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NCBS Nicolet Bankshares

Filed: 26 Feb 21, 3:04pm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-K 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2020
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)
Wisconsin47-0871001
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
111 North Washington Street
Green Bay, Wisconsin 54301
(920) 430-1400
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices) 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareNCBSThe NASDAQ Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
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 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 preceding12 months (or for such shorter period that the registrant was required to submit such files). Yes 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
Non-accelerated filer ☐         Smaller reporting company ☐         Emerging growth company ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of June 30, 2020, (the last business day of the registrant’s most recently completed second fiscal quarter) the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $509 million based on the closing sale price of $54.80 per share as reported on Nasdaq on June 30, 2020.
As of February 24, 2021 9,979,672 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K – Portions of the Proxy Statement for the 2021 Annual Meeting of Shareholders. 



Nicolet Bankshares, Inc. 
TABLE OF CONTENTS
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Forward-Looking Statements
Statements made in this Annual Report on Form 10-K and in any documents that are incorporated by reference which are not purely historical are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, including any statements regarding descriptions of management's plans, objectives, or goals for future operations, products or services, and forecasts of its revenues, earnings, or other measures of performance. Forward-looking statements are based on current management expectations and, by their nature, are subject to risks and uncertainties. These statements generally may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “should,” “will,” “intend,” or similar expressions. Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of Nicolet and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors, many of which are beyond Nicolet’s control, include but are not necessarily limited to the following:
the effects of the COVID-19 pandemic on the business, customers, employees and third-party service providers of Nicolet or any of its acquisition targets;
operating, legal and regulatory risks, including the effects of legislative or regulatory developments affecting the financial industry generally or Nicolet specifically;
economic, market, political and competitive forces affecting Nicolet’s banking and wealth management businesses;
changes in interest rates, monetary policy and general economic conditions, which may impact Nicolet’s net interest income;
diversion of management time on pandemic-related issues;
potential difficulties in integrating the operations of Nicolet with future acquisition targets following any merger;
adoption of new accounting standards, including the effects from the adoption of the current expected credit losses (“CECL”) model on January 1, 2020, or changes in existing standards;
changes to statutes, regulations or regulatory policies or practices resulting from the COVID-19 pandemic;
compliance or operational risks related to new products, services, ventures, or lines of business, if any, that Nicolet may pursue or implement; and
the risk that Nicolet’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements, and you should not place undue reliance on such statements. Nicolet specifically disclaims any obligation to update factors or to publicly announce the results of revisions to any of the forward-looking statements or comments included herein to reflect future events or developments.
PART I
ITEM 1. BUSINESS
General
Nicolet Bankshares, Inc. (individually referred to herein as the “Parent Company” and together with all its subsidiaries collectively referred to herein as “Nicolet,” the “Company,” “we,” “us” or “our”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Wisconsin. At December 31, 2020, Nicolet had total assets of $4.6 billion, loans of $2.8 billion, deposits of $3.9 billion and total stockholders’ equity of $539 million. For the year ended December 31, 2020, Nicolet earned net income of $60.1 million, or $5.70 per diluted common share. For 2020, Nicolet’s return on average assets was 1.41%.
Nicolet was founded upon five core values (Be Real, Be Responsive, Be Personal, Be Memorable, and Be Entrepreneurial) which are embodied within each of our employees and create a distinct competitive positioning in the markets within which we operate. Our mission is to be the leading community bank within the communities we serve, while our vision is to optimize the long-term return to our customers and communities, employees and shareholders (the “3 Circles”).
The Parent Company is a Wisconsin corporation, originally incorporated on April 5, 2000 as Green Bay Financial Corporation, a Wisconsin corporation, to serve as the holding company for and the sole shareholder of Nicolet National Bank. The Parent Company amended and restated its articles of incorporation and changed its name to Nicolet Bankshares, Inc. on March 14, 2002. It subsequently became the holding company for Nicolet National Bank upon the completion of the bank’s reorganization into a holding company structure on June 6, 2002. Nicolet elected to become a financial holding company in 2008.
Nicolet conducts its primary operations through its wholly owned subsidiary, Nicolet National Bank, a commercial bank which was organized in 2000 as a national bank under the laws of the United States and opened for business, in Green Bay, Wisconsin, on
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November 1, 2000 (referred to herein as the “Bank”). At December 31, 2020, the Parent Company also wholly owns a registered investment advisory firm, Nicolet Advisory Services, LLC (“Nicolet Advisory”), that conducts brokerage and financial advisory services primarily to individual consumers and retirement plan services to business customers. At December 31, 2020, the Bank wholly owns an investment subsidiary based in Nevada, an entity that owns the building in which Nicolet is headquartered, and a subsidiary in Green Bay that provides a web-based investment management platform for financial advisor trades and related activity. Other than the Bank, these subsidiaries are closely related to or incidental to the business of banking and none are individually or collectively significant to Nicolet’s financial position or results as of December 31, 2020.
Nicolet’s profitability is significantly dependent upon net interest income (interest income earned on loans and other interest-earning assets such as investments, net of interest expense on deposits and other borrowed funds), and noninterest income sources (including but not limited to service charges on deposits, trust and brokerage fees, and mortgage income from sales of residential mortgages into the secondary market), offset by the level of the provision for credit losses, noninterest expense (largely employee compensation and overhead expenses tied to processing and operating the Bank’s business), and income taxes.
Since its opening in late 2000, though more prominently since 2013, Nicolet has supplemented its organic growth with branch purchase and acquisition transactions. Merger and acquisition (“M&A”) activity has continued to be a source of strong growth for Nicolet. Since 2012 through year end 2020, Nicolet has successfully completed seven acquisitions. For information on recent transactions, see Note 2, “Acquisitions,” of the Notes to Consolidated Financial Statements under Part II, Item 8. In third quarter 2020, Nicolet completed the all-cash acquisition of Advantage Community Bancshares, Inc. (“Advantage”) and its wholly-owned bank subsidiary, Advantage Community Bank, which added total assets of $172 million at consummation (representing 4% of then pre-merger assets).
Products and Services Overview
Nicolet’s principal business is banking, consisting of lending and deposit gathering, as well as ancillary banking-related products and services, to businesses and individuals of the communities it serves, and the operational support to deliver, fund and manage such banking products and services. Additionally, trust, brokerage and other investment management services predominantly for individuals and retirement plan services for business customers are offered. Nicolet delivers its products and services principally through 36 bank branch locations, on-line banking, mobile banking and an interactive website. Nicolet’s call center also services customers.
Nicolet offers a variety of loans, deposits and related services to business customers (especially small and medium-sized businesses and professional concerns), including but not limited to: business checking and other business deposit products and cash management services, international banking services, business loans, lines of credit, commercial real estate financing, construction loans, agricultural real estate or production loans, and letters of credit, as well as retirement plan services. Similarly, Nicolet offers a variety of banking products and services to consumers, including but not limited to: residential mortgage loans and mortgage refinancing, home equity loans and lines of credit, residential construction loans, personal loans, checking, savings and money market accounts, various certificates of deposit and individual retirement accounts, safe deposit boxes, and personal brokerage, trust and fiduciary services. Nicolet also provides on-line services including commercial, retail and trust on-line banking, automated bill payment, mobile banking deposits and account access, remote deposit capture, and other services such as wire transfers, debit cards, credit cards, pre-paid gift cards, direct deposit, and official bank checks.
Lending is critical to Nicolet’s balance sheet and earnings potential. Nicolet seeks creditworthy borrowers principally within the geographic area of its branch locations. As a community bank with experienced commercial lenders and residential mortgage lenders, the primary lending function is to make loans in the following categories:
commercial-related loans, consisting of:
commercial, industrial, and business loans and lines, including Paycheck Protection Program (“PPP”) loans;
owner-occupied commercial real estate (“owner-occupied CRE”);
agricultural (“AG”) production and AG real estate;
commercial real estate investment loans (“CRE investment”);
construction and land development loans;
residential real estate loans, consisting of:
residential first lien mortgages;
residential junior lien mortgages;
home equity loans and lines of credit;
residential construction loans; and
other loans (mainly consumer in nature).
Lending involves credit risk. Nicolet has and follows extensive loan policies and procedures to standardize processes, meet compliance requirements and prudently manage underwriting, credit and other risks. Credit risk is further controlled and monitored
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through active asset quality management including the use of lending standards, thorough review of current and potential borrowers through Nicolet’s underwriting process, close relationships with and regular check-ins with borrowers, and active asset quality administration. For further discussion of the loan portfolio composition and credit risk management, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” under Part II, Item 7.
Human Capital Resources
At December 31, 2020, Nicolet had 556 full-time equivalent employees and 573 headcount employees. None of our employees are represented by unions.
Nicolet believes that diversity is directly linked to organizational performance and is committed to diversity and inclusion, including women, minorities, age, individuals with disabilities, culture, and life experiences, among others. In support of this, all employees complete annual diversity training, managers complete additional diversity training in management foundation training, and we expect our employees to be active in promoting diversity within the Company and communities we serve. Nicolet also analyzes pay practices to ensure it is fair and equitable among our diverse employee population. Our workforce at year end 2020 was 70% women, 30% men, and 42% of all officer titles were women.
As noted under "General", our mission is to be the leading community bank within the communities we serve, while our vision is to optimize the long-term return to our customers and communities, employees and shareholders (the “3 Circles”), guided by our five core value. Meaningful execution on the mission and vision comes from all employees embodying the core values and the 3 Circles in their decision-making and daily actions for their customers and communities.
We support the communities we serve through our employees’ dedication to giving back and their ties to the local communities.
In order to develop a workforce that aligns with our corporate values, we regularly sponsor local community events so that our employees can better integrate themselves in our communities. We believe that our employees’ well-being and personal and professional development is fostered by our outreach to the communities we serve. Our employees’ desire for active community involvement is supported and encouraged – such as, promoting causes of interest to employees, flexible schedules to support volunteerism, and giving of money to charities, community events or community organizations also served by employee volunteers. This includes Nicolet National Foundation, Inc., a public charity formed near our opening as a way for employees to give back, with 100% of the monies given by employees going directly back into our communities based on recommendations from our employees, and a 100% match of employee giving by the Bank to further support our community giving over time.
The health and well-being of our employees is of utmost importance to us. In response to the COVID-19 pandemic, we have taken significant steps to protect and promote the health and well-being of our employees and customers, including implementation of various management actions for safety, remote work, temporary branch changes, and on-site bonus pay.
Market Area and Competition
The Bank is a full-service community bank, providing a full range of traditional commercial, wealth (directly and through Nicolet Advisory) and retail banking products and services throughout northeastern and central Wisconsin and in Menominee, Michigan. Nicolet markets its services to owner-managed companies, the individual owners of these businesses, and other residents of its market area, which at December 31, 2020 is through 36 branches located principally in its trade area of northeastern and central Wisconsin, and in Menominee, Michigan. Based on deposit market share data published by S&P Global Market Intelligence as of June 30, 2020 for the 13 counties served by Nicolet, the Bank ranks in the top three of market share for 8 counties (Brown, Calumet, Clark, Door, Kewaunee, Menominee, Taylor, and Winnebago) and in the top five for 2 other counties (Marinette and Oneida).
The financial services industry is highly competitive. Nicolet competes for loans, deposits and wealth management or financial services in all its principal markets. Nicolet competes directly with other bank and nonbank institutions located within our markets (some that may have an established customer base or name recognition), internet-based banks, out-of-market banks that advertise or otherwise serve its markets, money market and other mutual funds, brokerage houses, mortgage companies, insurance companies or other commercial entities that offer financial services products. Competition involves efforts to retain current or procure new customers, obtain new loans and deposits, increase the scope and type of products or services offered, and offer competitive interest rates paid on deposits or earned on loans, as well as to deliver other aspects of banking competitively. Many of Nicolet’s competitors may enjoy competitive advantages, including greater financial resources, fewer regulatory requirements, broader geographic presence, more accessible branches or more advanced technologic delivery of products or services, more favorable pricing alternatives and lower origination or operating costs.
We believe our competitive pricing, personalized service and community engagement enable us to effectively compete in our markets. Nicolet employs seasoned banking and wealth management professionals with experience in its market areas and who are active in their communities. Nicolet’s emphasis on meeting customer needs in a relationship-focused manner, combined with local decision making on extensions of credit, distinguishes Nicolet from its competitors, particularly in the case of large financial institutions. Nicolet believes it further distinguishes itself by providing a range of products and services characteristic of a large
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financial institution while providing the personalized service, real conversation, and convenience characteristic of a local, community bank.
Supervision and Regulation
Set forth below is an explanation of the major pieces of legislation and regulation affecting the banking industry and how that legislation and regulation affects Nicolet’s business. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the business and prospects of Nicolet or the Bank, and legislative changes and the policies of various regulatory authorities may significantly affect their operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation or regulation may have on the future business and earnings of Nicolet or the Bank.
Regulation of Nicolet
Because Nicolet owns all of the capital stock of the Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a result, Nicolet is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Wisconsin, the Wisconsin Department of Financial Institutions (the “WDFI”) also regulates and monitors all significant aspects of its operations.
Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:
acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
acquiring all or substantially all of the assets of any bank; or
merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved in the transaction and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities of the bank holding company. The regulations provide a procedure for challenging rebuttable presumptions of control.
Permitted Activities. The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company to engage in activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among other activities, certain insurance, advisory and security activities.
Nicolet meets the qualification standards applicable to financial holding companies, and elected to become a financial holding company in 2008. In order to remain a financial holding company, Nicolet must continue to be considered well managed and well capitalized by the Federal Reserve, and the Bank must continue to be considered well managed and well capitalized by the Office of the Comptroller of the Currency (the “OCC”) and have at least a “satisfactory” rating under the Community Reinvestment Act.
Support of Subsidiary Institutions. Under Federal Reserve policy and the Dodd-Frank Act, Nicolet is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank. This support may be required at times when, without this Federal Reserve policy or the related rules, Nicolet might not be inclined to provide it.
In addition, any capital loans made by Nicolet to the Bank will be repaid only after the Bank’s deposits and various other obligations are repaid in full.
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Capital Adequacy. Nicolet is subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of the Bank, which are summarized under “Regulation of the Bank” below.
Dividend Restrictions. Under Federal Reserve policies, bank holding companies may pay cash dividends on common stock only out of income available over the past year if prospective earnings retention is consistent with the organization's expected future needs and financial condition and if the organization is not in danger of not meeting its minimum regulatory capital requirements. Federal Reserve policy also provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Under Federal Reserve policy, bank holding companies are expected to inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization's capital structure.
Stock Buybacks and Other Capital Redemptions. Under Federal Reserve policies and regulations, bank holding companies must seek regulatory approval prior to any redemption that would reduce the bank holding company's consolidated net worth by 10% or more, prior to the redemption of most instruments included in Tier 1 or Tier 2 capital with features permitting redemption at the option of the issuing bank holding company, or prior to the redemption of equity or other capital instruments included in Tier 1 or Tier 2 capital prior to stated maturity, if such redemption could have a material effect on the level or composition of the organization's capital base. Bank holding companies are also expected to inform the Federal Reserve reasonably in advance of a redemption or repurchase of common stock if such buyback results in a net reduction of the company's outstanding amount of common stock below the amount outstanding at the beginning of the fiscal quarter.
