loans (2)	$	1,452		$	173		$	1,625		$	11,431		$	(22	)	$	11,409		$	996		$	3,020		$	4,016		$	1,968		$	3,561		$	5,529
Investment securities:
Taxable	220			230			450			626			455			1,081			101			343			444			484			251			735
Tax-exempt (2)	(88		)	(210		)	(298		)	(179		)	(621		)	(800		)	(94		)	13			(81		)	(177		)	32			(145		)
Other interest-earning assets	301			39			340			1,121			69			1,190			(583		)	203			(380		)	(130		)	358			228
Total non-loan earning assets	433			59			492			1,568			(97		)	1,471			(576		)	559			(17		)	177			641			818
Total interest-earning assets	$	1,885		$	232		$	2,117		$	12,999		$	(119	)	$	12,880		$	420		$	3,579		$	3,999		$	2,145		$	4,202		$	6,347

Interest-bearing liabilities
Savings	$	12		$	172		$	184		$	41		$	506		$	547		$	31		$	75		$	106		$	54		$	194		$	248
Interest-bearing demand	185			248			433			578			1,193			1,771			(135		)	265			130			(232		)	610			378
MMA	(13		)	370			357			154			1,578			1,732			(348		)	129			(219		)	(339		)	407			68
Core time deposits	119			758			877			211			1,702			1,913			374			583			957			703			1,347			2,050
Brokered deposits	(118		)	(42		)	(160		)	(100		)	(67		)	(167		)	(44		)	(68		)	(112		)	(108		)	(86		)	(194		)
Total interest-bearing deposits	185			1,506			1,691			884			4,912			5,796			(122		)	984			862			78			2,472			2,550
Other interest-bearing liabilities	64			120			184			332			281			613			6			16			22			(1		)	108			107
Total interest-bearing liabilities	249			1,626			1,875			1,216			5,193			6,409			(116		)	1,000			884			77			2,580			2,657
Net interest income	$	1,636		$	(1,394	)	$	242		$	11,783		$	(5,312	)	$	6,471		$	536		$	2,579		$	3,115		$	2,068		$	1,622		$	3,690


(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)	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% ~~for 2018 periods and 34% for 2017 periods~~ and adjusted for the disallowance of interest expense.

The Federal Reserve raised short-term interest rates by 25 bps in eight moves from fourth quarter 2016 through fourth quarter 2018 (up 200 bps total) to 2.50% at December 31, 2018, with no short-term moves in 2019 through June 30. The noted increases impacted the rate earned on short-term assets and pressured the cost of shorter-term borrowings, but did not consistently cause a corresponding increase on rates further out on the curve. Hence, 2018 was characterized by a flattening yield curve, while the first six months of 2019 has had periods of an inverted yield curve.

Tax-equivalent net interest income was ~~$80~~$57.0 million for the first ~~nine~~six months of ~~2018, $6.5~~2019, comprised of net interest income of $56.4 million ($3.7 million or 9%7% higher than ~~$74~~first half 2018, overcoming $1.0 million ~~for~~lower aggregate discount accretion on purchased loans), and a $0.5 million tax-equivalent adjustment (relatively unchanged between the ~~first nine months~~periods). The $3.7 million increase in tax-equivalent net interest income was due to favorable volumes (which added $2.1 million, with $2.0 million from higher loan volumes) and favorable rates (which added $1.6 million). The net $1.6 million increase from rates was from interest-earning asset rate changes in the higher interest rate environment (improving net interest income by $4.2 million, of ~~2017.~~ which $3.6 million was from loans, inclusive of the lower aggregate discount accretion), exceeding the rising cost of funds (which cost $2.6 million more, led by interest-bearing deposits and most notably time deposits).

Between the ~~comparative nine-month~~comparable six-month periods, the interest rate spread ~~decreased 38~~increased 5 bps due to ~~a higher cost of funds (up 36 bps) and a decrease~~an increase in the interest-earning asset yield ~~(down 2 bps)~~(up 37 bps to 5.00%, aided by an improved mix of assets in higher-yielding loans), exceeding a rise in the cost of funds (up 32 bps to 1.19%). The contribution from net free funds increased 1013 bps, due mostly to the increase in average noninterest-bearing demand deposits (up ~~17%~~19%) and their increased value in the higher rate environment. As a result, the tax-equivalent net interest margin was ~~3.99%~~4.16% for first half 2019, up 18 bps compared to 3.98% for the comparable 2018 period.

Average interest-earning assets were $2.7 billion for the first ~~nine~~six months of ~~2018, down 28 bps compared to 4.27% for~~2019, $55 million or 2% higher than the comparable ~~2017~~2018 period.

Between the ~~comparable nine-month~~six-month periods, average ~~interest-earning assets~~loans increased ~~$372~~$68 million or ~~16% to $2.7 billion, primarily due to a $280 million or 15% increase in loans (attributable to acquired balances as well as organic growth) and a $93 million increase in~~3%, while all other interest-earning assets declined $13 million (mainly ~~low~~in lower earning cash, ~~which included the 2018 large short-term deposit previously noted)~~as total investment securities were relatively unchanged). The 2019 mix of average interest-earning assets was 80% loans, 15% investments, and 5% other interest-earning assets (mostly cash), compared to ~~80%~~79%, ~~18%~~15% and 2%6%, respectively, for ~~the nine months of 2017.~~first half 2018.

Tax-equivalent interest income ~~increased $12.9~~was $68.3 million for first half 2019, up $6.3 million or ~~16% to $94 million for the~~10% over first ~~nine months of~~half 2018, while the related interest-earning asset yield ~~decreased 2~~was 5.00%, up 37 bps ~~to 4.67%.~~over first half 2018. Interest income on loans increased ~~$11~~$5.5 million or 10% over ~~the~~ first ~~nine months of 2017, while the related yield was up 2 bps to 5.28%~~half 2018, despite $4$1.0 million lower aggregate discount accretion income ~~on favorably resolved purchased credit impaired loans~~ between the periods (predominantly attributable to aging discounts on purchased loans). The 2019 loan yield was 5.59%, up 34 bps over first half 2018 (which, if excluding the ~~PCI interest~~aggregate discount accretion income from both ~~nine month~~six-month periods, ~~the loan yield~~ would have increased 3244 bps), as ~~the higher yield~~improved yields on new, renewed and variable rate loans in the ~~rising~~higher rate environment more than offset the lower aggregate discount income. ~~Interest~~Between the comparable six-month periods, interest income on non-loan earning assets combined increased $1$0.8 million or ~~19% over the first nine months of 2017,~~13%, while the related yield ~~decreased 4~~increased 37 bps to 2.62%, due mostly to the ~~lower corporate effective tax~~higher rate ~~for 2018 reducing the benefit (and thus yields) of tax-exempt investment securities and the higher volume of lower interest-earning~~on cash ~~offset partly by~~levels, as well as higher yields on new investments added in the higher rate environment.

Average interest-bearing liabilities were ~~$2.0~~$1.9 billion, ~~an increase~~a decrease of ~~$259~~$86.0 million or ~~15%~~4% compared to ~~the~~ first ~~nine months of 2017,~~half 2018, primarily due to ~~a $244~~an $85.2 million or ~~15% increase~~4% decrease in interest-bearing deposits ~~(attributable to acquired balances and~~(with organic growth ~~including~~partially offsetting the $0.1 billion impact on first half 2018 of carrying a $0.3 billion short-term transaction deposit of a large commercial customer from late March to mid-June 2018). With core deposit ~~previously noted).~~growth (especially in core time deposits, responding to more favorable rate offerings between the years), brokered deposits have continued to decline. The mix of average interest-bearing liabilities was ~~91%~~92% core deposits, 5%4% brokered deposits and 4% other funding, compared to ~~89%~~90%, 7%6% and 4%, respectively, for ~~the nine months of 2017.~~

first half 2018.