Regulation of the Bank
Because the Bank is chartered as a national bank, it is primarily subject to the supervision, examination, and reporting requirements of the National Bank Act and the regulations of the OCC. The OCC regularly examines the Bank’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Because the Bank’s deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations and the FDIC also has examination authority and back-up enforcement power over the Bank. The Bank is also subject to numerous state and federal statutes and regulations that affect Nicolet, its business, activities, and operations.
Branching. National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under Wisconsin law and the Dodd-Frank Act, and with the prior approval of the OCC, the Bank may open branch offices within or outside of Wisconsin, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Wisconsin or other states.
Capital Adequacy. Banks and bank holding companies, as regulated institutions, are required to maintain minimum levels of capital. The Federal Reserve and the OCC have adopted minimum risk-based capital requirements (Tier 1 capital, common equity Tier 1 capital (“CET1”) and total capital) and leverage capital requirements, as well as guidelines that define components of the calculation of capital and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines.
In addition to the minimum risk-based capital and leverage ratios, effective January 1, 2019 banking organizations must maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increases the minimum well-capitalized CET1 capital, Tier 1 capital, and total capital ratios for U.S. banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The following table presents the risk-based and leverage capital requirements applicable to the Bank:
 Adequately Capitalized
Requirement
Well-Capitalized
Requirement
Well-Capitalized
with Buffer
Leverage4.0 %5.0 %5.0 %
CET14.5 %6.5 %7.0 %
Tier 16.0 %8.0 %8.5 %
Total Capital8.0 %10.0 %10.5 %
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Although capital instruments such as trust preferred securities and cumulative preferred shares are excluded from Tier 1 capital for certain larger banking organizations, Nicolet’s trust preferred securities are grandfathered as Tier 1 capital (provided they do not exceed 25% of Tier 1 capital) so long as Nicolet has less than $15 billion in total assets.
The capital rules require that goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities (“DTLs”), be deducted from CET1 capital. Additionally, deferred tax assets (“DTAs”) that arise from net operating loss and tax credit carryforwards, net of associated DTLs and valuation allowances, are fully deducted from CET1 capital. However, DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial institutions” are partially includible in CET1 capital, subject to deductions defined in the rules.
The OCC also considers interest rate risk (arising when the interest rate sensitivity of the Bank’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) in the evaluation of the bank’s capital adequacy. Banks with excessive interest rate risk exposure are required to hold additional amounts of capital against their exposure to losses resulting from that risk. Through the risk-weighting of assets, the regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk related to a bank’s lending and trading activities.
The Bank’s capital categories are determined solely for the purpose of applying the “prompt corrective action” rules described below and they are not necessarily an accurate representation of its overall financial condition or prospects for other purposes. Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. See “Prompt Corrective Action” below.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each category.
A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure pursuant to any written agreement, order, capital directive, or prompt corrective action directive, and has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a CET1 capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well-capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.
As of December 31, 2020, the Bank satisfied the requirements of “well-capitalized” under the regulatory framework for prompt corrective action. See Note 16, “Regulatory Capital Requirements,” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for Nicolet and the Bank regulatory capital ratios.
As a bank’s capital position deteriorates, federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories: undercapitalized, significantly undercapitalized, and critically undercapitalized. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
CECL. The Financial Accounting Standards Board (“FASB”) adopted a new credit loss accounting standard applicable to all banks, savings associations, credit unions, and financial holding companies, regardless of size. This standard became effective for the Bank for our fiscal year beginning on January 1, 2020. The final rule allows for an optional three-year phase in of the day-one adverse effects on a bank’s regulatory capital. This Current Expected Credit Losses (“CECL”) standard requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as an allowance for credit losses.
The CECL rules changed the prior “incurred losses” method of providing Allowances for Credit Losses (“ACL”), which has required us to increase our allowance, and to greatly increase the data we need to collect and review to determine the appropriate level of the ACL. Under CECL, the allowance for credit losses is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that
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affect the collectability of the remaining cash flows over the contractual term of the financial assets. CECL requires an allowance to be created upon the origination or acquisition of a financial asset measured at amortized cost, which may significantly impact the cost of M&A activity in the future. Any increase in our ACL, or expenses incurred to determine the appropriate level of the ACL, may have a material adverse effect on our financial condition and results of operations. For additional discussion of CECL, see section “New Accounting Pronouncements Adopted” within Note 1 “Nature of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements under Part II, Item 8.
FDIC Insurance Assessments. The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC up to $250,000, the maximum amount permitted by law. The FDIC uses the Deposit Insurance Fund to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails. The Bank is thus subject to FDIC deposit premium assessments. The cost of premium assessments are impacted by, among other things, a bank’s capital category under the prompt corrective action system.
Commercial Real Estate Lending. The federal banking regulators have issued the following guidance to help identify institutions that are potentially exposed to significant commercial real estate lending risk and may warrant greater supervisory scrutiny:
total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or
total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.
At December 31, 2020 the Bank’s commercial real estate lending levels are below the guidance levels noted above.
Enforcement Powers. The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be over $1.9 million per day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years.
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking agencies evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the terms of various Community Reinvestment Act-related agreements. The Bank received an “outstanding” CRA rating in its most recent evaluation.
Payment of Dividends. Statutory and regulatory limitations apply to the Bank’s payment of dividends to the Parent Company. If, in the opinion of the OCC, the Bank were engaged in or about to engage in an unsafe or unsound practice, the OCC could require that the Bank stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.
The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed (1) the total of the Bank’s net profits for that year, plus (2) the Bank’s retained net profits of the preceding two years. The payment of dividends may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines or any conditions or restrictions that may be imposed by regulatory authorities.
Transactions with Affiliates and Insiders. The Bank is subject to the provisions of Regulation W promulgated by the Federal Reserve, which implements Sections 23A and 23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also prohibits, among other things, an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Federal law also places restrictions on the Bank’s ability to extend credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties; and must not involve more than the normal risk of repayment or present other unfavorable features.
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USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act") requires each financial institution to: (i) establish an anti-money laundering program; and (ii) establish due diligence policies, procedures and controls with respect to its private and correspondent banking accounts involving foreign individuals and certain foreign banks. In addition, the USA PATRIOT Act encourages cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
Customer Protection. The Bank is also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and Procedures Act, the Fair Credit Reporting Act and the Federal Trade Commission Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.
Consumer Financial Protection Bureau. The Dodd-Frank Act centralized responsibility for consumer financial protection including implementing, examining and enforcing compliance with federal consumer financial laws with the Consumer Financial Protection Bureau (the “CFPB”). Depository institutions with less than $10 billion in assets, such as the Bank, are subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes.
UDAP and UDAAP. Bank regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act—the primary federal law that prohibits “unfair or deceptive acts or practices” and unfair methods of competition in or affecting commerce (“UDAP” or “FTC Act”). “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices” (“UDAAP”). The CFPB has brought a variety of enforcement actions for violations of UDAAP provisions and CFPB guidance continues to evolve.
Available Information
Nicolet became a public reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on March 26, 2013, when Nicolet’s registration statement related to its acquisition of Mid-Wisconsin Financial Services, Inc. (Registration Statement on Form S-4, Regis. No. 333-186401) became effective. Nicolet registered its common stock under Section 12(b) of the Exchange Act on February 24, 2016 in connection with listing on the Nasdaq Capital Market. Nicolet files annual, quarterly, and current reports, and other information with the SEC. These filings are available to the public on the Internet at the SEC’s website at www.sec.gov.
Nicolet’s internet address is www.nicoletbank.com. We make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 1A. RISK FACTORS
An investment in our common stock involves risks. If any of the following risks, or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occurs, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
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Risks Relating to Nicolet’s Business
Nicolet may not be able to sustain its historical rate of growth, or may encounter issues associated with its growth, either of which could adversely affect our financial condition, results of operations, and share price.
We have grown over the past several years and intend to continue to pursue a significant growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. We may not be able to further expand our market presence in existing markets or to enter new markets successfully, nor can we guarantee that any such expansion would not adversely affect our results of operations. Failure to manage growth effectively could have a material adverse effect on the business, future prospects, financial condition or results of our operations, and could adversely affect our ability to successfully implement business strategies. Also, if such growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.
Our ability to grow successfully will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and the ability to manage our growth. While we believe we have the management resources and internal systems in place to manage future growth successfully, there can be no assurance that growth opportunities will be available or that any growth will be managed successfully. In addition, our recent growth may distort some of our historical financial ratios and statistics.
As part of our growth strategy, we regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services. However, it is possible that some acquisitions might not close as a result of failure to meet closing conditions or the market could negatively affect the banking environment so much that an acquisition that may have, at one time, been beneficial to both institutions is now no longer prudent. The costs and effects of a such not completed acquisitions could negatively affect Nicolet.

Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things, difficulty in estimating the value of the target company, payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term, potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, potential volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts, difficulty and expense of integrating the operations and personnel of the target company, inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and / or other projected benefits, potential disruption to our business, potential diversion of our management’s time and attention, and the possible loss of key employees and customers of the target company.
The global coronavirus outbreak could harm business and results of operations for Nicolet.
In March 2020, the World Health Organization declared the coronavirus to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on the businesses of Nicolet and on its customers, and there is no guarantee that efforts by Nicolet to address the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on Nicolet’s customers and on Nicolet’s business, financial condition and results of operations. Nicolet may also incur additional costs to remedy damages caused by business disruptions.
In addition, actions by U.S. federal, state and foreign governments to address the pandemic, including travel bans and school, business and entertainment venue closures, may also have a significant adverse effect on the markets in which Nicolet conducts its businesses. The extent of impacts resulting from the coronavirus pandemic and other events beyond the control of Nicolet will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.
As a community bank, Nicolet’s success depends upon local and regional economic conditions and has different lending risks than larger banks.
We provide services to our local communities. Our ability to diversify economic risks is limited by our own local markets and economies. We lend primarily to individuals and small- to medium-sized businesses, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories.
We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the appropriateness of our allowance for credit losses. While this evaluation process uses historical and other objective information, the classification of
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loans and the establishment of credit losses is an estimate based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments. We can make no assurance that our credit loss reserves will be sufficient to absorb future credit losses or prevent a material adverse effect on our business, profitability or financial condition.
The core industries in our market area are manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. The area has a broad range of diversified equipment manufacturing services related to these core industries and others. The residential and commercial real estate markets throughout these areas depend primarily on the strength of these core industries. A material decline in any of these sectors will affect the communities we serve and could negatively impact our financial results and have a negative impact on profitability.
If the communities in which we operate do not grow or if the prevailing economic conditions locally or nationally are less favorable than we have assumed, our ability to maintain our low volume of nonperforming loans and other real estate owned and implement our business strategies may be adversely affected and our actual financial performance may be materially different from our projections.
Nicolet may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, results of operations, and share price.
Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.
Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant credit losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for credit losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, national and local economic conditions, reasonable and supportable forecasts, and other pertinent information.
If management’s assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease net income. We expect our allowance to continue to fluctuate; however, given current and future market conditions, we can make no assurance that our allowance will be appropriate to cover future credit losses.
In addition, the market value of the real estate securing our loans as collateral could be adversely affected by the economy and unfavorable changes in economic conditions in our market areas. As of December 31, 2020, approximately 40% of our loans were secured by commercial-based real estate, 3% of loans were secured by agriculture-based real estate, and 21% of our loans were secured by residential real estate. Any sustained period of increased payment delinquencies, foreclosures, or losses caused by adverse market and economic conditions, including another downturn in the real estate market, in our markets could adversely affect the value of our assets, results of operations, and financial condition.
Nicolet is subject to extensive regulation that could limit or restrict our activities, which could have a material adverse effect on our results of operations or share price.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations, including compliance with regulatory commitments, is costly and restricts certain of our activities, including the declaration and payment of cash dividends to stockholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations.
The laws and regulations applicable to the banking industry have changed and are likely to continue to change, and we cannot predict the effects of these changes on our business and profitability. Some or all of the changes, including the rule-making authority granted to the CFPB, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens for us, and many of our competitors that are not banks or bank holding companies may remain free from such limitations. This could affect our ability to attract and retain depositors, to offer competitive products and services, and to expand our business. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect our ability to operate profitably.
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Congress may consider additional proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions, bank holding companies and financial holding companies. Such legislation may change existing banking statutes and regulations, as well as the current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.
Nicolet’s profitability is sensitive to changes in the interest rate environment.
As a financial institution, our earnings significantly depend on net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.
In addition, we cannot predict whether interest rates will continue to remain at present levels, or the timing of any anticipated changes. Changes in interest rates may cause significant changes, up or down, in our net interest income. If the interest rates paid on deposits and borrowings increase at a faster rate than the interest rates received on loans and investment securities, our net interest income, and therefore earnings, could be adversely affected. Earnings also could be adversely affected if the interest rates received on loans and investment securities fall more quickly than the interest rates paid on deposits and borrowings. In addition, if there is a substantial increase in interest rates, our investment portfolio is at risk of experiencing price declines that may negatively impact our total capital position through changes in other comprehensive income. Any significant increase in prevailing interest rates could also adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer refinancing and purchase money mortgage originations.
Nicolet may be required to transition from the use of LIBOR interest rate index in the future.
Certain of our trust preferred securities, loans, investment securities, and junior subordinated debentures are currently indexed to LIBOR to calculate the interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected.
Nicolet faces significant operational risk, including risk of loss related to cybersecurity breaches, due to the financial services industry’s increased reliance on technology.
We rely heavily on communications and information systems to conduct our business, and we rely on third party vendors to provide key components of these systems, including our core application processing. Any failure, interruption or breach in security of these systems could result in failures or disruptions in customer relationship management, general ledger, deposit, loan functionality and the effective operation of other systems. We rely on third parties to compile, process or store computer systems, company data and infrastructure, and such information may be vulnerable to attack by hackers or unauthorized access. While we have policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, damage vendor relationships, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
We do not control the actions of the third party vendors we have selected to provide key components of our business infrastructure. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, or any failure, interruption or breach in security of the services they provide, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.
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Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
As a financial institution, we are also susceptible to fraudulent activity that may be committed against us, our third party vendors, or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our clients' information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. These risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications.
Negative publicity could damage our reputation.
Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending or foreclosure practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.
Competition in the banking industry is intense and Nicolet faces strong competition from larger, more established competitors.
The banking business is highly competitive, and we experience strong competition from many other financial institutions, as well as financial technology companies (“fintechs”). We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other financial institutions that operate in our primary market areas and elsewhere. Because technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, we also compete with fintechs seeking to disrupt conventional banking markets. In particular, the activity of fintechs has grown significantly over recent years and is expected to continue to grow. Fintechs have and may continue to offer bank or bank-like products and a number of fintechs have applied for bank or industrial loan charters. In addition, other fintechs have partnered with existing banks to allow them to offer deposit products to their customers.
We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established, much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions, we may face a competitive disadvantage as compared to large national or regional banks as a result of our smaller size and relative lack of geographic diversification.
Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts, and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.
Nicolet continually encounters technological change, we may have fewer resources than our competition to continue to invest in technological improvements.
The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in operations. Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.
Risks Related to Ownership of Nicolet’s Common Stock
Our stock price can be volatile.
Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. Our stock price can fluctuate widely in response to a variety of factors including, among other things:
 
actual or anticipated variations in quarterly results of operations or financial condition;
operating results and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns, and other issues in the financial services industry;
perceptions in the marketplace regarding us and / or our competitors;
new technology used or services offered by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
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changes in government regulations;
geopolitical conditions such as acts or threats of terrorism or military conflicts;
available supply and demand of investors interested in trading our common stock;
our own participation in the market through our buyback program; and
recommendations by securities analysts.
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of our operating results.
Nicolet has not historically paid dividends to our common shareholders, and we cannot guarantee that it will pay dividends to such shareholders in the future.
The holders of our common stock receive dividends if and when declared by the Nicolet board of directors out of legally available funds. Nicolet’s board of directors has not declared a dividend on the common stock since our inception in 2000. Any future determination relating to dividend policy will be made at the discretion of Nicolet’s board of directors and will depend on a number of factors, including the company’s future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that the board of directors may deem relevant.
Our principal business operations are conducted through the Bank. Cash available to pay dividends to our shareholders is derived primarily, if not entirely, from dividends paid by the Bank. The ability of the Bank to pay dividends to us, as well as our ability to pay dividends to our shareholders, is subject to and limited by certain legal and regulatory restrictions, as well as contractual restrictions related to our junior subordinated debentures. Further, any lenders making loans to us may impose financial covenants that may be more restrictive than regulatory requirements with respect to the payment of dividends by us. There can be no assurance of whether or when we may pay dividends in the future.
Nicolet may need to raise additional capital in the future but that capital may not be available when it is needed or may be dilutive to our shareholders.
We are required by federal and state regulatory authorities to maintain adequate capital levels to support our operations. In order to support our growth and operations and to comply with regulatory standards, we may need to raise capital in the future. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on favorable terms. The capital and credit markets have experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of volatility worsen, our ability to raise additional capital may be disrupted. If we cannot raise additional capital when needed, our results of operations and financial condition may be adversely affected, and our banking regulators may subject us to regulatory enforcement action, including receivership. In addition, the issuance of additional shares of our equity securities will dilute the economic ownership interest of our common shareholders.
Nicolet’s directors and executive officers own a significant portion of our common stock and can influence shareholder decisions.
Our directors and executive officers, as a group, beneficially owned approximately 16% of our fully diluted issued and outstanding common stock as of December 31, 2020. As a result of their ownership, our directors and executive officers have the ability, if they voted their shares in concert, to influence the outcome of matters submitted to our shareholders for approval, including the election of directors.
Holders of Nicolet’s subordinated debentures have rights that are senior to those of its common shareholders.
We have supported our continued growth by issuing trust preferred securities and accompanying junior subordinated debentures and by assuming the trust preferred securities and accompanying junior subordinated debentures issued by companies we have acquired. As of December 31, 2020, we had outstanding trust preferred securities and associated junior subordinated debentures with an aggregate par principal amount of approximately $33.0 million and $32.1 million, respectively.
We have unconditionally guaranteed the payment of principal and interest on our trust preferred securities. Also, the junior subordinated debentures issued to the special purpose trusts that relate to those trust preferred securities are senior to our common stock. As a result, we must make payments on the junior subordinated debentures before we can pay any dividends on our common stock, and in the event of our bankruptcy, dissolution or liquidation, holders of our junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We do have the right to defer distributions on our junior subordinated debentures (and related trust preferred securities) for up to five years, but during that time would not be able to pay dividends on our common stock.
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Because Nicolet is a regulated bank holding company, your ability to obtain “control” or to act in concert with others to obtain control over Nicolet without the prior consent of the Federal Reserve or other applicable bank regulatory authorities is limited and may subject you to regulatory oversight.
Nicolet is a bank holding company and, as such, is subject to significant regulation of its business and operations. In addition, under the provisions of the Bank Holding Company Act and the Change in Bank Control Act, certain regulatory provisions may become applicable to individuals or groups who are deemed by the regulatory authorities to “control” Nicolet or our subsidiary bank. The Federal Reserve and other bank regulatory authorities have very broad interpretive discretion in this regard and it is possible that the Federal Reserve or some other bank regulatory authority may, whether through a merger or through subsequent acquisition of Nicolet’s shares, deem one or more of Nicolet’s shareholders to control or to be acting in concert for purposes of gaining or exerting control over Nicolet. Such a determination may require a shareholder or group of shareholders, among other things, to make voluminous regulatory filings under the Change in Bank Control Act, including disclosure to the regulatory authorities of significant amounts of confidential personal or corporate financial information. In addition, certain groups or entities may also be required to either register as a bank holding company under the Bank Holding Company Act, becoming themselves subject to regulation by the Federal Reserve under that Act and the rules and regulations promulgated thereunder, which may include requirements to materially limit other operations or divest other business concerns, or to divest immediately their investments in Nicolet.
In addition, these limitations on the acquisition of our stock may generally serve to reduce the potential acquirers of our stock or to reduce the volume of our stock that any potential acquirer may be able to acquire. These restrictions may serve to generally limit the liquidity of our stock and, consequently, may adversely affect its value.
Nicolet’s securities are not FDIC insured.
Our securities are not savings or deposit accounts or other obligations of the Bank, and are not insured by the Deposit Insurance Fund, or any other agency or private entity and are subject to investment risk, including the possible loss of some or all of the value of your investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The corporate headquarters of both the Parent Company and the Bank are located at 111 North Washington Street, Green Bay, Wisconsin. At year-end 2020, including the main office, the Bank operated 36 bank branch locations, 28 of which are owned and eight that are leased. In addition, Nicolet owns or leases other real property that, when considered in aggregate, is not significant to its financial position. Most of the offices are free-standing, newer buildings that provide adequate access, customer parking, and drive-through and/or ATM services. The properties are in good condition and considered adequate for present and near term requirements. None of the owned properties are subject to a mortgage or similar encumbrance.
One leased location involves a director, with lease terms that management considers arms-length. For additional disclosure, see Note 14, “Related Party Transactions,” of the Notes to Consolidated Financial Statements under Part II, Item 8.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Nicolet registered its common stock under Section 12(b) of the Exchange Act on February 24, 2016, in connection with listing on the Nasdaq Capital Market, and trades under the symbol “NCBS”. As of February 22, 2021, Nicolet had approximately 2,200 shareholders of record.
Nicolet has not paid dividends on its common stock since its inception in 2000. Any cash dividends paid by Nicolet on its common stock must comply with applicable Federal Reserve policies described further in “Business—Regulation of Nicolet—Dividend Restrictions.” The Bank is also subject to regulatory restrictions on the amount of dividends it is permitted to pay to Nicolet as
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further described in “Business—Regulation of the Bank—Payment of Dividends” and in Note 16, “Regulatory Capital Requirements,” in the Notes to Consolidated Financial Statements under Part II, Item 8.
Following are Nicolet’s monthly common stock purchases during the fourth quarter of 2020.
Period:
Total Number 
of Shares 
Purchased (#) (a) (b)
Average Price
Paid per Share ($)
Total Number of
Shares Purchased  as
Part of Publicly
Announced Plans
or Programs (#) (b)
Maximum Number of
Shares that May  Yet
Be Purchased  Under
the Plans
or Programs (#) (a) (b)
October 1 – October 31, 2020123,759 $60.61 123,759 308,400 
November 1– November 30, 202048,608 $65.27 46,043 587,400 
December 1 – December 31, 202037,138 $68.50 35,199 552,200 
Total209,505 $63.09 205,001 552,200 
(a) During fourth quarter 2020, the Company repurchased 3,251 shares for minimum tax withholding settlements on restricted stock and repurchased 1,253 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 2014 the board of directors approved a common stock repurchase program which authorized, with subsequent modifications, the use of up to $126 million to repurchase up to 2,625,000 shares of outstanding common stock. The common stock repurchase program has no expiration date. During fourth quarter 2020, Nicolet spent $12.9 million to repurchase and cancel 205,001 shares at a weighted average price of $62.97 per share, bringing the life-to-date cumulative totals to $105.6 million to repurchase and cancel 2.1 million shares at a weighted average price of $50.92 per share. At December 31, 2020, approximately $20.4 million remained available to repurchase common shares.
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Performance Graph
The following graph shows the cumulative stockholder return on our common stock compared with the KBW NASDAQ Bank Index and the S&P 500 Index for the period of December 31, 2015 to December 31, 2020. The graph assumes the value of the investment in the Company’s common stock and in each index was $100 on December 31, 2015. Historical stock price performance shown on the graph is not necessarily indicative of the future price performance.
ncbs-20201231_g1.jpg
Period Ending
Index201520162017201820192020
Nicolet Bankshares, Inc.$100.00 $150.02 $172.19 $153.51 $232.31 $208.71 
S&P 500 Index100.00 111.96 136.40 130.42 171.49 203.04 
KBW Nasdaq Bank Index100.00 128.51 152.40 125.41 170.71 153.11 
Source: S&P Global Market Intelligence
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented as of December 31, 2020 and 2019 and for each of the years in the three-year period ended December 31, 2020 is derived from the audited consolidated financial statements and related notes included in this report and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data for all other periods shown is derived from audited consolidated financial statements that are not required to be included in this report.
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EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
 At and for the years ended December 31,
(in thousands, except per share data)20202019201820172016
Results of operations:     
Interest income$149,202 $138,588 $125,537 $109,253 $75,467 
Interest expense19,864 22,510 18,889 10,511 7,334 
Net interest income129,338 116,078 106,648 98,742 68,133 
Provision for credit losses10,300 1,200 1,600 2,325 1,800 
Noninterest income62,626 53,367 39,509 34,639 26,674 
Noninterest expense100,719 96,799 89,758 81,356 64,942 
Income before income tax expense80,945 71,446 54,799 49,700 28,065 
Income tax expense20,476 16,458 13,446 16,267 9,371 
Net income60,469 54,988 41,353 33,433 18,694 
Net income attributable to noncontrolling interest347 347 317 283 232 
Net income attributable to Nicolet Bankshares, Inc.60,122 54,641 41,036 33,150 18,462 
Preferred stock dividends— — — — 633 
Net income available to common shareholders$60,122 $54,641 $41,036 $33,150 $17,829 
Earnings per common share:     
Basic$5.82 $5.71 $4.26 $3.51 $2.49 
Diluted$5.70 $5.52 $4.12 $3.33 $2.37 
Common shares:     
Basic weighted average10,337 9,562 9,640 9,440 7,158 
Diluted weighted average10,541 9,900 9,956 9,958 7,514 
Outstanding10,011 10,588 9,495 9,818 8,553 
Year-End Balances:     
Loans$2,789,101 $2,573,751 $2,166,181 $2,087,925 $1,568,907 
Allowance for credit losses - loans (“ACL-Loans”)32,173 13,972 13,153 12,653 11,820 
Securities available for sale, at fair value539,337 449,302 400,144 405,153 365,287 
Goodwill and other intangibles, net175,353 165,967 124,307 128,406 87,938 
Total assets4,551,789 3,577,260 3,096,535 2,932,433 2,300,879 
Deposits3,910,399 2,954,453 2,614,138 2,471,064 1,969,986 
Short-term and long-term borrowings53,869 67,629 77,305 78,046 37,617 
Stockholders’ equity539,189 516,262 386,609 364,178 275,947 
Book value per common share$53.86 $48.76 $40.72 $37.09 $32.26 
Tangible book value per common share *$36.34 $33.08 $27.62 $24.01 $21.98 
Average Balances:     
Loans$2,787,587 $2,257,033 $2,127,470 $1,899,225 $1,346,304 
Interest-earning assets3,849,812 2,794,641 2,671,560 2,351,451 1,723,600 
Goodwill and other intangibles, net168,802 129,112 126,284 115,447 61,588 
Total assets4,255,207 3,126,535 2,977,457 2,648,754 1,934,770 
Deposits3,439,748 2,598,271 2,508,952 2,228,408 1,641,894 
Interest-bearing liabilities2,660,508 1,939,639 1,951,846 1,750,099 1,307,471 
Common equity527,428 423,952 371,635 332,897 217,432 
Stockholders’ equity527,428 423,952 371,635 332,897 226,265 
Financial Ratios:     
Return on average assets1.41 %1.75 %1.38 %1.25 %0.95 %
Return on average equity11.40 12.89 11.04 9.96 8.16 
Return on average common equity11.40 12.89 11.04 9.96 8.20 
Return on average tangible common equity *16.76 18.53 16.73 15.24 11.44 
Average equity to average assets12.39 13.56 12.48 12.57 11.69 
Net interest margin3.38 4.19 4.04 4.30 4.01 
Stockholders’ equity to assets11.85 14.43 12.49 12.42 11.99 
Tangible common equity to tangible assets *8.31 10.27 8.83 8.41 8.50 
Net charge-offs to average loans0.05 0.02 0.05 0.08 0.02 
Nonperforming loans to total loans0.34 0.55 0.25 0.63 1.29 
Nonperforming assets to total assets0.29 0.42 0.19 0.49 0.97 
Allowance for credit losses-loans to loans1.15 0.54 0.61 0.61 0.75 
* 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.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is management’s analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of Nicolet. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report.
Evaluation of financial performance and certain balance sheet line items was impacted by the timing and size of Nicolet's acquisitions, Choice Bancorp, Inc. (“Choice”) on November 8, 2019, at 12% of Nicolet’s then pre-merger asset size, and Advantage Community Bancshares, Inc. (“Advantage”) on August 21, 2020, at 4% of Nicolet’s then pre-merger asset size. Certain income statement results, average balances and related ratios for 2020 include full contribution from Choice and a partial contribution from Advantage, while 2019 includes partial contribution from Choice and no contribution from Advantage. At consummation, Choice added $457 million in assets, loans of $348 million, deposits of $289 million, core deposit intangible of $1.7 million, goodwill of $45 million, and one net new branch. At consummation, Advantage added $172 million in assets, loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, goodwill of $12 million, and four branches.
The detailed financial discussion that follows focuses on 2020 results compared to 2019. See “2019 Compared to 2018” for the summary comparing 2019 and 2018 results. Some tabular information is shown for trends of three years or for five years as required under SEC regulations.
Overview
Nicolet provides a diversified range of traditional commercial and retail banking services, as well as wealth management services, to individuals, business owners, and businesses in its market area primarily through, as of year-end 2020, the 36 bank branch offices of its banking subsidiary, located in northeast and central Wisconsin and Menominee, Michigan.
The 2020 year was marked by significant events (health pandemic, large sudden rate drop by the Federal Reserve, unprecedented government stimulus, political changes and social issues, and other market and economic disruptions), volatility, and uncertainty, that turned 2020 into a very tactical year for Nicolet management. Management took several actions to respond: added $0.2 billion of liquidity (which later proved to not be necessary, leading to a reduction in non-deposit leverage in the second half of the year), temporarily (and later permanently) closed 8 branches, provided temporary relief to customers through loan payment modifications on nearly 1,000 loans (with only a fraction remaining on modified terms at year end), dramatically elevated the credit loss provision given pervading uncertainty (though slowed the provision in fourth quarter as potential deterioration of loan quality metrics initially anticipated had not materialized), channeled significant resources to originate PPP loans (peaking at 2,725 loans totaling $351 million during 2020) and residential mortgages (over $1 billion originated to consumers under atypical conditions), granted $1.25 million of aid to expedite funds to smaller businesses who would have otherwise waited for small PPP loans, kept people safe (with $0.6 million of expense in second quarter for onsite-bonuses, testing and protective supplies), and prioritized full return to on-site work by June to allow us to move forward on goals and improvements (with offsite workforce peaking at 52%, comprised of 34% remote and 18% paid to stay home and not work due to risk concerns or location closure). During 2020, we still executed on our acquisition strategy, completing the all-cash acquisition of Advantage. While we announced a merger agreement with a $0.7 billion bank in February 2020, we exercised discipline, mutually terminating that deal in May 2020, (given the level of uncertainty and pricing in the significantly depressed market that made the transaction unlikely to close) and incurred a $0.5 million charge. Nicolet has used acquisitions as part of its growth strategy over the past few years and has successfully integrated and realized cost efficiencies related to scale quickly after each acquisition.
In 2020, despite the turbulent year and through the many actions noted above, Nicolet delivered on growth, profitability, capital positioning, and sound asset quality management.  At December 31, 2020, Nicolet had total assets of $4.6 billion, loans of $2.8 billion, deposits of $3.9 billion and stockholders’ equity of $539 million, representing increases over December 31, 2019 of 27%, 8%, 32% and 4%, in assets, loans, deposits and total equity, respectively, largely due to the significant increase in liquidity, and only partly due to the Advantage acquisition. At December 31, 2020, cash and cash equivalents grew significantly, up $0.6 billion to $0.8 billion or 18% of assets (compared to $0.2 billion or 5% of assets at year end 2019), while loans increased $0.2 billion and investments grew $0.1 billion, funded by the surge in deposits (up $956 million) over year end 2019. Asset quality remained sound, with nonperforming assets to assets of 0.29% at December 31, 2020 (down from 0.42% at year-end 2019), as the borrowing base has largely remained resilient, profitable and liquid in the uncertain times. The allowance for credit losses-loans grew to $32.2 million (1.15% of loans, or 1.24% of loans excluding PPP loans) compared to $14.0 million or 0.54% of loans at December 31, 2019. The large increase in the allowance resulted from the $10.3 million provision exceeding $1.4 million of net charge-offs (or 0.05% of average loans), and a $9.3 million addition upon adoption of the current expected credit losses (“CECL”) model. Nicolet repurchased approximately 646,700 shares of common stock for $40.5 million in 2020 under its common stock repurchase program, given the opportunity of a depressed market.  At December 31, 2020 there remained $20.4 million authorized under the repurchase program, as modified. With total stockholders’ equity to assets of 11.85% at year-end 2020, Nicolet has capacity to act on targets of interest in relevant or growth markets that provide a path to or support our position as the lead-local community bank.
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For 2020, net income was record-breaking at $60.1 million (10% higher than $54.6 million for 2019), and return on average assets was 1.41% (compared to 1.75% for 2019), with 2020 impacted by the sizable increase in average assets (mainly cash). Diluted earnings per common share for 2020 was $5.70 (3% higher than 2019), benefiting from the stronger net income, while covering a 6% increase in average diluted shares, mostly due to the timing of the 1.2 million shares issued in the Choice acquisition net of strong repurchase activity throughout 2020 (totaling 0.6 million shares). Notably, second quarter 2020 net income unfavorably included $4 million of isolated expenses ($3 million after tax) related to the onset of the pandemic, a terminated acquisition and branch closure decisions. During second quarter 2019, net income favorably included $5.4 million (or $0.55 of diluted earnings per share) related to two one-time actions combined, the sale of 80% of Nicolet's equity investment in a data processing entity ($7.4 million after-tax gain) and $2.75 million retirement-related compensation declared to benefit all employees after that sale ($2.0 million after-tax cost).
Net income before taxes for 2020 was $80.9 million ($9.5 million or 13% higher than 2019), predominantly due to increased net interest income (up $13 million or 11% aided mainly on higher volumes, despite an 81bps decline in net interest margin between the years, dominated by the very high proportion of low-earning cash in total interest-earning assets), record net mortgage income (at $30 million versus $12 million in 2019) and strong wealth revenues (up $2 million or 13%), which more than covered a $10 million negative swing in net asset gains or losses (at $2 million net loss for 2020 versus $8 million net gain for 2019), higher credit loss provision (up $9 million) and a $4 million or 4% increase in overall expenses, evidencing diligent expense management and improved efficiencies in a difficult year.
For 2021, Nicolet’s focus will return to its long-term strategies, especially M&A, as we believe such opportunities have grown in light of industry stress, and we have remained well-positioned to capitalize on it through a solid core franchise, strong asset quality, and an experienced team. That said, when evaluating transactions, quantitative and qualitative factors need to make sense in combination with each other, including but not limited to the economics of the transaction, cultural and strategic fit, geographic and business line relevance, and current or potential talent. We will remain committed on driving growth in core earnings through our expanded customer base. Our objective is to achieve solid organic growth in loans, core deposits, wealth management services and other revenue lines within all our markets, in a cost-effective, profitable manner to sustain a healthy return on average assets. We plan to remain active on-site as a differentiator to many of our competitors, remain adaptable for our customers in the continuing uncertainty, and deliver on our long-term leadership succession plans. Additional resources are planned in 2021 for furthering automation and data analysis (to enhance customer experiences and company efficiencies and decision-making), for personnel expenses (in support of deepening talent and leadership in light of growth and succession needs), and for capital management (to balance safety and opportunity for the long-term). While Nicolet believes delivering strong earnings, return on assets, and disciplined capital management aligned with growth will provide upward pressure on our common stock performance throughout the year, ongoing uncertainties remain for 2021 across many environments (health, social, political and economic), which will likely heighten potential challenges for the year.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount, mix and composition of interest-earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies. Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and is used in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources. Tables 1, 2, and 3 present information to facilitate the review and discussion of selected average balance sheet items, tax-equivalent net interest income, interest rate spread, and net interest margin.
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Table 1: Average Balance Sheet and Net Interest Income Analysis - Tax-Equivalent Basis
 Years Ended December 31,
(in thousands)202020192018
 Average
Balance
InterestAverage
Yield/Rate
Average
Balance
InterestAverage
Yield/Rate
Average
Balance
InterestAverage
Yield/Rate
ASSETS         
Interest-earning assets         
PPP Loans$220,544 $8,062 3.66 %$— $— — %$— $— — %
Commercial-based loans ex PPP2,088,149 105,643 5.06 %1,802,747 101,509 5.63 %1,657,207 91,349 5.51 %
Retail-based loans478,894 22,776 4.76 %454,286 24,206 5.33 %470,263 22,791 4.85 %
   Total loans, including loan fees (1)(2)
2,787,587 136,481 4.90 %2,257,033 125,715 5.57 %2,127,470 114,140 5.37 %
Investment securities:
   Taxable354,430 8,118 2.29 %276,742 7,584 2.74 %261,107 6,068 2.32 %
   Tax-exempt (2)
135,779 2,961 2.18 %132,419 2,927 2.21 %149,900 3,259 2.17 %
      Total investment securities490,209 11,079 2.26 %409,161 10,511 2.57 %411,007 9,327 2.27 %
Other interest-earning assets572,016 2,611 0.46 %128,447 3,405 2.65 %133,083 3,220 2.42 %
   Total non-loan earning assets1,062,225 13,690 1.29 %537,608 13,916 2.59 %544,090 12,547 2.31 %
   Total interest-earning assets3,849,812 $150,171 3.90 %2,794,641 $139,631 5.00 %2,671,560 $126,687 4.74 %
Other assets, net405,395 331,894 305,897 
Total assets$4,255,207 $3,126,535 $2,977,457 
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Interest-bearing liabilities      
Savings$422,171 $700 0.17 %$318,525 $1,528 0.48 %$285,777 $1,181 0.41 %
Interest-bearing demand562,370 3,938 0.70 %486,139 4,852 1.00 %524,924 4,530 0.86 %
Money market accounts (“MMA”)749,877 1,502 0.20 %582,646 3,676 0.63 %634,947 3,926 0.62 %
Core time deposits390,216 6,023 1.54 %402,141 8,136 2.02 %337,100 5,266 1.56 %
   Total interest-bearing core deposits2,124,634 12,163 0.57 %1,789,451 18,192 1.02 %1,782,748 14,903 0.84 %
Brokered deposits289,489 4,478 1.55 %75,159 773 1.03 %91,379 517 0.57 %
   Total interest-bearing deposits2,414,123 16,641 0.69 %1,864,610 18,965 1.02 %1,874,127 15,420 0.82 %
PPPLF161,634 571 0.35 %— — — %— — — %
Other interest-bearing liabilities84,751 2,652 3.13 %75,029 3,545 4.72 %77,719 3,469 4.46 %
   Total wholesale funding246,385 3,223 1.31 %75,029 3,545 4.72 %77,719 3,469 4.46 %
   Total interest-bearing liabilities2,660,508 19,864 0.75 %1,939,639 22,510 1.16 %1,951,846 18,889 0.97 %
Noninterest-bearing demand deposits1,025,625  733,661  634,825  
Other liabilities41,646  29,283  19,151  
Stockholders’ equity527,428  423,952  371,635  
Total liabilities and stockholders’ equity$4,255,207  $3,126,535  $2,977,457  
Tax-equivalent net interest income and rate spread $130,307 3.15 % $117,121 3.84 % $107,798 3.77 %
Tax-equivalent adjustment and net free funds969 0.23 %1,043 0.35 %1,150 0.27 %
Net interest income and net interest margin $129,338 3.38 % $116,078 4.19 % $106,648 4.04 %
Selected Additional Information:
Total loans ex PPP$2,567,043 $128,419 5.00 %$2,257,033 $125,715 5.57 %$2,127,470 $114,140 5.37 %
Total interest-earning assets ex PPP3,629,268 142,109 3.92 %2,794,641 139,631 5.00 %2,671,560 126,687 4.74 %
Total interest-bearing liabilities ex PPPLF2,498,874 19,293 0.77 %1,939,639 22,510 1.16 %1,951,846 18,889 0.97 %
Net interest rate spread ex PPP & PPPLF3.15 %3.84 %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% and adjusted for the disallowance of interest expense.
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Table 2: Volume/Rate Variance - Tax-Equivalent Basis
(in thousands)
2020 Compared to 2019
Increase (Decrease) Due to Changes in
2019 Compared to 2018
Increase (Decrease) Due to Changes in
 VolumeRate
Net (1)
VolumeRate
Net (1)
Interest-earning assets      
PPP Loans$8,062 $— $8,062 $— $— $— 
Commercial-based loans ex PPP18,251 (14,117)4,134 7,114 3,046 10,160 
Retail-based loans1,300 (2,730)(1,430)233 1,182 1,415 
   Total loans, including loan fees (2) (3)
27,613 (16,847)10,766 7,347 4,228 11,575 
Investment securities:
   Taxable1,175 (641)534 638 878 1,516 
   Tax-exempt (3)
74 (40)34 (385)53 (332)
      Total investment securities1,249 (681)568 253 931 1,184 
Other interest-earning assets2,894 (3,688)(794)(33)218 185 
  Total non-loan earning assets4,143 (4,369)(226)220 1,149 1,369 
Total interest-earning assets$31,756 $(21,216)$10,540 $7,567 $5,377 $12,944 
Interest-bearing liabilities      
Savings$389 $(1,217)$(828)$145 $202 $347 
Interest-bearing demand683 (1,597)(914)(352)674 322 
MMA842 (3,016)(2,174)(329)79 (250)
Core time deposits(235)(1,878)(2,113)1,134 1,736 2,870 
   Total interest-bearing core deposits1,679 (7,708)(6,029)598 2,691 3,289 
Brokered deposits3,148 557 3,705 (105)361 256 
   Total interest-bearing deposits4,827 (7,151)(2,324)493 3,052 3,545 
PPPLF571 — 571 — — — 
Other interest-bearing liabilities37 (930)(893)(32)108 76 
   Total wholesale funding608 (930)(322)(32)108 76 
Total interest-bearing liabilities5,435 (8,081)(2,646)461 3,160 3,621 
Net interest income$26,321 $(13,135)$13,186 $7,106 $2,217 $9,323 
(1)The change in interest due to both rate and volume has been allocated in proportion to the relationship of dollar amounts of change in each.
(2)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.
(3)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.
Table 3: Interest Rate Spread, Margin and Average Balance Mix - Tax-Equivalent Basis
 Years Ended December 31,
(in thousands)2020 Average2019 Average2018 Average
 Balance% of
Earning
Assets
Yield/RateBalance% of
Earning
Assets
Yield/RateBalance% of
Earning
Assets
Yield/Rate
Loans$2,787,587 72 %4.90 %$2,257,033 81 %5.57 %$2,127,470 80 %5.37 %
Non-loan earning assets1,062,225 28 %1.29 %537,608 19 %2.59 %544,090 20 %2.31 %
Total interest-earning assets$3,849,812 100 %3.90 %$2,794,641 100 %5.00 %$2,671,560 100 %4.74 %
Interest-bearing liabilities$2,660,508 69 %0.75 %$1,939,639 69 %1.16 %$1,951,846 73 %0.97 %
Noninterest-bearing funds, net1,189,304 31 %855,002 31 %719,714 27 %
Total funds sources$3,849,812 100 %0.54 %$2,794,641 100 %0.84 %$2,671,560 100 %0.73 %
Interest rate spread3.15 %3.84 %3.77 %
Contribution from net free funds0.23 %0.35 %0.27 %
Net interest margin3.38 %4.19 %4.04 %
Comparison of 2020 versus 2019
Net interest income was up 11% over 2019, despite an 81 bps decline in net interest margin. Overall asset volumes increased net interest income while the mix of interest-earning assets (particularly the very high cash levels) squeezed the related net interest margin. In general, the lower interest rate environment pressured both net interest income and net interest margin.
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The interest rate environment experienced dramatic change in 2020. Prior to the pandemic, the Federal Reserve steadily raised short-term interest rates during 2017 and 2018 in support of a growing economy (up 175 bps total to 2.50% at December 31, 2018), and then reduced rates by 75 bps in three moves during the second half of 2019 (to 1.75% at December 31, 2019) largely responding to global issues and slowing growth, which contributed to a flattened yield curve with periods of inversion. In response to the pandemic in March 2020, the Federal Reserve dropped short-term rates by 150 bps (to 25 bps at March 31, 2020) in two emergency moves, which brought slope back into the yield curve, though still fairly flat. Comparatively, short-term rates were 150 bps lower at December 31, 2020 than at December 31, 2019. While the following paragraphs will discuss the comparison of 2020 and 2019, we expect that the pandemic impacts will continue to evolve and pressure future quarters even further, including continued margin pressure in the low rate environment and potential unusual loan or deposit volume or pricing impacts.