Interest expense was ~~$14~~$11.3 million for ~~the~~ first ~~nine months of 2018,~~half 2019, up $6$2.7 million over ~~the~~ first ~~nine months of 2017,~~half 2018, and the related cost of funds increased 3632 bps to ~~0.92%~~1.19%, driven predominantly by the cost, mix and volume of deposits. Interest expense on deposits increased ~~nearly $6~~$2.6 million from ~~the~~ first ~~nine months of 2017~~half 2018 and the average cost of interest-bearing deposits increased 3531 bps to ~~0.77%~~1.04%, influenced by increases in select deposit rates from general rate pressures of the ~~federal funds~~higher rate environment and the larger proportion of core time deposits. The 2019 cost of savings, interest-bearing demand and money market accounts increased over first half 2018 by 13 bps, 25 bps and 13 bps, respectively, as product rate changes ~~since~~lagged the ~~start~~incremental rise in the rate environment, and time deposits cost 74 bps more between the six-month periods commensurate with paying more for a customer's commitment of ~~2017. The Federal Reserve raised short-term interest rates by 150 bps since January 1, 2017.~~term in the higher rate environment.

Of note for 2018, the large customer deposit previously noted as accepted in late March and fully distributed by mid-June was a positive contributor to net interest income, though at a very low net spread, compressing the related margin components for 2018. The inclusion of the large deposit lowered the 2018 earning asset yield by approximately 8 bps and net interest margin by 8 bps, with no material impact on the cost of funds.

Provision for Loan Losses

Asset quality trends remained strong. The provision for loan losses was ~~$1.4~~$0.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018, exceeding net charge-offs of~~2019, compared to $1.0 ~~million. In comparison, the provision for loan losses~~million for the ~~nine~~six months ended ~~September~~June 30, ~~2017, was $1.9 million, exceeding net charge-offs of $1.1 million. Asset quality trends remained strong with continued resolutions of problem loans.~~2018. The ALLL was ~~$13.0~~$13.6 million ~~(0.61%~~(0.62% of loans) at ~~September~~June 30, ~~2018,~~2019, compared to ~~$12.7~~$13.2 million (0.61% of loans) at December 31, ~~2017~~2018 and ~~$12.6~~$12.9 million ~~(0.61%~~(0.60% of loans) at ~~September~~June 30, ~~2017.~~2018.

The provision for loan losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ALLL. The appropriateness of the ALLL is affected by changes in the size and character of the loan portfolio, changes in levels of impaired 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 ALLL, see ~~“Balance Sheet Analysis~~“BALANCE SHEET ANALYSIS — Loans,” “— Allowance for Loan Losses,” and “— Nonperforming Assets.”

Noninterest Income

Table 4: Noninterest Income


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,									Six Months Ended June 30,
(in thousands)	2018		2017		$ Change			% Change		2018		2017		$ Change			% Change		2019		2018		$ Change			% Change		2019		2018		$ Change			% Change
Trust services fee income	$	1,638	$	1,479	$	159		10.8	%	$	4,915	$	4,431	$	484		10.9	%	$	1,569	$	1,671	$	(102	)	(6	)%	$	3,037	$	3,277	$	(240	)	(7	)%
Brokerage fee income	1,732		1,500		232			15.5		5,074		4,192		882			21.0		2,002		1,738		264			15		3,812		3,342		470			14
Mortgage income, net	1,902		1,774		128			7.2		4,510		4,022		488			12.1		2,059		1,528		531			35		3,262		2,608		654			25
Service charges on deposit accounts	1,247		1,238		9			0.7		3,637		3,367		270			8.0		1,194		1,200		(6		)	(1	)	2,364		2,390		(26		)	(1	)
Card interchange income	1,481		1,225		256			20.9		4,082		3,378		704			20.8		1,660		1,358		302			22		3,080		2,601		479			18
BOLI income	1,019		459		560			122.0		1,929		1,314		615			46.8		880		468		412			88		1,339		910		429			47
Rent income	303		285		18			6.3		951		852		99			11.6
Other income	1,181		899		282			31.4		3,292		2,391		901			37.7		1,624		1,304		320			25		3,108		2,759		349			13
Noninterest income without net gains	10,503		8,859		1,644			18.6		28,390		23,947		4,443			18.6		10,988		9,267		1,721			19		20,002		17,887		2,115			12
Asset gains (losses), net	146		1,305		(1,159		)	(88.8	)	1,322		2,071		(749		)	(36.2	)	7,572		972		6,600			N/M		7,744		1,176		6,568			N/M
Total noninterest income	$	10,649	$	10,164	$	485		4.8	%	$	29,712	$	26,018	$	3,694		14.2	%	$	18,560	$	10,239	$	8,321		81	%	$	27,746	$	19,063	$	8,683		46	%
Trust services fee income & Brokerage fee income combined																			$	3,571	$	3,409	$	162		5	%	$	6,849	$	6,619	$	230		3	%

N/M means not meaningful.

Noninterest income ~~grew $3.7~~was $27.7 million for first half 2019, compared to $19.1 million for first half 2018, an increase of $8.7 million or ~~14% over~~46%, mostly due to the ~~first nine months of 2017, with all categories increasing except~~$7.4 million gain on the equity investment sale noted previously. Noninterest income excluding net asset ~~gains.~~

~~Trust service fees were up $0.5~~gains grew $2.1 million or ~~11%~~12% between the comparable ~~nine-month~~six-month periods, ~~due to higher assets under management. Between the first nine months,~~with most categories up year over year.

Trust services fee income and brokerage ~~fees~~fee income combined were up ~~$0.9~~$0.2 million or ~~21%, attributable to growth within~~3% with some Trust accounts being transferred into the ~~financial advisor business.~~Brokerage accounts.

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, fair value marks on the mortgage interest rate lock commitments and forward commitments, offsetting MSR amortization, MSR valuation changes, if any, and to a smaller degree some related income. Net mortgage income increased ~~$0.5~~$0.7 million or ~~12%~~25% between the comparable ~~nine-month~~six-month periods, ~~commensurate with~~predominantly from higher ~~sales volume~~MSR gains (reflective of changes in MSR capitalization assumptions in mid-2018), higher gains on sale, and increased net servicing fees on the growing portfolio of mortgage loans serviced for ~~others.~~

others, partially offset by unfavorable changes in the fair value of the mortgage interest rate lock and forward commitments.

Service charges on deposits accounts were minimally changed at $2.4 million for both six-month periods. The change in the 2019 deposit ~~accounts increased $0.3 million or 8% over~~base had minimal impact on service charges since most of the ~~first nine months of 2017, resulting from a higher number of accounts~~deposit growth in 2019 occurred in time deposits and anthe increase to the ~~fee charged on overdrafts implemented during mid-2017.~~ earnings credit rate in mid-2018 mostly offset the growth in transaction deposits.

Card interchange income grew ~~$0.7~~$0.5 million or ~~21%~~18% due to higher volume and activity.

BOLI income ~~was up $0.6~~increased $0.4 million, ~~or 47% over the first nine months of 2017, with the majority~~fully attributable to a BOLI death ~~benefit.~~ benefit received in second quarter 2019.

Other income ~~was $3.3~~increased $0.3 million, ~~up $0.9 million or 38% over the first nine months of 2017,~~ mostly attributable to the fee earned on a customer loan interest rate swap in second quarter 2019.