At the onset of the pandemic, but prior to the announcement of government stimulus, we added liquidity to ensure we could meet customer needs. The action demonstrated our capacity to support our communities, but proved later to not be necessary, leading us to reduce non-deposit leverage in the second half of 2020. Efforts to minimize pressure on net interest income during the changes throughout 2020 included prudent pricing actions on deposits and loans, allowing brokered deposits to mature without renewal, prepayment of selected FHLB advances, and full payback of the PPPLF funding (approximately $335 million used for 5 months at a cost of 35 bps). In addition, we fully redeemed our subordinated notes ($12 million at 5% fixed) in November 2020 and one of our junior subordinated debenture issuances ($6 million at 8% fixed) in December 2020, which combined will reduce annual interest expense by approximately $1.1 million going forward.
Tax-equivalent net interest income was $130.3 million for 2020, up $13.2 million (11%), compared to 2019, comprised of net interest income of $129.3 million ($13.3 million or 11% higher than 2019) and a $1.0 million tax-equivalent adjustment (down nearly $0.1 million between the years). The $13.2 million increase in tax-equivalent net interest income was comprised of $10.6 million higher interest income and $2.6 million lower interest expense. Higher volumes added $26.3 million to net interest income, including a $31.8 million increase to interest income on higher interest-earning assets (mostly from higher loan volumes, due to the inclusion of loans acquired with Choice and Advantage, as well as PPP loans), offset partly by a $5.4 million increase to interest expense on higher interest-bearing liabilities (mostly from higher deposit volumes also related to the inclusion of Choice and Advantage, as well as overall deposit growth from increased liquidity of consumers and businesses). Rate changes reduced net interest income $13.1 million, comprised of $21.2 million lower interest income (with $16.8 million was from lower rates on loans and $3.7 million from the dramatically reduced cash rate earned), but also lower interest expense on funding of $8.1 million (including $7.7 million savings from non-brokered interest-bearing core deposits and $0.9 million savings from wholesale funding, partly offset by $0.6 million more interest expense from term brokered deposits).
The interest rate spread decreased 69 bps between the periods, as the interest-earning asset yield decreased 110 bps to 3.90% and the cost of funds declined favorably 41 bps to 0.75%. The significantly higher mix of cash assets (to 15% of interest-earning assets versus 4% in 2019) combined with their dramatic decline in yield (to 0.46% versus 2.65% in 2019), has pressured the net interest margin most. Loans yielded 4.90% for 2020, down 67 bps from 2019, in part from the inclusion of lower-earning PPP loans (yielding 3.66%) in 2020, while all other loans earned 5.00%, down 57 bps from 2019. Investments yielded 2.26%, 31 bps lower than 2019. The 41 bps favorable decline in the 2020 cost of funds was primarily attributable to prudent pricing actions on core interest-bearing deposits (down 45 bps to 0.57%) and lower wholesale funding rates (down 159 bps to 3.13% for funding costs excluding PPPLF), offset partly by higher-costing brokered deposits (acquired with the Choice acquisition and procured with the March-April 2020 liquidity actions under competitive conditions). The contribution from net free funds decreased 12 bps, due mostly to the reduced value in the lower interest rate environment, though offset partly by the increase in average net free funds (largely from average noninterest-bearing demand deposits and stockholders' equity) between the years. As a result, the net interest margin was 3.38% for 2020, down 81 bps compared to 4.19% for 2019.
Average interest-earning assets were $3.8 billion for 2020, $1.1 billion (38%) higher than 2019, primarily due to the timing of the acquisitions (Choice in November 2019 and Advantage in August 2020), addition of PPP loans (beginning in second quarter 2020), and significantly higher cash starting in second quarter 2020. Average loans increased $531 million (24%) to $2.8 billion (which includes $348 million of Choice loans at acquisition, $88 million of Advantage loans at acquisition, and $186 million of net PPP loans at December 31, 2020), investments increased $81 million, and other interest-earning assets (which are predominantly cash) increased $444 million. The mix of average interest-earning assets shifted to lower-yielding assets, at 72% loans (comprised of 6% PPP loans and 66% all other loans), 13% investments, and 15% other interest-earning assets (mostly cash) for 2020, compared to 81%, 15%, and 4%, respectively, for 2019.
Tax-equivalent interest income was $150.2 million, up $10.5 million (8%) over 2019, while the related interest-earning asset yield decreased 110 bps to 3.90%. Interest income on loans increased $10.8 million (9%) over 2019, aided by strong volumes, including the Choice and Advantage acquisitions, as well as PPP loans. The 2020 loan yield was 4.90%, down 67 bps from 2019, largely from the significantly lower interest rate environment impacting yields on new, renewed, and variable rate loans, as well as from inclusion of PPP loans at a 3.66% yield. Between the years, interest income on non-loan earning assets combined decreased $0.2
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million to $13.7 million, impacted by a 130 bps decline in the yield (to 1.29%) in the lower rate environment, partially offset by higher average volumes (up 98%) from the significantly higher cash.
Average interest-bearing liabilities were $2.7 billion for 2020, an increase of $721 million (37%) from 2019, primarily due to the timing of the acquisitions (Choice in November 2019 and Advantage in August 2020), as well as the significant increase in deposits from government stimulus activities and deposited PPP loan proceeds. Average core interest-bearing deposits increased $335 million, brokered deposits grew $214 million, and funding increased $171 million (mostly PPPLF funding). The mix of average interest-bearing liabilities was 80% core deposits, 11% brokered deposits, and 9% other funding for 2020, compared to 92% core deposits, 4% brokered deposits, and 4% other funding in 2019, with the mix changes (especially increased money markets and brokered deposits) influenced by the composition of the $289 million of Choice deposits acquired, and the procurement of brokered deposits in March-April 2020 as part of previously discussed liquidity actions.
Interest expense was $20 million for 2020, down $3 million (12%) from 2019, on larger average interest-bearing liabilities volumes (up 37% to $2.7 billion) but at a lower overall cost (down 41 bps to 0.75%). Interest expense on deposits decreased $2.3 million from 2019 given 29% higher average interest-bearing deposit balances, but at a lower cost (down 33 bps to 0.69%). The 2020 cost of savings, interest-bearing demand, money market accounts, and core time deposits decreased from 2019 by 31 bps, 30 bps, 43 bps, and 48 bps, respectively, as product rate changes were made in the lower interest rate environment, and brokered deposits cost 52 bps more than 2019 largely from higher-costing term brokered funds acquired with the Choice acquisition in November 2019 and procured during March-April 2020 under competitive conditions as part of previously discussed liquidity actions. Interest expense on other interest-bearing liabilities decreased $0.3 million (9%), as additional interest expense on higher average balances (up $171 million) was substantially offset by lower rates (down 341 bps to 1.31%), mostly impacted by the inclusion of the low-costing PPPLF (average balance of $162 million for 2020 at a 0.35% rate), and variable rate debt repricing and maturing advances replaced in the lower rate environment.
Provision for Credit Losses
The provision for credit losses in 2020 was $10.3 million, exceeding $1.4 million of net charge-offs. Comparatively, 2019 provision for credit losses and net charge-offs were $1.2 million and $0.4 million, respectively. The increase in the provision for credit losses between the years was largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID pandemic, and to a lesser extent, to the acquisition of Advantage.
The provision for credit losses is predominantly a function of Nicolet’s methodology and judgment as to qualitative and quantitative factors used to determine the appropriateness of the ACL-Loans. The appropriateness of the ACL-Loans is affected by changes in the size and character of the loan portfolio, changes in levels of collateral-dependent and other nonperforming loans, historical losses and delinquencies in each portfolio segment, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and future economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. For additional information regarding asset quality and the ACL-Loans, see “BALANCE SHEET ANALYSIS — Loans,” and “— Allowance for Credit Losses - Loans” and “—Nonperforming Assets.”

Noninterest Income
Table 4: Noninterest Income
(in thousands)Years Ended December 31,Change From Prior Year
 202020192018
$ Change
2020
% Change
2020
$ Change
2019
% Change
2019
Trust services fee income$6,463 $6,227 $6,498 $236 %$(271)(4)%
Brokerage fee income9,753 8,115 7,042 1,638 20 %1,073 15 %
Mortgage income, net29,807 11,878 6,344 17,929 151 %5,534 87 %
Service charges on deposit accounts4,208 4,824 4,845 (616)(13)%(21)— %
Card interchange income6,998 6,498 5,665 500 %833 15 %
Bank owned life insurance (“BOLI”) income2,710 2,369 2,418 341 14 %(49)(2)%
Other income4,492 5,559 5,528 (1,067)(19)%31 %
  Noninterest income without net gains64,431 45,470 38,340 18,961 42 %7,130 19 %
Asset gains (losses), net(1,805)7,897 1,169 (9,702)N/M6,728 N/M
    Total noninterest income$62,626 $53,367 $39,509 $9,259 17 %$13,858 35 %
Trust services fee income
& Brokerage fee income combined
$16,216 $14,342 $13,540 $1,874 13 %$802 %
N/M means not meaningful.
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Comparison of 2020 versus 2019
Noninterest income was $62.6 million for 2020, an increase of $9.3 million (17%) over 2019, which included a $7.4 million gain on the equity investment sale previously noted in the “Overview” section. Noninterest income excluding net asset gains increased $19.0 million (42%) between 2020 and 2019. Notable contributions to the change in noninterest income were:
Trust services fee income and brokerage fee income combined were $16.2 million for 2020, up $1.9 million (13%) from 2019, consistent with the growth in assets under management.
Mortgage income represents net gains received from the sale of residential real estate loans into the secondary market, capitalized mortgage servicing rights (“MSRs”), servicing fees net of MSR amortization, fair value marks on the mortgage interest rate lock commitments and forward commitments (“mortgage derivatives”), and MSR valuation changes, if any. Net mortgage income was $29.8 million for 2020, up $17.9 million (151%) over 2019, predominantly from higher sale gains and capitalized gains combined (up $18.9 million or 168%, commensurate with the increase in volumes sold into the secondary market, aided by the current refinance boom and better pricing between the years), partially offset by a $1.0 million MSR asset valuation allowance given faster paydown activity. See also “Off-Balance Sheet Arrangements, Lending-Related Commitments and Contractual Obligations” and Note 6, “Goodwill and Other Intangibles and Mortgage Servicing Rights” in the Notes to Consolidated Financial Statements, under Part II, Item 8
Service charges on deposit accounts were down $0.6 million (13%) to $4.2 million for 2020, mainly as we waived certain fees during second quarter 2020 to provide economic relief to our customers.
Card interchange income grew $0.5 million (8%) to $7.0 million in 2020 due to higher volume and activity.
BOLI income increased $0.3 million (14%) to $2.7 million for 2020, attributable to the difference in BOLI death benefits received in each year (up $0.2 million) and income on higher average balances from $5 million new BOLI purchased in mid-2019, $6 million BOLI acquired with Choice, and $3 million BOLI acquired with Advantage.
Other income of $4.5 million was down $1.1 million (19%) from 2019, largely due to $0.5 million lower income from the smaller equity interest in a data processing entity after the partial sale in 2019 and $0.3 million attributable to the fee earned on a customer loan interest rate swap in 2019.
The $1.8 million net asset losses in 2020 were comprised primarily of $1.0 million market losses on equity securities held in the lower, more volatile market and $0.9 million of net losses on branch other real estate owned write-downs. Net asset gains in 2019 of $7.9 million were comprised primarily of the $7.4 million gain on the equity investment sale in second quarter 2019 and $1.1 million of favorable fair value marks on equity securities, partially offset by losses of $0.6 million on the disposal and write-down of fixed assets, OREO, and an other investment. Additional information on the net gains is also included in Note 15, “Asset Gains (Losses), Net,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Noninterest Expense
Table 5: Noninterest Expense
($ in thousands)Years Ended December 31,Change From Prior Year
 202020192018
Change
2020
% Change
2020
Change
2019
% Change
2019
Personnel$57,121 $54,437 $49,476 $2,684 %$4,961 10 %
Occupancy, equipment and office16,718 14,788 14,574 1,930 13 %214 %
Business development and marketing5,396 5,685 5,324 (289)(5)%361 %
Data processing10,694 9,950 9,514 744 %436 %
Intangibles amortization3,567 3,872 4,389 (305)(8)%(517)(12)%
Other expense7,223 8,067 6,481 (844)(10)%1,586 24 %
Total noninterest expense$100,719 $96,799 $89,758 $3,920 %$7,041 %
Non-personnel expenses$43,598 $42,362 $40,282 $1,236 %$2,080 %
Average full-time equivalent employees553 560 553 (7)(1)%%
Comparison of 2020 versus 2019
Noninterest expense was $100.7 million, an increase of $3.9 million (4%) over 2019, with second quarter 2020 including $4 million of isolated expenses related to the onset of the pandemic, a terminated acquisition, and branch closure decisions. Personnel costs increased $2.7 million, and non-personnel expenses combined increased $1.2 million over 2019. Notable contributions to the change in noninterest expense were:
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Personnel expense (including salaries, overtime, cash and equity incentives, and employee benefit and payroll-related expenses) was $57.1 million for 2020, an increase of $2.7 million (5%) over 2019. Salaries increased $2.3 million (7%) over 2019, of which $0.6 million was attributable to branch closure severances and on-site bonus pay in second quarter 2020, and $1.7 million (representing a 5% increase over 2019) was due to merit increases and hires between the years. Cash and equity award incentives increased $1.5 million, while retirement-based compensation (401k, profit sharing and nonqualified deferred compensation) declined $1.0 million between the years, rewarding strong performance of both years and matching the mix of incentive compensation to be meaningful to recipients. Overtime pay doubled to $0.6 million (up $0.3 million over 2019), largely to cover the effort of processing PPP originations and significant mortgage volume. All other fringe benefits combined declined $0.4 million from 2019, mainly on lower health costs between the years.
Occupancy, equipment and office expense was $16.7 million for 2020, up $1.9 million (13%) from 2019, with 2020 including $0.5 million of accelerated depreciation and write-offs related to the branch closures, higher expense for software and technology to drive operational efficiencies and enhance products or services, and for additional licenses and equipment to expand remote workers in response to the pandemic. 2019 also included $0.4 million of accelerated depreciation for branch facility upgrades.
Business development and marketing expense was $5.4 million for 2020, down $0.3 million (5%), largely due to lower business development costs from less travel and entertainment during the pandemic, partly offset by $1.25 million for the micro-grant program.
Data processing expense was $10.7 million for 2020, up $0.7 million (7%) over 2019, mostly due to volume-based increases in core processing charges.
Intangible amortization decreased $0.3 million mainly from declining amortization on the aging intangibles of previous acquisitions, partly offset by amortization from the new intangibles of the August 2020 Advantage and November 2019 Choice acquisitions.
Other expense was $7.2 million for 2020, down $0.8 million (10%) from 2019. Other expense for 2020 included $1.0 million of lease termination charges related to the branch closures and $0.5 million to terminate the Commerce merger agreement. Other expense for 2019 included a $0.7 million lease termination charge for the closure of Nicolet's Oshkosh branch in conjunction with the Choice acquisition, an $0.8 million full write-off of non-bank goodwill, and $0.7 million related to a fraud loss contingency.
Income Taxes
Income tax expense was $20.5 million, up 4.0 million (24%) over 2019, partly due to 13% higher pre-tax earnings. The 2020 effective tax rate was 25.3%, higher than 23.0% for 2019. The increase in effective tax rate was due to the favorable tax treatment of the partial equity investment sale of a data processing company in 2019, as well as the change in tax benefit on stock-based compensation (see Note 10, “Stock-Based Compensation” for additional information on the tax benefit on stock-based compensation), and nondeductible compensation from compensation limits between the years.