The $7.7 million net asset gains in first half 2019 were comprised primarily of the $7.4 million gain on the equity investment sale and $0.6 million of favorable fair value marks on equity securities, partially offset by losses of $0.1 million on the disposal of fixed assets, a $0.1 million write-down on an ~~increase~~OREO property, and a $0.1 million write-down on an other investment. The $7.4 million equity investment gain was related to Nicolet's sale of ~~$0.3 million in income from the~~approximately 80% of its equity interest in UFS, (aLLC, a data processing ~~company interest acquired with a 2016 bank merger)~~ and ~~$0.3 million of annual card contract incentives received in first quarter 2018.~~

e-banking entity. The ~~$1.3~~$1.2 million net asset gains in first half 2018 were primarily attributable to $0.6 million of net gains on the sale of ~~OREO and~~ fixed assets, ~~and~~ a ~~$0.7~~$0.3 million ~~favorable~~ fair value mark on equity ~~securities. The $2.1~~securities, and a $0.2 million ~~net asset gains in 2017 were primarily attributable to a $1.2 million gain to record the fair value of Nicolet's pre-acquisition interest in First Menasha, a $0.3 million net~~ gain on the sale of ~~OREO, and a $0.7 million net gain on the sale or disposition of assets (mostly from the sale of two vacated bank branches).~~equity securities.

Noninterest Expense

Table 5: Noninterest Expense


	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,									Six Months Ended June 30,
($ in thousands)	2018		2017		Change			% Change		2018		2017		Change			% Change		2019		2018		Change			% Change		2019		2018		Change			% Change
Personnel	$	12,983	$	11,488	$	1,495		13.0	%	$	38,149	$	32,404	$	5,745		17.7	%	$	15,358	$	12,674	$	2,684		21	%	$	27,895	$	25,166	$	2,729		11	%
Occupancy, equipment and office	3,660		3,559		101			2.8		10,901		9,613		1,288			13.4		3,757		3,454		303			9		7,507		7,241		266			4
Business development and marketing	1,334		1,113		221			19.9		4,139		3,359		780			23.2		1,579		1,463		116			8		2,860		2,805		55			2
Data processing	2,375		2,238		137			6.1		7,094		6,428		666			10.4		2,350		2,399		(49		)	(2	)	4,705		4,719		(14		)	—
FDIC expense	245		205		40			19.5		800		582		218			37.5
Intangibles amortization	1,054		1,173		(119		)	(10.1	)	3,336		3,514		(178		)	(5.1	)	969		1,100		(131		)	(12	)	2,022		2,282		(260		)	(11	)
Other expense	1,393		1,086		307			28.3		3,718		3,598		120			3.3		1,714		1,361		353			26		3,497		2,880		617			21
Total noninterest expense	$	23,044	$	20,862	$	2,182		10.5	%	$	68,137	$	59,498	$	8,639		14.5	%	$	25,727	$	22,451	$	3,276		15	%	$	48,486	$	45,093	$	3,393		8	%

Non-personnel expenses	$	10,061	$	9,374	$	687		7.3	%	$	29,988	$	27,094	$	2,894		10.7	%	$	10,369	$	9,777	$	592		6	%	$	20,591	$	19,927	$	664		3	%
Average full-time equivalent employees	567		547		20			3.7	%	554		519		35			6.7	%	555		552		3			1	%	552		548		4			1	%

Noninterest expense ~~increased $8.6~~was $48.5 million, an increase of $3.4 million or ~~15%~~8% over first half 2018. Personnel costs increased $2.7 million, and non-personnel expenses combined increased $0.7 million or 3% over the first ~~nine months~~half of 2017, mostly due to the expanded workforce and larger operating base. Excluding the $0.5 million of non-recurring merger-related costs included in 2017, noninterest expense increased $9.1 million or 15%.2018.

Personnel expense was ~~$38.1~~$27.9 million for the first ~~nine~~six months of ~~2018, up $5.7~~2019, an increase of $2.7 million or ~~18% compared~~11% over the comparable period in 2018. As previously noted, the increase in personnel expense was largely driven by $2.75 million of retirement-related compensation actions in second quarter 2019, including a discretionary profit sharing contribution of $1.05 million to the ~~first nine months of 2017, partly due~~401k plan and a $1.7 million contribution to the ~~expanded workforce resulting from~~nonqualified deferred compensation plan. Consistent with our philosophy of aligning outcomes to customers, shareholders, and employees, the ~~2017 acquisition, with average full-time equivalent~~board approved these retirement-related compensation actions to benefit

all employees ~~up 7% between~~following the ~~comparable nine-month periods. Additionally,~~recognition of the ~~increase results from~~gain on the equity investment sale. Personnel expense was also impacted by merit increases between the periods ~~additional competitive market-based wage increases made more broadly across staff positions after tax reform was passed,~~(though on a minimally changed workforce, with average full-time equivalents up less than 1%), lower equity and cash incentives (mostly timing in nature), and ~~equity incentives timing, and higher~~lower health and other ~~benefits~~benefit costs.

Occupancy, equipment and office expense was ~~$10.9~~$7.5 million for ~~the~~ first ~~nine months of 2018,~~half 2019, up ~~$1.3~~$0.3 million or ~~13%~~4% compared to ~~2017, primarily the result of the larger operating base and~~first half 2018, with 2019 including higher expense for software and technology ~~costs as the Company invests in~~ solutions ~~that will~~to drive operational efficiency and product or service ~~enhancements. In addition, 2018 includes~~enhancements, and both periods including approximately ~~$0.4~~$0.2 million of accelerated depreciation ~~on old buildings related to two branches, one extensively renovated and the other a new location under construction.~~for branch facility upgrades.

Business development and marketing expense was ~~$4.1~~$2.9 million, up ~~$0.8~~$0.1 million or ~~23%~~2%, between the comparable ~~nine-month~~six-month periods, largely due to ~~$0.7 million higher charitable giving and~~ the timing and extent of donations, marketing campaigns, promotions, and media.

~~Data processing, which is primarily volume-based, rose $0.7~~Intangibles amortization decreased $0.3 million ~~or 10%~~ between the ~~comparable nine-month periods; however, excluding the $0.2 million of merger-related expenses incurred in 2017, data processing costs rose 14%, in line with the higher volume of accounts and activity.~~

~~Intangible amortization decreased between the nine-month~~first half periods ~~as higher expense~~ from ~~intangibles added in April 2017 was more than offset by~~ declining amortization on the aging intangibles of previous acquisitions. Other expense was $3.5 million, up ~~$0.1~~$0.6 million

or 3%21% between the comparable ~~nine-month periods; however, excluding the~~six-month periods, due primarily to a $0.3 million ~~of merger-related expenses incurred~~fraud contingency loss recognized in ~~2017, other expenses rose 11%,~~first quarter 2019 and $0.3 million for the annual equity retainer granted to directors in ~~line with the larger operating base offset by certain economies of scale.~~second quarter 2019 (versus granted in third quarter last year).

Income Taxes

Income tax expense was ~~$9.4~~$6.2 million (effective tax rate of ~~23.7%~~17.6%) for ~~the~~ first ~~nine months of 2018,~~half 2019, compared to ~~$12.6~~$6.2 million (effective tax rate of ~~34.2%~~24.0%) for the comparable period of ~~2017.~~2018. The ~~underlying Federal corporate~~lower effective tax rate ~~declined~~was due to ~~21% (beginning in 2018) from 35% (for 2017) as a result~~the favorable tax treatment of the ~~Tax Cuts and Jobs Act passed in December 2017, impacting the effective tax rates between the years. Additionally, the~~equity investment sale, BOLI death benefit, ~~recognized in third quarter 2018 was non-taxable,~~ and athe tax benefit of $159,000 and $176,000 was recorded against income tax expense for the nine months ended September 30, 2018 and 2017, respectively, related to the tax impact of stock option exercises and vesting of restricted stock.on stock-based compensation.

Income Statement Analysis – Three Months Ended ~~September~~June 30, ~~2018~~2019 versus Three Months Ended ~~September~~June 30, ~~2017~~2018

Net income was ~~$10.9~~$18.5 million for the three months ended ~~September~~June 30, ~~2018,~~2019, an increase of ~~$1.3~~$8.8 million or ~~14%~~91% over ~~$9.5~~$9.7 million for the three months ended ~~September~~June 30, ~~2017.~~2018. Earnings per diluted common share was ~~$1.09~~$1.91 for ~~third~~second quarter ~~2018, 20%~~2019, 95% higher than ~~$0.91~~$0.98 for ~~third~~second quarter ~~2017. Annualized return on average assets~~2018. Net income in second quarter 2019 included $5.4 million from two nonrecurring items, a $7.4 million after-tax gain from the equity investment sale previously noted (recorded in net asset gains) and $2.75 million ($2.0 million after tax) in personnel expense for ~~third quarter 2018 and 2017 was 1.45% and 1.34%, respectively.~~retirement-related compensation actions.

Tax-equivalent net interest income was ~~$27.2~~$29.2 million for ~~third~~second quarter ~~2018,~~2019, comprised of net interest income of ~~$26.9~~$28.9 million ($~~0.6~~3.1 million or 2%12% over ~~third~~second quarter ~~2017, despite $1.8~~2018, driven mostly by net positive rate variances, including $0.6 million ~~lower~~higher aggregate discount accretion on purchased loans), and a tax-equivalent adjustment of $0.3 million ~~(down $0.3 million, due to lower tax-exempt municipal securities held and the lower corporate tax rate between the years)~~(unchanged from second quarter 2018). Tax-equivalent interest income increased ~~$2.1~~$4.0 million between the ~~third~~second quarter periods, with ~~$1.9 million from stronger earning asset volumes (led by loans and lower earning cash) and $0.2~~$3.6 million from improved yields across all interest-earning assets though led by loans (with a 365 bps increase in the interest-earning asset ~~yield, despite lower discount accretion income~~yield) and $0.4 million from ~~favorably resolved purchased credit impaired~~stronger volumes (led by average loans ~~and the lower taxable equivalent adjustment). Excluding the PCI interest from both third~~which grew to represent 81% of interest-earning assets versus 77% for second quarter ~~periods, the loan yield would have increased 38 bps, compared to the reported 6 bps increase reflected in Table 2.~~2018). Interest expense increased ~~$1.9~~$0.9 million over ~~third~~second quarter ~~2017,~~2018, with ~~$1.6~~$1.0 million from rising rates (with a 3628 bps increase in the cost of funds) and the remainder from higher volumes, both led by ~~deposits.~~deposits and deposit mix. For additional information regarding average balances and net interest income, see “Income Statement Analysis — Net Interest Income.”

Second quarter 2019 earning asset yield, cost of funds, and net interest margin were 5.11%, 1.19% and 4.28%, respectively, compared to 4.46%, 0.91% and 3.77%, respectively, for second quarter 2018. Of note, a $0.3 billion short-term transaction deposit of a long-standing customer was carried from late March to mid-June 2018, increasing second quarter 2018 average deposits and interest-bearing cash each by approximately $0.2 billion. The inclusion of the large deposit was a positive contributor to second quarter 2018 net interest income, though at a very low net spread, which lowered that quarter's reported earning asset yield and net interest margin by approximately 20 bps each and lowered the reported cost of funds by approximately 2 bps. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

Asset quality remained exceptional. For ~~third~~second quarter ~~2018,~~2019, provision for loan losses was $0.3 million ~~and~~(covering $0.1 million of net ~~charge-offs were $0.2 million, on continually improving asset quality. Provision~~charge-offs), compared to provision for loan losses of $0.5 million (covering $0.4 million of net charge-offs) for ~~third~~second quarter ~~2017 was $1.0 million, with net charge-offs of $1.0 million due to the charge-off of a large commercial loan.~~2018.

Noninterest income was ~~$10.6~~$18.6 million for ~~third~~second quarter ~~2018,~~2019, an increase of ~~$0.5~~$8.3 million or 5%81% over ~~third~~second quarter ~~2017.~~2018. Excluding net asset gains, noninterest income increased ~~$1.6~~$1.7 million or 19%, largely due to ~~trust and brokerage fees (up $0.4 million or 13% combined), card interchange income (up $0.3 million or 21% on higher volume and activity),~~ mortgage income (up ~~$0.1~~$0.5 million or 7%35% on higher sales volume and a larger servicing portfolio), trust services fee income and brokerage fee income combined (up $0.2 million or 5%, with some Trust accounts being transferred into Brokerage), card interchange income (up $0.3 million or 22% on higher volume and activity), and BOLI income (up ~~$0.6~~$0.4 million from a death benefit). Net asset gains of ~~$0.1~~$7.6 million for ~~third~~second quarter ~~2018~~2019 were largely attributable to ~~fair value marks~~the $7.4 million gain on the equity ~~securities.~~investment sale noted previously. Net asset gains of ~~$1.3~~$1.0 million for ~~third~~second quarter ~~2017~~2018 were primarily attributable to $0.4 million of net gains on the ~~gain to record the~~sale of fixed assets, a $0.4 million fair value mark on equity securities, and a $0.2 million gain on the sale of ~~Nicolet's pre-acquisition interest in First Menasha.~~equity securities. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

Noninterest expense was ~~$23.0~~$25.7 million for ~~third~~second quarter ~~2018,~~2019, an increase of ~~$2.2~~$3.3 million or ~~10%~~15% over ~~third~~second quarter ~~2017.~~2018. Personnel expense increased ~~$1.5~~$2.7 million or ~~13%~~21% from ~~third~~second quarter ~~2017 partly due~~2018, fully attributable to the ~~expanded workforce (average FTEs increased 4%), as well as~~large retirement-related compensation noted previously. Personnel expense was also impacted by merit ~~and competitive wage~~ increases between the periods ~~higher~~(though on a

minimally changed workforce, with average full-time equivalents up less than 1%), lower equity and cash incentives (mostly timing in nature), and ~~higher~~minimally changed health and other benefit costs. Non-personnel expenses combined increased ~~$0.7~~$0.6 million or 7%6%, largely due to ~~business development~~occupancy, equipment, and ~~marketing~~office (up ~~$0.2~~$0.3 million or ~~20%~~9%, ~~on higher charitable giving)~~attributable to accelerated depreciation for branch facility upgrades) and other expense (up ~~$0.3~~$0.4 million or ~~28% for an~~26%, mainly from the $0.3 million annual equity retainer granted to ~~the Board)~~directors in second quarter versus third quarter last year). For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

Income tax expense for ~~third~~second quarter 2018 benefited from the lower corporate tax rate effective in 2018, due to the passage of the Tax Cuts and Jobs Act in December 2017, as well as the tax treatment on the BOLI death benefit in 2018. Income tax expense for third quarter 20182019 was ~~$3.3~~$2.8 million, with an effective tax rate of ~~23.0%~~13.2%, compared to income tax expense of ~~$5.1~~$3.3 million and an effective tax rate of ~~34.9%~~24.9% for ~~third~~second quarter ~~2017.~~2018. The lower income tax expense and effective tax rate was due to the favorable tax treatment of the equity investment sale, BOLI death benefit, and the tax benefit on stock-based compensation.