The accounting for income taxes requires deferred income taxes to be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized. This analysis involves the use of estimates, assumptions, interpretation, and judgment concerning accounting pronouncements and federal and state tax codes; therefore, income taxes are considered a critical accounting policy. At December 31, 2020 and 2019, no valuation allowance was determined to be necessary. Additional information on the subjectivity of income taxes is discussed further under “Critical Accounting Policies-Income Taxes.” The Company’s accounting policy for income taxes are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures relative to income taxes are included in Note 12, “Income Taxes” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
BALANCE SHEET ANALYSIS
Loans
Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan including the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, retail, service, and businesses supporting the general building industry. The Company concentrates on originating loans in its local markets and assisting current loan customers. Nicolet actively utilizes government loan programs such as those provided by the U.S. Small Business Administration (“SBA”), including the Paycheck Protection Program, to help customers with current economic conditions and positioning their businesses for the future. In addition to the discussion that follows, accounting policies for loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Table 6: Period End Loan Composition
 December 31, 2020December 31, 2019December 31, 2018December 31, 2017December 31, 2016
(in thousands)Amount% of
Total
Amount% of
Total
Amount% of
Total
Amount% of
Total
Amount% of
Total
Commercial & industrial$750,718 27 %$806,189 31 %$684,920 32 %$637,337 30 %$428,270 28 %
PPP loans186,016 %— — %— — %— — %— — %
Owner-occupied CRE521,300 19 %496,372 19 %441,353 20 %430,043 21 %360,227 23 %
Agricultural109,629 %95,450 %89,069 %87,233 %80,001 %
Commercial1,567,663 57 %1,398,011 54 %1,215,342 56 %1,154,613 56 %868,498 56 %
CRE investment460,721 16 %443,218 17 %343,652 16 %314,463 15 %195,879 12 %
Construction & land development131,283 %92,970 %80,599 %89,660 %74,988 %
Commercial real estate592,004 21 %536,188 21 %424,251 20 %404,123 19 %270,867 17 %
     Commercial-based
loans
2,159,667 78 %1,934,199 75 %1,639,593 76 %1,558,736 75 %1,139,365 73 %
Residential construction41,707 %54,403 %30,926 %36,995 %23,392 %
Residential first mortgage444,155 16 %432,167 17 %357,841 17 %363,352 17 %300,304 19 %
Residential junior mortgage111,877 %122,771 %111,328 %106,027 %91,331 %
   Residential real estate597,739 21 %609,341 24 %500,095 23 %506,374 24 %415,027 26 %
Retail & other31,695 %30,211 %26,493 %22,815 %14,515 %
   Retail-based loans629,434 22 %639,552 25 %526,588 24 %529,189 25 %429,542 27 %
Total loans$2,789,101 100 %$2,573,751 100 %$2,166,181 100 %$2,087,925 100 %$1,568,907 100 %
Total loans ex. PPP loans$2,603,085 93 %$2,573,751 100 %$2,166,181 100 %$2,087,925 100 %$1,568,907 100 %
Total loans were $2.8 billion at December 31, 2020, an increase of $215 million (8%), compared to total loans of $2.6 billion at December 31, 2019. During 2020, we acquired Advantage, which added total loans of $88 million at acquisition. In addition, we originated 2,725 PPP loans totaling $351 million, bearing a 1% contractual rate, and earned a $12.3 million fee, of which $5.7 million was accreted into interest income during 2020. At December 31, 2020, the net carrying value of PPP loans was $186 million, or 7% of loans, with the decline in balance coming almost exclusively from SBA loan forgiveness, boosting overall borrower equity in their businesses. Given strong participation in the PPP and caution around debt levels, utilization of conventional lines of credit fell. For the first time in recent history, commercial lines of credit declined between year-end periods to $221 million (down $104 million or 32% from December 31, 2019). Excluding PPP loans and commercial lines of credit, all other loans combined increased $133 million (6%) over December 31, 2019 (or up 2%, further excluding loans acquired from Advantage).
As noted in Table 6 above, year-end 2020 loans were broadly 78% commercial-based and 22% retail-based compared to 75% commercial-based and 25% retail-based at year-end 2019. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis.
Commercial and industrial loans consist primarily of commercial loans to small businesses, PPP loans, and, to a lesser degree, to municipalities within a diverse range of industries. The credit risk related to commercial and industrial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any. Commercial and industrial loans, including the PPP loans, continue to be the largest segment of Nicolet’s portfolio, representing 34% of the portfolio at year-end 2020.
Owner-occupied CRE loans represented 19% of loans at year-end 2020, unchanged from year-end 2019. This category primarily consists of loans within a diverse range of industries secured by business real estate that is occupied by borrowers who operate their businesses out of the underlying collateral and who may also have commercial and industrial loans. The credit risk related to owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral.
Agricultural loans consist of loans secured by farmland and the related farming operations. The credit risk related to agricultural loans is largely influenced by the prices farmers can get for their production and/or the underlying value of the farmland. These loans represented 4% of loans at year-end 2020, unchanged from a year ago.
The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. These loans represented 16% of loans at December 31, 2020, compared to 17% of loans at year-end 2019.
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Loans in the construction and land development portfolio represented 5% of total loans at year-end 2020. Construction and land development loans provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Nicolet controls the credit risk on these types of loans by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances. Credit risk is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis.
On a combined basis, Nicolet’s residential real estate loans represented 21% of total loans at year-end 2020 compared to 24% of total loans at year-end 2019. Residential first mortgage loans include conventional first-lien home mortgages. Residential junior mortgage loans consist of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential first mortgage loans are sold in the secondary market with the servicing rights retained. Nicolet’s mortgage loans are typically of high quality and have historically had low net charge-off rates.
Loans in the retail and other classification represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and/or guaranty positions.
Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early problem loan identification and remedial action to minimize losses, an appropriate ACL-Loans, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls.
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 December 31, 2020, 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.
Table 7: Loan Maturity Distribution 
The following table presents the maturity distribution of the loan portfolio at December 31, 2020.
(in thousands)Loan Maturity
 One Year
or Less
Over One Year
to Five Years
Over
Five Years
Total
Commercial & industrial, including PPP loans$257,087 $606,888 $72,759 $936,734 
Owner-occupied CRE72,228 373,933 75,139 521,300 
Agricultural30,842 70,786 8,001 109,629 
CRE investment114,169 264,753 81,799 460,721 
Construction & land development76,143 42,639 12,501 131,283 
Residential construction *38,906 286 2,515 41,707 
Residential first mortgage30,417 140,754 272,984 444,155 
Residential junior mortgage7,132 7,200 97,545 111,877 
Retail & other17,584 9,430 4,681 31,695 
   Total loans$644,508 $1,516,669 $627,924 $2,789,101 
Percent by maturity distribution23 %54 %23 %100 %
Fixed rate$341,351 $1,439,306 $339,952 $2,120,609 
Floating rate303,157 77,363 287,972 668,492 
   Total$644,508 $1,516,669 $627,924 $2,789,101 
   Fixed rate percent53 %95 %54 %76 %
   Floating rate percent47 %%46 %24 %
* The residential construction loans with a loan maturity over five years represent a construction to permanent loan product.
Allowance for Credit Losses - Loans
In addition to the discussion that follows, accounting policies for the allowance for credit losses - loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional ACL-Loans disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Credit risks within the loan portfolio are inherently different for each loan type as described under “BALANCE SHEET ANALYSIS – Loans.” Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and ongoing review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, interest, and related expenses. For additional information regarding nonperforming assets see “BALANCE SHEET ANALYSIS – Nonperforming Assets.”
The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management's ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these factors involves significant judgment; therefore, management considers the ACL-Loans a critical accounting policy, as further discussed under “Critical Accounting Policies – Allowance for Credit Losses - Loans.”
Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated and other credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses at the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows.
Management performs ongoing intensive analysis of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ACL-Loans. In addition, various regulatory agencies periodically review the ACL-Loans. These agencies may require the Company to make additions to the ACL-Loans or may require that certain loan balances be charged off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments of collectability from information available to them at the time of their examination.
At December 31, 2020, the ACL-Loans was $32.2 million (representing 1.15% of period end loans and 1.24% of period end loans excluding PPP loans) compared to $14.0 million at December 31, 2019. The increase in the ACL-Loans was largely due to the $9.3 million impact from the adoption of CECL (comprised of $8.5 million for the CECL impact on the loan portfolio and $0.8 million for the PCD gross-up) and a much higher provision for credit losses in 2020 given the unprecedented economic disruption and uncertainty surrounding the COVID pandemic. The components of the ACL-Loans are detailed further in Tables 8 and 9 below.
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Table 8: Allowance for Credit Losses - Loans
(in thousands)Years Ended December 31,
20202019201820172016
Allowance for credit losses - loans:     
Beginning balance$13,972 $13,153 $12,653 $11,820 $10,307 
Adoption of CECL8,488 — — — — 
Initial PCD ACL797 — — — — 
    Total impact for adoption of CECL9,285 — — — — 
Loans charged off:     
Commercial & industrial(812)(159)(813)(1,442)(279)
Owner-occupied CRE(530)(93)(74)— (108)
Agricultural— — — — — 
CRE investment(190)— (37)— — 
Construction & land development— — — (13)— 
Residential construction— (226)— — — 
Residential first mortgage(2)(22)(85)(8)(80)
Residential junior mortgage— (80)— (72)(57)
Retail & other(155)(347)(204)(69)(60)
   Total loans charged off(1,689)(927)(1,213)(1,604)(584)
Recoveries of loans previously charged off:     
Commercial & industrial120 420 43 38 26 
Owner-occupied CRE81 14 30 
Agricultural— — — — — 
CRE investment— — — 221 
Construction & land development— — — — — 
Residential construction— — — — — 
Residential first mortgage11 36 25 31 
Residential junior mortgage67 39 35 
Retail & other26 49 16 15 
   Total recoveries305 546 113 112 297 
   Total net charge-offs(1,384)(381)(1,100)(1,492)(287)
Provision for credit losses10,300 1,200 1,600 2,325 1,800 
Ending balance of ACL-Loans$32,173 $13,972 $13,153 $12,653 $11,820 
Ratios:     
ACL-Loans to total loans1.15 %0.54 %0.61 %0.61 %0.75 %
ACL-Loans to total loans ex. PPP loans1.24 %0.54 %0.61 %0.61 %0.75 %
ACL-Loans to net charge-offs2,325 %3,667 %1,196 %848 %4,118 %
Net charge-offs to average loans0.05 %0.02 %0.05 %0.08 %0.02 %
Net charge-offs to average loans ex. PPP loans0.05 %0.02 %0.05 %0.08 %0.02 %
The allocation of the ACL-Loans by loan category for each of the past five years is shown in Table 9. The largest portions of the ACL-Loans were allocated to commercial & industrial loans and owner-occupied CRE loans combined, representing 54% and 61% of the ACL-Loans at December 31, 2020 and 2019, respectively. The change in allocated ACL-Loans from December 31, 2019 to December 31, 2020 was consistent with changes related to the adoption of CECL, as well as changes in outstanding loan balances between the years and risk trends within loan categories.
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Table 9: Allocation of the Allowance for Credit Losses - Loans
(in thousands)December 31, 2020ACL Category as a % of Total ACL *December 31, 2019ACL Category as a % of Total ACL *December 31, 2018ACL Category as a % of Total ACL *December 31, 2017ACL Category as a % of Total ACL *December 31, 2016ACL Category as a % of Total ACL *
Commercial & industrial **$11,644 36 %$5,471 39 %$5,271 40 %$4,934 39 %$3,919 33 %
Owner-occupied CRE5,872 18 %3,010 22 %2,847 22 %2,607 21 %2,867 24 %
Agricultural1,395 %579 %422 %425 %435 %
CRE investment5,441 17 %1,600 11 %1,470 11 %1,388 11 %1,124 10 %
Construction & land development984 %414 %510 %726 %774 %
Residential construction421 %368 %211 %251 %304 %
Residential first mortgage4,773 15 %1,669 12 %1,646 12 %1,609 13 %1,784 15 %
Residential junior mortgage1,086 %517 %472 %488 %461 %
Retail & other557 %344 %304 %225 %152 %
Total ACL-Loans$32,173 100 %$13,972 100 %$13,153 100 %$12,653 100 %$11,820 100 %
          
* See Table 6 for the ratio of loans by category to total loans.
** The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.
Nonperforming Assets
As part of its overall credit risk management process, management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. Management is actively working with customers and monitoring credit risk from the unprecedented economic disruptions surrounding the COVID pandemic (as also discussed in the Overview section). Since the pandemic started, nearly 1,000 loans with a current balance of $456 million were provided temporary payment modifications. Initial metrics reflected the loan modifications as 88% commercial and 12% retail, with 67% on interest only payments and 33% on full payment deferrals. As of December 31, 2020, $408 million (90%) had returned to normal payment structures, $29 million (6%) were paid off, $15 million (3%) remain under temporary modification structure, and only $4 million (1%) became troubled debt restructurings (included in Table 10 below). The combined $19 million under modification or restructure represented less than 1% of total loans at December 31, 2020. In addition to the discussion that follows, accounting policies for loans and the ACL-Loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional credit quality disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonaccrual loans were $9 million at December 31, 2020, compared to $14 million at December 31, 2019. Nonperforming assets (which include nonperforming loans and other real estate owned “OREO”) were $13 million at December 31, 2020, compared to $15 million at December 31, 2019. OREO was $4 million at December 31, 2020, up from $1 million at year-end 2019, with the increase primarily due to the addition of closed bank branch properties. Nonperforming assets as a percent of total assets was 0.29% at December 31, 2020, compared to 0.42% at December 31, 2019.
The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ACL-Loans. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $21 million (0.7% of total loans) and $23 million (0.9% of total loans) at December 31, 2020 and 2019, 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.
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Table 10: Nonperforming Assets
(in thousands)December 31, 2020December 31, 2019December 31, 2018December 31, 2017December 31, 2016
Nonaccrual assets:     
Commercial & industrial$2,646 $6,249 $2,816 $6,016 $358 
PPP loans— — — — — 
Owner-occupied CRE1,869 3,311 673 533 2,894 
Agricultural1,830 1,898 164 186 217 
CRE investment1,488 1,073 210 4,531 12,317 
Construction & land development327 20 80 — 1,193 
Residential construction— — 80 260 
Residential first mortgage823 1,090 1,265 1,587 2,990 
Residential junior mortgage384 480 262 158 56 
Retail & other88 — — 
Total nonaccrual loans9,455 14,122 5,471 13,095 20,285 
Accruing loans past due 90 days or more— — — — — 
    Total nonperforming loans9,455 14,122 5,471 13,095 20,285 
OREO:
Commercial real estate owned— — 420 185 991 
Residential real estate owned— — — 70 29 
Bank property real estate owned3,608 1,000 — 1,039 1,039 
  Total OREO3,608 1,000 420 1,294 2,059 
   Total nonperforming assets (NPAs)$13,063 $15,122 $5,891 $14,389 $22,344 
Performing troubled debt restructurings$2,120 $— $— $— $— 
Ratios:     
Nonperforming loans to total loans0.34 %0.55 %0.25 %0.63 %1.29 %
NPAs to total loans plus OREO0.47 %0.59 %0.27 %0.69 %1.42 %
NPAs to total assets0.29 %0.42 %0.19 %0.49 %0.97 %
ACL-Loans to nonperforming loans340 %99 %240 %97 %58 %
Table 11 shows the approximate gross interest that would have been recorded if the loans accounted for on a nonaccrual basis at the end of each year shown had performed in accordance with their original terms, in contrast to the amount of interest income that was included in interest income on such loans for the period. The interest income recognized generally includes cash interest received and potentially includes prior nonaccrual interest on acquired loans which existed at acquisition and was subsequently collected.