BALANCE SHEET ANALYSIS

At ~~September~~June 30, ~~2018,~~2019, assets were ~~$3.0~~$3.1 billion, ~~an increase~~a decrease of ~~$68~~$42 million or 1% from December 31, 2018, while deposits were $2.5 billion, a decrease of $78 million or 3% over the same period, with both reflecting the usual cyclical decline. Loans grew $37 million or 2% ~~from December 31, 2017, including an increase of $56 million or 3% in loans, fully attributable~~ to ~~commercial-based loans. Deposits of $2.5~~$2.2 billion ~~increased $51 million or 2% over the same period.~~at June 30, 2019. Total stockholders’ equity was ~~$377~~$411 million, an increase of ~~$13~~$25 million from December 31, ~~2017,~~2018, with ~~net income and stock issuances partially offset by stock repurchases~~earnings and net fair value investment ~~changes.~~

changes partially offset by stock repurchases.

Compared to ~~September~~June 30, ~~2017,~~2018, assets ~~increased $155~~were $3.1 billion, up $133 million or 5%, ~~including~~and deposits were $2.5 billion, an increase of ~~$92~~$81 million or 5%3%, largely due to growth in ~~loans, fully attributable to commercial-based loans. Deposits~~time deposits. Loans increased ~~$155~~$75 million or ~~7% over the same period.~~4% from June 30, 2018. Compared to ~~September~~June 30, ~~2017,~~2018, stockholders’ equity increased ~~$17~~$41 million, primarily due to net income, ~~and~~ stock issuances, and net fair value investment changes partially offset by stock repurchases over the year.

Loans

Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan. ~~It continues to concentrate its efforts in~~The Company concentrates on originating loans in its local markets and assisting its current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At ~~September~~June 30, ~~2018,~~2019, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks. See also Note 6, “Loans, Allowance for Loan Losses, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on loans.

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

Table 6: Period End Loan Composition


	September 30, 2018				December 31, 2017				September 30, 2017				June 30, 2019				December 31, 2018				June 30, 2018
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial & industrial	$	665,754	31.1	%	$	637,337	30.5	%	$	625,729	30.5	%	$	737,928	34	%	$	684,920	32	%	$	666,249	31	%
Owner-occupied CRE	449,151		21.0		430,043		20.6		428,054		20.9		447,554		20		441,353		20		448,367		21
AG production	35,727		1.7		35,455		1.7		36,352		1.8		35,765		2		35,625		2		34,016		2
Commercial	1,150,632		53.8		1,102,835		52.8		1,090,135		53.2		1,221,247		56		1,161,898		54		1,148,632		54
AG real estate	52,378		2.4		51,778		2.5		48,443		2.4		53,485		2		53,444		2		53,019		2
CRE investment	331,312		15.5		314,463		15.1		303,448		14.8		326,820		15		343,652		16		333,893		16
Construction & land development	86,533		4.0		89,660		4.3		87,649		4.3		73,108		3		80,599		4		75,053		4
Commercial real estate	470,223		21.9		455,901		21.9		439,540		21.5		453,413		20		477,695		22		461,965		22
Commercial-based loans	1,620,855		75.7		1,558,736		74.7		1,529,675		74.7		1,674,660		76		1,639,593		76		1,610,597		76
Residential construction	30,295		1.4		36,995		1.8		33,163		1.6		38,246		2		30,926		1		28,701		1
Residential first mortgage	357,163		16.6		363,352		17.4		363,116		17.7		345,061		16		357,841		17		358,537		17
Residential junior mortgage	109,692		5.1		106,027		5.1		102,654		5.0		116,433		5		111,328		5		106,592		5
Residential real estate	497,150		23.1		506,374		24.3		498,933		24.3		499,740		23		500,095		23		493,830		23
Retail & other	25,452		1.2		22,815		1.0		22,514		1.0		28,873		1		26,493		1		24,197		1
Retail-based loans	522,602		24.3		529,189		25.3		521,447		25.3		528,613		24		526,588		24		518,027		24
Total loans	$	2,143,457	100.0	%	$	2,087,925	100.0	%	$	2,051,122	100.0	%	$	2,203,273	100	%	$	2,166,181	100	%	$	2,128,624	100	%

Broadly, the loan portfolio at ~~September~~June 30, ~~2018, is~~2019, was 76% commercial-based and 24% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial-based loans of ~~$1.6~~$1.7 billion increased ~~$62~~$35 million or 4%2% since December 31, ~~2017,~~2018, primarily due to ~~a $28 million or 4% increase~~growth in commercial and industrial ~~and a $19 million or 4% increase in owner-occupied CRE.~~loans. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and ~~increased to 31.1%~~represented 34% of the total portfolio at ~~September~~June 30, ~~2018, up from 30.5% at December 31, 2017.~~

Commercial real estate loans of $0.5 billion increased $14 million or 3% from year-end 2017, primarily in CRE investment loans. Lending in the CRE investment and construction and land development categories has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development.2019.

Residential real estate loans ~~declined $9 million or 2% since~~were relatively unchanged from year-end ~~2017,~~2018, and represented ~~23.1%~~23% of total loans at ~~September~~June 30, ~~2018, compared to 24.3% at year-end 2017.~~2019. Residential first mortgage loans include conventional first-lien home mortgages, ~~and~~while residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are ~~largely~~ sold in the secondary market with or without retaining the servicing rights. ~~Mortgage~~Nicolet's mortgage loans ~~retained in the portfolio~~ are typically of high quality and have historically had low net charge-off rates.

Retail and other loans (up $2 million from year-end 2018) represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. ~~The loan balances in this portfolio remained relatively unchanged from December 31, 2017 to September 30, 2018.~~

Allowance for Loan Losses

In addition to the discussion that follows, see also Note 6, “Loans, Allowance for Loan Losses, and Credit Quality,” in the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on the allowance for loan losses.

Credit risks within the loan portfolio are inherently different for each loan type as ~~described~~summarized under ~~“Balance Sheet Analysis~~“BALANCE SHEET ANALYSIS — Loans.” A detailed discussion of the loan portfolio credit risk can be found in the "Loans" section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2018 Annual Report on Form 10-K. There have been no material changes in the credit risk of the Company's loan portfolio since December 31, 2018. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ~~on-going~~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.

The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the appropriateness of the ALLL, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v)

the risk characteristics of the various loan ~~portfolios;~~segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing ~~and forecasted~~ economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses. Assessing these numerous factors involves significant judgment; therefore, management considers the ALLL a critical accounting policy.

Management allocates the ALLL by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve for the estimated shortfall is established for all loans determined to be impaired. The specific reserve in the ALLL is equal to the aggregate collateral or discounted cash flow shortfall calculated from the impairment ~~analyses. Management has defined~~analysis. For determining the appropriateness of the ALLL, management defines impaired loans as nonaccrual credit relationships over $250,000, all loans determined to be troubled debt restructurings (“restructured loans”), plus additional loans with impairment risk characteristics. Second, management allocates the ALLL with historical loss rates by loan segment. The loss factors applied ~~in the methodology~~ are periodically re-evaluated and adjusted to reflect changes in historical loss levels on an annual basis. The look-back period on which the average historical loss rates are determined is a rolling 20-quarter (5 year) average. Lastly, management allocates ~~the~~ ALLL to the remaining loan portfolio using the qualitative factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience of each loan segment. Management conducts its allocation methodology on both the originated loans and on the acquired loans separately to account for differences, such as different loss histories and qualitative factors, between the two loan portfolios.

At ~~September~~June 30, ~~2018,~~2019, the ALLL was ~~$13.0~~$13.6 million compared to ~~$12.7~~$13.2 million at December 31, ~~2017.~~2018. The ~~increase in~~components of the ALLL ~~was the net result of a $1.4 million provision for loan losses exceeding net charge-offs by $0.3 million. Comparatively, the provision for loan losses~~are detailed further in ~~the first nine months of 2017 was $1.9 million and net charge-offs were $1.1 million.~~Table 7 below. Annualized net charge-offs as a percent of average loans were ~~0.06% in the~~0.01% for first ~~nine months of 2018~~half 2019, compared to 0.08% for ~~the~~ first ~~nine months of 2017~~half 2018 and ~~0.08%~~0.05% for the entire ~~2017~~2018 year.