Table 11: Foregone Loan Interest
(in thousands)Years Ended December 31,
202020192018
Interest income in accordance with original terms$651 $1,178 $1,046 
Interest income recognized(580)(935)(948)
Reduction in interest income$71 $243 $98 
Investment Securities Portfolio
The investment securities portfolio is intended to provide Nicolet with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All securities are classified as available for sale (“AFS”) and are carried at fair value. In addition to the discussion that follows, the investment securities portfolio accounting policies are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures are included in Note 3, “Securities Available for Sale,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
Table 12: Investment Securities Portfolio
(in thousands)December 31, 2020December 31, 2019December 31, 2018
 Amortized
Cost
Fair
Value
% of
Total
Amortized
Cost
Fair
Value
% of
Total
Amortized
Cost
Fair
Value
% of
Total
U.S. government agency securities$63,162 $63,451 12 %$16,516 $16,460 %$22,467 $21,649 %
State, county and municipals226,493 231,868 43 %155,501 156,393 35 %163,702 160,526 40 %
Mortgage-backed securities156,148 162,495 30 %193,223 195,018 43 %134,350 131,644 33 %
Corporate debt securities76,073 81,523 15 %78,009 81,431 18 %87,352 86,325 21 %
Total securities AFS$521,876 $539,337 100 %$443,249 $449,302 100 %$407,871 $400,144 100 %
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At December 31, 2020, the total fair value of investment securities was $539 million (representing 12% of total assets), compared to $449 million (representing 13% of total assets) at December 31, 2019. The increase in securities AFS from year-end 2019 was primarily due to the purchase of approximately $50 million U.S. Treasury securities in early 2020, $24 million of investments Advantage added at acquisition and an $11 million change in the unrealized gain position (from an unrealized gain of $6 million at December 31, 2019 to an unrealized gain of $17 million at December 31, 2020). At December 31, 2020, the securities AFS portfolio did not contain securities of any single issuer, including any securities issued by a state or political subdivision that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of stockholders’ equity.
In addition to securities AFS, Nicolet had other investments of $28 million and $24 million at December 31, 2020 and 2019, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (“FHLB”) (required as members of the Federal Reserve Bank System and the FHLB System), equity securities with readily determinable fair values, and to a lesser degree equity investments in other private companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus not liquid, have no ready market or quoted market value, and are carried at cost. The private company equity investments have no quoted market prices, and are carried at cost less impairment charges, if any. The other investments are evaluated periodically for impairment, considering financial condition and other available relevant information. A $0.1 million write-off was recorded on the surrender of our Commerce common stock in connection with the terms of the mutual termination of the Commerce merger agreement during 2020, and a $0.1 million impairment charge was recorded on a private company equity investment during 2019.
Table 13: Investment Securities Portfolio Maturity Distribution (1)
December 31, 2020Within
One Year
After One
but Within
Five Years
After Five
but Within
Ten Years
After
Ten Years
Mortgage-
backed
Securities
Total
Amortized
Cost
Total
Fair
Value
 (in thousands)AmountYieldAmountYieldAmountYieldAmountYieldAmountYieldAmountYieldAmount
U.S. government agency securities$61,736 1.4 %$1,226 2.8 %$200 2.5 %$— — %$— — %$63,162 1.4 %$63,451 
State, county and municipals19,599 2.6 %101,685 2.4 %97,462 2.3 %7,747 1.9 %— — %226,493 2.4 %231,868 
Mortgage-backed securities— — %— — %— — %— — %156,148 2.9 %156,148 2.9 %162,495 
Corporate debt securities3,982 1.9 %65,391 3.2 %— — %6,700 4.1 %— — %76,073 3.2 %81,523 
Total amortized cost$85,317 1.7 %$168,302 2.7 %$97,662 2.4 %$14,447 3.0 %$156,148 2.9 %$521,876 2.5 %$539,337 
Total fair value and carrying value$85,712 $174,975 $100,445 $15,710 $162,495 $539,337 
 16 %32 %19 %%30 %100 %
(1) The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% adjusted for the disallowance of interest expense.
Deposits
Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Deposit challenges include competitive deposit product features, price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Additional disclosures on deposits are included in Note 7, “Deposits,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Table 14: Period End Deposit Composition
(in thousands)December 31, 2020December 31, 2019December 31, 2018
 Amount% of
Total
Amount% of
Total
Amount% of
Total
Noninterest-bearing demand$1,212,787 31 %$819,055 28 %$753,065 29 %
Money market and interest-bearing demand1,551,325 40 %1,241,642 42 %1,163,369 45 %
Savings521,814 13 %343,199 11 %294,068 11 %
Time624,473 16 %550,557 19 %403,636 15 %
   Total deposits$3,910,399 100 %$2,954,453 100 %$2,614,138 100 %
Brokered transaction accounts$46,340 %$48,497 %$62,021 %
Brokered time deposits278,521 %111,694 %19,328 %
   Total brokered deposits$324,861 %$160,191 %$81,349 %
Customer transaction accounts$3,239,586 83 %$2,355,399 80 %$2,148,481 82 %
Customer time deposits345,952 %438,863 15 %384,308 15 %
   Total customer deposits (core)$3,585,538 92 %$2,794,262 95 %$2,532,789 97 %
Total deposits were $3.9 billion at December 31, 2020, an increase of $956 million (32%) over year-end 2019. Since December 31, 2019, customer transaction accounts increased $884 million (38%), including $490 million in interest-bearing transaction accounts and $394 million in noninterest-bearing transaction accounts, influenced by the very uncertain times, government stimulus payments and pandemic stay-at-home orders, which reduced spending and increased liquidity of many consumers and businesses, and by PPP loan proceeds retained on deposit by commercial borrowers. In addition, during 2020, we acquired Advantage, which added customer deposits of $141 million at acquisition. Total brokered deposits increased $165 million over year-end 2019, largely due to our liquidity build executed at the onset of the pandemic. In the second half of 2020, given continued growth in core deposit funding, brokered deposits were allowed to mature without renewal and nearly half of the brokered time deposits outstanding at year-end 2020 are expected to mature in 2021.
On average, deposits grew $841 million (32%) between 2020 and 2019 (as detailed in Table 1), primarily due to the timing of the acquisitions (Choice in November 2019 and Advantage in August 2020) and the signficant increase in deposits from government stimulus activities and deposited PPP loan proceeds. Noninterest-bearing demand deposits increased $292 million (40%) and core interest-bearing deposits (savings, interest-bearing demand, money market) increased $347 million (25%), while core time deposits decreased $12 million (3%). Average brokered deposits grew $214 million, attributable to the mix of deposits acquired with Choice and the procurement of brokered deposits at the onset of the pandemic as part of liquidity actions.
Table 15: Maturity Distribution of Certificates of Deposit of $100,000 or More
(in thousands)December 31, 2020December 31, 2019December 31, 2018
3 months or less$46,575 $55,464 $28,466 
Over 3 months through 6 months38,586 55,000 30,438 
Over 6 months through 12 months40,795 54,700 68,983 
Over 12 months79,326 120,346 57,992 
Total$205,282 $285,510 $185,879 
Other Funding Sources
Other funding sources include short-term borrowings (zero at both December 31, 2020 and 2019) and long-term borrowings (totaling $54 million and $68 million at December 31, 2020 and 2019, respectively). Short-term borrowings consist mainly of short-term FHLB advances, customer repurchase agreements maturing in less than nine months or federal funds purchased. Long-term borrowings include FHLB advances, PPP Liquidity Facility (“PPPLF”) funding (credit provided by the Federal Reserve to financial institutions participating in the PPP loan program), junior subordinated debentures (largely qualifying as Tier 1 capital for regulatory purposes given their long maturity dates, even though they are redeemable in whole or in part at par), and subordinated notes (issued in 2015 with 10-year maturities, callable on or after the fifth anniversary date of their respective issuance dates, and qualifying as Tier 2 capital for regulatory purposes). The interest on all long-term borrowings is current.
During 2020, the Company added $24 million in long-term FHLB advances to support liquidity actions initiated at the onset of the pandemic (prior to the announcement of government stimulus) and $344 million of PPPLF funding to support the PPP loans. Based on growth in core deposits during the year, select long-term FHLB advances and the full PPPLF funding was repaid in the second half of 2020. In addition, the subordinated notes ($12 million at 5% fixed) were fully redeemed on November 16, 2020, and one issuance of junior subordinated debentures ($6 million at 8% fixed) was redeemed in full on December 31, 2020. See Note 8, “Short
35


and Long-Term Borrowings,” of the Notes to Consolidated Financial Statements under Part II, Item 8 for additional details. See section “Liquidity Management,” for information on available other funding sources at December 31, 2020.
RISK MANAGEMENT AND CAPITAL
Liquidity Management
Liquidity management refers to the ability to ensure that cash is available in a timely and cost-effective manner to meet cash flow requirements of depositors and borrowers and to meet other commitments as they fall due, including the ability to service debt, invest in subsidiaries, repurchase common stock, pay dividends to shareholders (if any), and satisfy other operating requirements.
Given the stable core customer deposit base, fairly consistent patterns of activity in the core deposit base (including extra growth in core deposits during the pandemic as previously discussed), and the minimal use of capacity available in numerous non-core funding sources, Nicolet's liquidity levels and resources have been sufficient to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary. At the onset of the pandemic, but prior to the announcement of government stimulus, management initiated preparatory actions to increase on-balance sheet liquidity to ensure we could meet customer needs, and brokered deposits of approximately $200 million were procured, increasing liquid cash. These actions proved later to not be necessary, leading us to reduce non-deposit leverage in the second half of 2020. In addition to the on-balance sheet liquidity build, remaining liquidity facilities continue to provide capacity and flexibility in an uncertain time.
Funds are available from a number of basic banking activity sources including, but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of additional brokered deposits or other wholesale funding. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At December 31, 2020, approximately 27% of the $539 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 December 31, 2020, consist of a $10 million available and unused line of credit at the holding company, $175 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $163 million, and borrowing capacity in the brokered deposit market.
In consideration of the funds availability for the Bank and the current high levels of cash in a very low interest rate environment, management has taken prudent pricing actions on deposits and loans, as well as actions to reduce non-deposit funding. Brokered deposits have matured without renewal, selected FHLB advances were repaid early, and the PPPLF funding was fully paid back (approximately $335 million used for 5 months at a cost of 35 bps). In addition, we fully redeemed our subordinated notes ($12 million at 5% fixed) in November and one of our junior subordinated debenture issuances ($6 million at 8% fixed) in December.
Management is committed to the Parent Company being a source of strength to the Bank and its other subsidiaries, and therefore, regularly evaluates capital and liquidity positions of the Parent Company in light of current and projected needs, growth or strategies. The Parent Company uses cash for normal expenses, debt service requirements and, when opportune, for common stock repurchases or investment in other strategic actions such as mergers or acquisitions. At December 31, 2020, the Parent Company had $50 million in cash. Additional cash sources, among others, available to the Parent Company include its $10 million available and unused line of credit, and access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds, as more fully described in “Business—Regulation of the Bank – Payment of Dividends” and in Note 16, “Regulatory Capital Requirements,” in the Notes to the Consolidated Financial Statements under Part II, Item 8. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.
Cash and cash equivalents at December 31, 2020 and 2019 were approximately $803 million and $182 million, respectively. The $621 million increase in cash and cash equivalents since year-end 2019 included $79 million net cash provided by operating activities (mostly earnings), more than offset by $209 million net cash used in investing activities (primarily to fund loan growth, mostly PPP loans) and $751 million net cash provided by financing activities (with funds from increased deposits partly offset by the early redemption of selected debt and common stock repurchases). Nicolet’s liquidity resources were sufficient as of December 31, 2020 to fund loans, accommodate deposit trends and cycles, and to meet other cash needs as necessary.
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Interest Rate Sensitivity Management and Impact of Inflation
A reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield, is highly important to Nicolet’s business success and profitability. As an ongoing part of its financial strategy and risk management, Nicolet attempts to understand and manage the impact of fluctuations in market interest rates on its net interest income. The consolidated balance sheet consists mainly of interest-earning assets (loans, investments and cash) which are primarily funded by interest-bearing liabilities (deposits and other borrowings). Such financial instruments have varying levels of sensitivity to changes in market rates of interest. Market rates are highly sensitive to many factors beyond our control, including but not limited to general economic conditions and policies of governmental and regulatory authorities. Our operating income and net income depends, to a substantial extent, on “rate spread” (i.e., the difference between the income earned on loans, investments and other earning assets and the interest expense paid to obtain deposits and other funding liabilities).
Asset-liability management policies establish guidelines for acceptable limits on the sensitivity to changes in interest rates on earnings and market value of assets and liabilities. Such policies are set and monitored by management and the board of directors’ Asset and Liability Committee.
To understand and manage the impact of fluctuations in market interest rates on net interest income, Nicolet measures its overall interest rate sensitivity through a net interest income analysis, which calculates the change in net interest income in the event of hypothetical changes in interest rates under different scenarios versus a baseline scenario. Such scenarios can involve static balance sheets, balance sheets with projected growth, parallel (or non-parallel) yield curve slope changes, immediate or gradual changes in market interest rates, and one-year or longer time horizons. The simulation modeling uses assumptions involving market spreads, prepayments of rate-sensitive instruments, renewal rates on maturing or new loans, deposit retention rates, and other assumptions.
Among other scenarios, Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The results provided include the liquidity measures mentioned above and reflect the changed interest rate environment in response to the current crisis. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at December 31, 2020 and 2019, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 16 below. The results were within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps, and given the relatively short nature of the Company’s balance sheet, reflect a largely unchanged risk position as expected.
Table 16: Interest Rate Sensitivity
 December 31, 2020December 31, 2019
200 bps decrease in interest rates(0.8)%(1.8)%
100 bps decrease in interest rates(0.8)%(1.0)%
100 bps increase in interest rates4.0 %0.8 %
200 bps increase in interest rates8.1 %1.7 %
Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and their impact on customer behavior and management strategies.
The effect of inflation on a financial institution differs significantly from the effect on an industrial company. While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items. Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation. Inflation may also have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite of banking products and the credit health of the Bank’s customer base.
Capital
Management regularly reviews the adequacy of its capital to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines 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.
Capital balances and changes in capital are presented in the Consolidated Statements of Changes in Stockholders’ Equity in Part II, Item 8. Further discussion of capital components is included in Note 11, “Stockholders' Equity,” and a summary of dividend
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restrictions, as well as regulatory capital amounts and ratios for Nicolet and the Bank is presented in Note 16, “Regulatory Capital Requirements,” of the Notes to Consolidated Financial Statements under Part II, Item 8.