The ratio of the ALLL as a percentage of period-end loans was 0.62% at June 30, 2019, compared to 0.61% ~~at September~~and 0.60% for December 31, 2018 and June 30, 2018, ~~unchanged from 0.61% at both December 31, 2017, and September 30, 2017.~~respectively. The ALLL to loans ratio is impacted by the accounting treatment of Nicolet’s bank acquisitions, which combined at their acquisition dates (from 2013 to 2017) added no ALLL to the numerator and $1.3 billion of loans into the ~~denominator at their then estimated fair values.~~denominator. Remaining outstanding acquired loans were ~~$725~~$625 million (28% of total loans) and ~~$844~~$681 million (31% of total loans) at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. ~~The related allowance~~At June 30, 2019, the $13.6 million ALLL was comprised of $1.6 million for acquired loans ~~was $1.9 million, representing 0.26%~~(0.26% of acquired loans) and $11.9 million for originated loans (0.76% of originated loans). In comparison, at ~~September 30,~~December 31, 2018, ~~compared to an allowance~~the $13.2 million ALLL was comprised of $1.7 million for acquired loans ~~of $2.1 million, representing 0.25%~~(0.25% of acquired loans) and $11.4 million for originated loans at December 31, 2017. Originated loans outstanding, the related allowance and the ALLL to loans ratio at September 30, 2018 were $1.4 billion, $11.1 million and 0.78%, respectively, compared to $1.2 billion, $10.5 million and 0.85%, respectively, at December 31, 2017.(0.77% of originated loans).

Table 7: Allowance for Loan Losses


	Nine Months Ended						Year Ended			Six Months Ended						Year Ended
(in thousands)	September 30, 2018			September 30, 2017			December 31, 2017			June 30, 2019			June 30, 2018			December 31, 2018
Allowance for loan losses (ALLL):
Allowance for loan losses:
Balance at beginning of period	$	12,653		$	11,820		$	11,820		$	13,153		$	12,653		$	12,653
Provision for loan losses	1,360			1,875			2,325			500			1,020			1,600
Charge-offs	(1,110		)	(1,156		)	(1,604		)	(232		)	(877		)	(1,213		)
Recoveries	89			71			112			150			79			113
Net charge-offs	(1,021		)	(1,085		)	(1,492		)
Net (charge-offs) recoveries										(82		)	(798		)	(1,100		)
Balance at end of period	$	12,992		$	12,610		$	12,653		$	13,571		$	12,875		$	13,153

Net loan charge-offs (recoveries):
Net loan (charge-offs) recoveries:
Commercial & industrial	$	713		$	1,077		$	1,404		$	50		$	(564	)	$	(770	)
Owner-occupied CRE	52			(29		)	(30		)	(11		)	(54		)	(60		)
AG production	—			—			—			—			—			—
AG real estate	—			—			—			—			—			—
CRE investment	37			(1		)	(1		)	—			(37		)	(37		)
Construction & land development	—			13			13			—			—			—
Residential construction	—			—			—			—			—			—
Residential first mortgage	82			2			(17		)	35			(47		)	(80		)
Residential junior mortgage	(31		)	(2		)	69			(31		)	29			35
Retail & other	168			25			54			(125		)	(125		)	(188		)
Total net loans charged-off	$	1,021		$	1,085		$	1,492

Total net (charge-offs) recoveries										$	(82	)	$	(798	)	$	(1,100	)
Ratios:
ALLL to total loans	0.61		%	0.61		%	0.61		%	0.62		%	0.60		%	0.61		%
ALLL to net charge-offs	951.7		%	869.3		%	848.1		%
Net charge-offs to average loans, annualized	0.06		%	0.08		%	0.08		%	0.01		%	0.08		%	0.05		%

Nonperforming Assets

As part of its overall credit risk management process, ~~Nicolet’s~~ 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. See also Note 6, “Loans, Allowance for Loan Losses, and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements under Part I, Item 1, for additional disclosures on credit quality.

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, 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. Nonaccrual loans ~~decreased to $10.2~~were $7.7 million (consisting of ~~$4.9~~$4.3 million originated loans and ~~$5.3~~$3.4 million acquired loans) at ~~September~~June 30, ~~2018~~2019 compared to ~~$13.1~~$5.5 million at December 31, ~~2017~~2018 (consisting of ~~$3.3~~$1.4 million originated loans and ~~$9.8~~$4.1 million acquired loans)~~, with the decline primarily attributable to the favorable resolution of a large purchased credit impaired commercial loan.~~. Nonperforming assets (which include nonperforming loans and ~~OREO)~~other real estate owned “OREO”) were ~~$11.5~~$8.0 million at ~~September~~June 30, ~~2018~~2019 compared to ~~$14.4~~$5.9 million at December 31, ~~2017.~~2018. OREO was ~~$1.3~~$0.3 million at ~~September~~June 30, ~~2018, minimally changed from year-end 2017, the majority of which is closed bank branch property.~~2019 and $0.4 million at December 31, 2018. Nonperforming assets as a percent of total assets were ~~0.38%~~0.26% at ~~September~~June 30, ~~2018~~2019 compared to ~~0.49%~~0.19% at December 31, ~~2017.~~2018.

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 ALLL. 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 ~~$14.0~~$26.5 million ~~(0.7%~~(1.2% of loans) and ~~$13.6~~$21.9 million ~~(0.7%~~(1.0% of loans) at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 8: Nonperforming Assets


(in thousands)	September 30, 2018			December 31, 2017			September 30, 2017			June 30, 2019			December 31, 2018			June 30, 2018
Nonperforming loans:
Commercial & industrial	$	5,803		$	6,016		$	5,078		$	2,673		$	2,816		$	6,119
Owner-occupied CRE	474			533			1,276			2,462			673			588
AG production	—			—			2			401			—			66
AG real estate	175			186			186			427			164			175
CRE investment	1,381			4,531			4,537			175			210			1,487
Construction & land development	80			—			723			—			80			—
Residential construction	28			80			80			451			1			108
Residential first mortgage	1,973			1,587			2,301			739			1,265			2,063
Residential junior mortgage	268			158			239			314			262			276
Retail & other	—			4			—			8			—			—
Total nonaccrual loans	10,182			13,095			14,422			7,650			5,471			10,882
Accruing loans past due 90 days or more	—			—			—			—			—			—
Total nonperforming loans	$	10,182		$	13,095		$	14,422		$	7,650		$	5,471		$	10,882
OREO:
Commercial real estate owned	$	505		$	185		$	275		$	300		$	420		$	505
Residential real estate owned	51			70			—
Bank property real estate owned	725			1,039			1,039			—			—			725
Total OREO	1,281			1,294			1,314			300			420			1,230
Total nonperforming assets	$	11,463		$	14,389		$	15,736		$	7,950		$	5,891		$	12,112
Performing troubled debt restructurings	$	—		$	—		$	—		$	466		$	—		$	—
Ratios:
Nonperforming loans to total loans	0.48		%	0.63		%	0.70		%	0.35		%	0.25		%	0.51		%
Nonperforming assets to total loans plus OREO	0.53		%	0.69		%	0.77		%	0.36		%	0.27		%	0.57		%
Nonperforming assets to total assets	0.38		%	0.49		%	0.55		%	0.26		%	0.19		%	0.41		%
ALLL to nonperforming loans	127.6		%	96.6		%	87.4		%	177.4		%	240.4		%	118.3		%

Deposits

Deposits represent Nicolet’s largest source of funds. The deposit composition ~~including brokered deposits within total deposits,~~ is presented in Table 9 below.

Total deposits were $2.5 billion at ~~September~~June 30, ~~2018, $51~~2019, $77 million or ~~2% higher~~3% lower than December 31, ~~2017.~~2018, reflecting the usual cyclical decline. Notably, the decrease in total deposits since year-end 2018 was largely due to money market and interest-bearing demand (down $109 million or 9%), partially offset by growth in savings and time accounts.

Compared to June 30, 2018, total deposits were up $81 million or 3%. Notably, the increase in total deposits since ~~year-end 2017~~June 30, 2018 was largely due to noninterest-bearing demand accounts (up ~~$33~~$122 million or ~~5%, mostly commercial in nature),~~20%) as well as growth in savings and time accounts, ~~combined exceeding the decline~~partially offset by reductions in ~~MMA~~money market and interest-bearing demand ~~accounts. Given strong underlying growth in customer-based (“core”) deposits, brokered deposits were allowed to decline, down $44~~(down $115 million ~~since year-end 2017. Core deposits increased $95 million over year-end 2017, including $58 million in time deposits and $37 million in transaction accounts (led by noninterest-bearing demand)~~or 10%).

Table 9: Period End Deposit Composition


	September 30, 2018				December 31, 2017				September 30, 2017				June 30, 2019				December 31, 2018				June 30, 2018
(in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Noninterest-bearing demand	$	664,788	26.4	%	$	631,831	25.6	%	$	638,447	27.0	%	$	743,380	29	%	$	753,065	29	%	$	621,576	25	%
Money market and interest-bearing demand	1,174,912		46.6	%	1,222,401		49.5	%	1,107,360		46.8	%	1,054,256		41	%	1,163,369		45	%	1,169,163		48	%
Savings	291,058		11.5	%	269,922		10.9	%	274,828		11.6	%	318,947		13	%	294,068		11	%	289,156		12	%
Time	391,398		15.5	%	346,910		14.0	%	346,316		14.6	%	420,056		17	%	403,636		15	%	375,641		15	%
Total deposits	$	2,522,156	100.0	%	$	2,471,064	100.0	%	$	2,366,951	100.0	%	$	2,536,639	100	%	$	2,614,138	100	%	$	2,455,536	100	%

Brokered transaction accounts	$	45,894	1.8	%	$	76,141	3.1	%	$	77,440	3.3	%	$	37,020	1	%	$	62,021	2	%	$	63,741	3	%
Brokered time deposits	31,056		1.2	%	44,645		1.8	%	48,249		2.0	%	17,100		1	%	19,130		1	%	37,713		1	%
Total brokered deposits	$	76,950	3.0	%	$	120,786	4.9	%	$	125,689	5.3	%	$	54,120	2	%	$	81,151	3	%	$	101,454	4	%

Customer transaction accounts	$	2,084,864	82.7	%	$	2,048,013	82.9	%	$	1,943,195	82.1	%	$	2,079,563	82	%	$	2,148,481	82	%	$	2,016,154	82	%
Customer time deposits	360,342		14.3	%	302,265		12.2	%	298,067		12.6	%	402,956		16	%	384,506		15	%	337,928		14	%
Total customer deposits (core)	$	2,445,206	97.0	%	$	2,350,278	95.1	%	$	2,241,262	94.7	%	$	2,482,519	98	%	$	2,532,987	97	%	$	2,354,082	96	%

Lending-Related Commitments

As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, Nicolet had the following off-balance sheet lending-related commitments.

Table 10: Commitments


(in thousands)	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Commitments to extend credit	$	696,684	$	680,307	$	720,685	$	721,098
Financial standby letters of credit	9,176		8,783		11,399		8,571
Performance standby letters of credit	8,538		9,080		9,164		7,094

Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments and represented ~~$35.6~~$80.3 million and ~~$16.2~~$15.2 million, respectively, at ~~September~~June 30, 2019. In comparison, interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans held for sale represented $18.2 million and $6.0 million, respectively, at December 31, 2018. The net fair value of these interest rate lock commitments and forward commitments was ~~not significant~~a loss of $154,000 at ~~September~~June 30, 2019 compared to a gain of $162,000 at December 31, 2018.

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 ~~pay dividends to shareholders,~~ service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.

Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of brokered ~~deposits.~~deposits or other wholesale funding. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At ~~September~~June 30, ~~2018,~~2019, approximately 33% of the ~~$411~~$404 million securities AFS portfolio was pledged to secure public deposits and short-term borrowings, as applicable, and for other purposes as required by law. Additional funding sources at ~~September~~June 30, ~~2018,~~2019, consist of a $10 million available and unused line of credit at the holding company, ~~$158~~$175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of ~~$180~~$170 million, and borrowing capacity in the brokered deposit market.

Cash and cash equivalents at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were ~~$161~~$155 million and ~~$155~~$250 million, respectively. The ~~increase~~decrease in cash and cash equivalents since year-end ~~2017~~2018 was largely attributable to ~~earnings~~loan growth, a reduction in deposits, and ~~deposit growth,~~common stock purchases, partially offset by ~~loan growth, net investment purchases, and common stock purchases.~~earnings. Nicolet’s liquidity resources were sufficient as of ~~September~~June 30, ~~2018~~2019 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as necessary.

Management is committed to the ~~holding company~~parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the ~~holding company~~parent Company in light of current and projected needs, growth or strategies. The ~~Parent~~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. Dividends from the Bank and, to a lesser extent, stock

option exercises, represent a significant ~~source~~sources of ~~incoming~~ cash ~~flow~~flows for the ~~Parent Company, along with option exercises.~~parent Company. Among others, additional cash sources available

to the ~~Parent~~parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated debt or other debt. At ~~September~~June 30, ~~2018,~~2019, the ~~Parent~~parent Company had ~~$31~~$42 million in cash.

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.

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 interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 11 below. ~~The slight improvement to the rising rate scenario is mostly from the slightly lagged liability pricing.~~ The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table 11: Interest Rate Sensitivity


	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
200 bps decrease in interest rates	(1.1	)%	(1.0	)%	(2.4	)%	(0.6	)%
100 bps decrease in interest rates	(0.2	)%	(0.2	)%	(1.1	)%	—	%
100 bps increase in interest rates	0.1	%	(0.1	)%	1.1	%	(0.1	)%
200 bps increase in interest rates	0.5	%	(0.2	)%	2.2	%	—	%

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

The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation.

Capital

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 and actively reviews capital strategies 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.

~~As shown~~Nicolet’s intent is to maintain capital levels for the Company and the Bank at amounts in ~~Table 12, Nicolet’s~~excess of the regulatory ~~capital ratios remain well above minimum regulatory ratios.~~well-capitalized thresholds. At ~~September~~June 30, ~~2018,~~2019, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet’s

and the Bank’s regulatory capital amounts and ratios, as ~~of September 30, 2018 and December 31, 2017~~well as selected capital metrics are presented in the following table.

Table 12: Capital


(in millions)	September 30, 2018			December 31, 2017
Company:
							At or for the Six Months Ended			At or for the Year Ended
($ in thousands)							June 30, 2019			December 31, 2018
Company Stock Repurchases: *
Common stock repurchased during the period (dollars)							$	14,742		$	22,178
Common stock repurchased during the period (full shares)							253,753			408,071
Company Risk-Based Capital:
Total risk-based capital	$	318.6		$	299.0		$	344,596		$	326,235
Tier 1 risk-based capital	292.6			274.5			319,050			301,125
Common equity Tier 1 capital	263.1			245.2			289,130			271,435
Total capital ratio	12.8		%	12.8		%	13.2		%	12.9		%
Tier 1 capital ratio	11.8		%	11.8		%	12.2		%	11.9		%
Common equity tier 1 capital ratio	10.6		%	10.5		%	11.1		%	10.7		%
Tier 1 leverage ratio	10.3		%	10.0		%	11.0		%	10.4		%
Bank:
Bank Risk-Based Capital:
Total risk-based capital	$	280.7		$	267.2		$	292,810		$	274,492
Tier 1 risk-based capital	267.7			254.5			279,239			261,339
Common equity Tier 1 capital	267.7			254.5			279,239			261,339
Total capital ratio	11.3		%	11.5		%	11.2		%	10.8		%
Tier 1 capital ratio	10.8		%	10.9		%	10.7		%	10.3		%
Common equity tier 1 capital ratio	10.8		%	10.9		%	10.7		%	10.3		%
Tier 1 leverage ratio	9.4		%	9.3		%	9.6		%	9.1		%
* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.							* Reflects common stock repurchased under board of director authorizations for the common stock repurchase program.

In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During ~~the~~ first ~~nine months of 2018, $16.9~~half 2019, $14.7 million was utilized to repurchase and cancel ~~approximately 307,800~~253,753 shares of common stock pursuant to our ~~2014~~ common stock repurchase program. On June 18, 2019, Nicolet's board authorized an increase to the program ~~bringing the life-to-date cumulative totals~~of $20 million or up to ~~just over 1 million~~325,000 shares ~~repurchased for $41.1 million.~~of common stock. As ~~of September~~a result, at June 30, ~~2018,~~2019, there remains ~~$12.9~~$25.0 million authorized under the repurchase program to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for loan losses and income taxes. A discussion of these policies can be found in the “Critical Accounting Policies” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s ~~2017~~2018 Annual Report on Form 10-K. There have been no changes in the Company’s application of critical accounting policies since December 31, ~~2017.~~2018.

Future Accounting Pronouncements

Recent accounting pronouncements adopted are included in Note 1, “Basis of Presentation” of the Notes to Unaudited Consolidated Financial Statements within Part I, Item 1.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The updated guidance is effective for annual reporting periods, including interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. As the new ASU only revises disclosure requirements, it is not expected to have a material impact on the Company's consolidated financial statements.

In ~~August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~. ASU 2017-12 expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging transactions. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of the new guidance on its consolidated financial statements, and it is not expected to have a significant impact on its consolidated financial statements because the Company does not have any significant derivatives and does not currently apply hedge accounting to derivatives.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments intended to improve the financial reporting by requiring earlier recognition of credit losses on loans and certain other financial assets. Topic 326 replaces the current incurred loss impairment model (which recognizes losses when a

probable threshold is met) with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The measurement of lifetime expected credit losses will be based on historical experience, current

conditions, and reasonable and supportable forecasts. The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Entities should apply the amendment by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early application ~~will be~~is permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company expects to adopt the new accounting standard in 2020, as required. Nicolet ~~has~~ established a cross-functional team to assess the impact of the new guidance on its consolidated financial statements and implement the new standard. This team ~~is currently in the process of~~continues to make progress on developing credit models, model validation and testing, as well as accounting, reporting, and governance processes to comply with the new credit loss requirements.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842),~~ ~~with several subsequent updates. Topic 842 introduces a new accounting model for lessors and lessees~~. For lessees, almost all leases will be required to be recognized on the balance sheet as a right-of-use asset and lease liability, unlike current GAAP which requires only capital leases to be recognized on the balance sheet. The accounting applied by lessors is largely unchanged from existing guidance. Topic 842 also requires additional disclosures concerning the amount, timing and uncertainty of cash flows arising from leases. The updated guidance is effective for annual reporting periods beginning after December 15, 2018, with early application permitted. The Company will adopt the new accounting standard in 2019, as required, and is currently assessing the impact of the new guidance on its consolidated financial statements. At adoption, Nicolet will recognize right-of-use assets and lease liabilities for virtually all of its operating lease commitments. The amounts of these assets and liabilities recorded will be based, primarily, on the present value of unpaid future minimum lease payments as of January 1, 2019, the date of adoption. Those amounts will also be impacted by assumptions around renewals and/or extensions, and the interest rate used to discount those future lease commitments. As of December 31, 2017, Nicolet reported approximately $5 million in minimum lease payments due under lease commitments for January 1, 2019 forward. While these leases represent a majority of the leases within the scope of the standard, the lease portfolio is subject to change from the execution of new leases and termination of existing leases prior to the effective date.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I, Item 2.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, under the supervision, and with the participation, of our Chairman, President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act pursuant to Exchange Act Rule 13a-15). Based upon, and as of the date of such evaluation, the Chairman, President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no changes in the Company’s internal controls or, to the Company’s knowledge, in other factors during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Following are Nicolet’s monthly common stock purchases during the ~~third~~second quarter of ~~2018.~~2019.

Total Number of
Shares Purchased

Average Price
Paid per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans
or Programs(a)
(#) ($) (#) (#)
Period
July 1 – July 31, 2018 2,014
$ 55.04
1,700
514,000
August 1 – August 31, 2018 4,337
$ 54.96
2,457
512,000
September 1 – September 30, 2018 77,123
$ 54.45
77,123
435,000
Total 83,474
$ 54.49
81,280
435,000



	Total Number of Shares Purchased ^(a)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ^(b)
	(#)	($)		(#)	(#)
Period
April 1 – April 30, 2019	39,755	$	59.72	39,409	393,000
May 1 – May 31, 2019	140,245	$	60.88	75,730	317,000
June 1 – June 30, 2019	35,959	$	60.96	35,959	606,000
Total	215,959	$	60.68	151,098	606,000

(a)

During ~~third~~second quarter ~~2018,~~2019, the Company repurchased 180 common shares for minimum tax withholding settlements on restricted stock and repurchased 64,681 common shares to satisfy the exercise price and / or tax withholding requirements of stock options, respectively. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors' authorization.

(b)

During second quarter 2019, Nicolet utilized ~~$4.4~~$9.1 million to repurchase and cancel approximately ~~81,300~~151,000 shares of common stock pursuant to our ~~2014~~ common stock repurchase ~~program, bringing~~program. On June 18, 2019, Nicolet's board authorized an increase to the life-to-date cumulative totals to $41.1 million to repurchase and cancel just over 1 million shares at a weighted average price of $40.47 per share excluding commissions. At September 30, 2018, approximately $12.9 million remained available to repurchase up to 435,000 common shares.

program of $20 million or up to 325,000 shares of common stock. As a result, at June 30, 2019, approximately $25.0 million remained available to repurchase up to 606,000 common shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:



Exhibit Number		Description
2.1		Agreement and Plan of Merger Between Nicolet Bankshares, Inc. and Choice Bancorp, Inc. dated June 26, 2019⁽¹⁾
31.1		Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2		Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101		The following material from Nicolet’s Form 10-Q Report for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated ~~Statement~~Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

(1) Incorporated by reference to Exhibit 2.1 in the Registrant's Current Report on Form 8-K, filed on June 27, 2019.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	NICOLET BANKSHARES, INC.

~~November~~August 2, ~~2018~~2019	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, President and Chief Executive Officer

~~November~~August 2, ~~2018~~2019	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer

4846



	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(a)
	(#)	($)		(#)	(#)
Period
July 1 – July 31, 2018	2,014	$	55.04	1,700	514,000
August 1 – August 31, 2018	4,337	$	54.96	2,457	512,000
September 1 – September 30, 2018	77,123	$	54.45	77,123	435,000
Total	83,474	$	54.49	81,280	435,000