The Company’s regulatory capital ratios remain well above minimum regulatory ratios, including the capital conservation buffer. At December 31, 2020, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. For a discussion of the regulatory restrictions applicable to the Company and the Bank, see section “Business-Regulation of Nicolet” and “Business-Regulation of the Bank,” included within Part I, Item 1. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios, as well as selected capital metrics are presented in Table 17.
Table 17: Capital
($ in thousands)December 31, 2020December 31, 2019
Company Stock Repurchases: *
Common stock repurchased during the year (dollars)$40,544 $18,701 
Common stock repurchased during the year (shares)646,748 310,781 
Company Risk-Based Capital:  
Total risk-based capital$406,325 $404,573 
Tier 1 risk-based capital385,068 378,608 
Common equity Tier 1 capital361,162 348,454 
Total capital ratio12.9 %13.4 %
Tier 1 capital ratio12.2 %12.6 %
Common equity tier 1 capital ratio11.4 %11.6 %
Tier 1 leverage ratio9.0 %11.9 %
Bank Risk-Based Capital:  
Total risk-based capital$351,081 $323,432 
Tier 1 risk-based capital329,824 309,460 
Common equity Tier 1 capital329,824 309,460 
Total capital ratio11.2 %10.8 %
Tier 1 capital ratio10.5 %10.3 %
Common equity tier 1 capital ratio10.5 %10.3 %
Tier 1 leverage ratio7.8 %9.8 %
* Reflects only the common stock repurchased under board of director authorizations.
At December 31, 2020, Nicolet’s total capital was $539 million, compared to $516 million at December 31, 2019 (mostly due to solid earnings and favorable changes in the fair value AFS securities, partly offset by common stock repurchase activity and the $6 million net impact of adopting CECL). Book value per common share increased to $53.86 at year-end 2020, up 10% over $48.76 at year-end 2019.
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. Based on this evaluation, the Company early redeemed certain capital-equivalent debt during fourth quarter 2020, including its higher-costing subordinated Notes ($12 million at 5% fixed) and one issuance of junior subordinated debentures ($6 million at 8% fixed). These redemptions reduced the Company’s Tier 1 risk-based capital $6 million and Total risk-based capital $16 million. The redemptions had no impact on the Bank’s risk-based capital.
Through an ongoing repurchase program, the Board has authorized the repurchase of Nicolet’s common stock as an alternative use of capital. During 2020, $40.5 million was used to repurchase and cancel nearly 646,700 shares at a weighted average price per share of $62.69. At December 31, 2020, there remained $20.4 million authorized under this repurchase program, as modified, to be utilized from time to time to repurchase shares in the open market, through block transactions or in private transactions.
Off-Balance Sheet Arrangements, Lending-Related Commitments and Contractual Obligations
Nicolet is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2020, interest rate lock commitments to originate residential mortgage loans held for sale of $113 million (included in the commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale of $20 million are considered derivative instruments. Further information and discussion of these commitments is included in Note 13, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, under Part II, Item 8.
The table below outlines the principal amounts and timing of Nicolet’s contractual obligations. The amounts presented below exclude amounts due for interest, if applicable, and include any unamortized premiums / discounts or other similar carrying value
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adjustments. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on the ability to procure competitive interest rates, liquidity needs, availability of collateral for pledging purposes supporting the long-term advances, or other borrowing alternatives. As of December 31, 2020, Nicolet had the following contractual obligations.
Table 18: Contractual Obligations
 (in thousands)NoteMaturity by Years
 ReferenceTotal1 or less1-33-5Over 5
Time deposits7$624,473 $335,433 $233,330 $54,713 $997 
Long-term borrowings853,869 4,000 — 5,000 44,869 
Operating leases53,201 920 1,277 497 507 
Total long-term contractual obligations $681,543 $340,353 $234,607 $60,210 $46,373 

Fourth Quarter 2020 Results
Nicolet recorded net income of $18.0 million for fourth quarter 2020, or $1.74 for diluted earnings per common share, compared to $12.3 million, or $1.18, respectively for fourth quarter 2019. Return on average assets was 1.58% and 1.46% for fourth quarter 2020 and 2019, respectively, even with the elevated cash assets in 2020. See Table 19 for selected quarterly information.
Net interest income increased $3.5 million (12%) between the comparable fourth quarter periods, despite a 77 bps decline in net interest margin, mostly due to the high cash levels and much lower interest rate environment. Interest income increased $1.8 million (including $6.3 million on higher volumes, partly offset by $4.5 million lower rates), while interest expense decreased $1.7 million (with $2.8 million from lower rates more than covering the $1.1 million higher volumes). The net interest margin between the comparable quarters decreased 77 bps to 3.29% in fourth quarter 2020, comprised of 60 bps lower interest rate spread (to 3.10%, as the yield on earning assets decreased 114 bps and the rate on interest-bearing liabilities decreased 54 bps) and a 17 bps lower contribution from net free funds (with the higher balances worth less in the very low interest rate environment).
Average interest-earning assets increased $1.1 billion to $4.1 billion for fourth quarter 2020, largely due to growth in loans (up $430 million) and other interest-earning assets, which is mostly cash (up $591 million). The mix of average earning assets between fourth quarter periods shifted from 82% in average loans, 14% in average investments, and 4% in other interest-earning assets (mostly low-earning cash assets) to 70% in loans, 13% in investments, and 17% in other interest-earning assets for fourth quarter 2020. On the funding side, average interest-bearing deposits were up $651 million and average demand deposits increased $386 million.
Noninterest income for fourth quarter 2020 increased $3.6 million (27%) to $16.9 million versus fourth quarter 2019. Net mortgage income increased $2.9 million (60%), mostly on higher sale gains and capitalized gains combined (up $3.6 million) from strong refinance activity and better pricing between the comparable quarters, partly offset by an unfavorable change in the fair values on the mortgage derivatives and mortgage servicing asset combined (down $0.8 million). Trust services fee income and brokerage fee income combined grew $0.6 million (17%), consistent with growth in accounts and assets under management in a volatile market.
On a comparable quarter basis, noninterest expense was minimally changed (down $0.1 million) to $25.4 million for fourth quarter 2020. Personnel expense of $15.2 million, increased $1.6 million (12%) from fourth quarter 2019, reflecting changes in the timing (with 2019 including a mid-year profit sharing contribution after the partial equity sale of a data processing entity versus a fourth quarter contribution in 2020) and mix of incentive compensation. All nonpersonnel expense categories combined were down $1.7 million (14%), as fourth quarter 2019 included a $0.7 million lease termination charge for the closure of Nicolet's Oshkosh branch in conjunction with the Choice acquisition and a $0.8 million full write-off of non-bank goodwill.
For fourth quarter 2020, Nicolet recognized income tax expense of $6.1 million with an effective tax rate of 25.4%, compared to income tax expense of $5.7 million with an effective tax rate of 31.4% for fourth quarter 2019. The increase in income tax expense was attributable to a 34% increase in pretax income, partly offset by salary deduction limitations that exceeded the tax benefit on stock-based compensation between the comparable fourth quarter periods (tax benefit of $0.1 million and $1.3 million in fourth quarter 2020 and 2019, respectively, mainly due to large stock option exercises in fourth quarter 2019). Additional information on income taxes is also included in “Income Taxes,” and Note 12, “Income Taxes” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Selected Quarterly Financial Data
The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 2020 and 2019.
Table 19: Selected Quarterly Financial Data
(in thousands, except per share data)2020 Quarter Ended
 December 31,September 30,June 30,March 31,
Interest income$38,037 $37,270 $36,892 $37,003 
Interest expense4,019 4,710 5,395 5,740 
   Net interest income34,018 32,560 31,497 31,263 
Provision for credit losses1,300 3,000 3,000 3,000 
Noninterest income16,879 18,691 17,471 9,585 
Noninterest expense25,367 23,685 27,813 23,854 
   Income before income tax expense24,230 24,566 18,155 13,994 
Income tax expense6,145 6,434 4,576 3,321 
   Net income18,085 18,132 13,579 10,673 
Less: Net income attributable to noncontrolling interest98 30 101 118 
   Net income attributable to Nicolet Bankshares, Inc.$17,987 $18,102 $13,478 $10,555 
Basic earnings per common share*$1.79 $1.75 $1.29 $1.00 
Diluted earnings per common share*$1.74 $1.72 $1.28 $0.98 
 2019 Quarter Ended
 December 31,September 30,June 30,March 31,
Interest income$36,192 $34,667 $34,570 $33,159 
Interest expense5,723 5,477 5,626 5,684 
   Net interest income30,469 29,190 28,944 27,475 
Provision for credit losses300 400 300 200 
Noninterest income13,309 12,312 18,560 9,186 
Noninterest expense25,426 22,887 25,727 22,759 
   Income before income tax expense18,052 18,215 21,477 13,702 
Income tax expense5,670 4,603 2,833 3,352 
   Net income12,382 13,612 18,644 10,350 
Less: Net income attributable to noncontrolling interest87 82 95 83 
Net income attributable to Nicolet Bankshares, Inc.$12,295 $13,530 $18,549 $10,267 
Basic earnings per common share*$1.22 $1.45 $1.98 $1.09 
Diluted earnings per common share*$1.18 $1.40 $1.91 $1.05 
*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 quarters' earnings per share data will not necessarily equal the year to date earnings per share data.
2019 Compared to 2018
Net income attributable to Nicolet was $54.6 million for 2019, or $5.52 per diluted common share. Comparatively, 2018 net income attributable to Nicolet was $41.0 million or $4.12 per diluted common share. Return on average assets was 1.75% and 1.38% for 2019 and 2018, respectively, while return on average common equity was 12.89% for 2019 and 11.04% for 2018. Book value per common share was $48.76 at December 31, 2019, up 20% over $40.72 at December 31, 2018.
Key factors contributing to the 2019 versus 2018 results are discussed below.
Net income for 2019 benefited from the net of two nonrecurring items in the second quarter, a $7.4 million after-tax gain on the partial sale of our equity interest in a data processing company, and $2.75 million ($2.0 million after-tax) in personnel expense for retirement-related compensation declared to benefit all employees after that sale. Excluding these two nonrecurring items, 2019 net income would be $49.2 million (20% over 2018), return on average assets would be 1.58% and diluted earnings per share would be $4.98 (or 21% over 2018).
Net interest income was $116.1 million for 2019, an increase of $9.4 million or 9% compared to 2018, as we exercised discipline in the challenging rate environment. Interest income grew $13.1 million (overcoming $0.9 million lower aggregate discount income on purchased loans), aided by a 5% increase in average interest-earning assets and the elevated rate environment particularly on new, renewed and variable rate loans through the first half of 2019, before rates declined
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during the second half. Interest expense increased $3.6 million, primarily due to the initially rising rates on a relatively unchanged funding base. The improvement consisted of $7.1 million from net favorable volume and mix variances, and $2.2 million from favorable rate variances. The interest rate spread increased 7 bps to 3.84% for 2019, due to the increase in the interest-earning asset yield (up 26 bps to 5.00% for 2019), exceeding the rise in the cost of funds (up 19 bps to 1.16% for 2019). The contribution from net free funds increased 8 bps due to stronger net free fund balances (led by a 16% increase in average noninterest-bearing demand deposits) and the higher cost of funds. As a result, the net interest margin increased 15 bps to 4.19% for 2019, compared to 4.04% for 2018. Tables 1, 2, and 3 show additional average balance sheet, net interest income, and net interest margin information.
Loans were $2.6 billion at December 31, 2019, an increase of $408 million (19%) compared to $2.2 billion at December 31, 2018, largely due to the acquisition of Choice. Excluding the $348 million loans Choice added at acquisition in 2019, loans increased $60 million (3%) over year-end 2018, reflective of the growth in Nicolet's markets. Average loans were $2.3 billion in 2019 yielding 5.57%, compared to $2.1 billion in 2018 yielding 5.37%, a 6% increase in average balances. Table 6 shows additional information on loans.
Total deposits were $3.0 billion at December 31, 2019, an increase of $340 million (13%) over December 31, 2018, largely due to the acquisition of Choice. Excluding the $289 million deposits Choice added at acquisition in 2019, deposits increased $51 million (2%) over 2018. Between 2019 and 2018, average deposits increased $89 million (4%), with average cored deposits up $106 million from solid growth in noninterest-bearing demand deposits (up $99 million to represent 28% of total deposits for 2019 versus 25% for 2018), partly offset by a reduction in brokered deposits. Tables 14 and 15 show additional information on deposits. 
Asset quality measures remained strong. Nonperforming assets were $15 million, representing 0.42% of total assets at December 31, 2019, compared to $6 million, representing 0.19% of assets at December 31, 2018. For 2019, the provision for credit losses was $1.2 million, exceeding net charge-offs of $0.4 million, versus provision of $1.6 million and net charge-offs of $1.1 million for 2018. The ACL-Loans was $14.0 million at December 31, 2019 (representing 0.54% of loans), compared to $13.2 million (representing 0.61% of loans) at December 31, 2018. Tables 8, 9, 10, and 11 show additional information on asset quality measures.
Noninterest income was $53.4 million for 2019 (including $7.9 million of net asset gains, largely from the equity interest sale noted above), compared to $39.5 million for 2018 (including $1.2 million of net asset gains). Excluding the net asset gains, noninterest income was up $7.1 million (19%), most notably in net mortgage income (up $5.5 million or 87% on significantly higher volumes), trust and brokerage fees combined (up $0.8 million or 6%), and card interchange income (up $0.8 million or 15%), benefiting from increased business and activity. Table 4 shows additional noninterest income information.
Noninterest expense was $96.8 million for 2019, an increase of $7.0 million (8%) over 2018 noninterest expense of $89.8 million, mostly due to the continued investment in people and improvements. Personnel expense was $54.4 million for 2019, up $5.0 million (10%) over 2018, including the one-time compensation action noted above, as well as merit increases on a minimally changed workforce (with average full-time equivalent employees up 1% between the years), and higher cash and equity incentives supporting strong performance. Non-personnel expenses also increased on a combined basis (up $2.1 million or 5%), mostly due to volume-based processing costs partially offset by process efficiencies, as well as a $0.7 million lease termination charge on a branch closure related to the Choice acquisition and $0.8 million full write-off of non-bank goodwill for a change in business strategy. Table 5 shows additional noninterest expense information.
Critical Accounting Policies
The consolidated financial statements of Nicolet are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the consolidated financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loan acquisition transactions, as well as the determination of the allowance for credit losses and income taxes and, therefore, are critical accounting policies. The critical accounting policies are discussed directly with Nicolet’s Audit Committee. In addition to the discussion that follows, these critical accounting policies are further described in Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.
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Business Combinations and Valuation of Loans Acquired in Business Combinations
We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at the estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalized the fair values of acquired assets and assumed liabilities within this 12-month period and management currently considers such values to be the Day 1 Fair Values for the acquisition transactions.
In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.
Allowance for Credit Losses - Loans
Management’s evaluation process used to determine the appropriateness of the ACL-Loans is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated credit losses and therefore the appropriateness of the ACL-Loans could change significantly. Effective January 1, 2020, the Company changed its methodology for accounting for the allowance for credit losses-loans due to the adoption of a new accounting standard, which requires use of a lifetime expected credit losses model versus the historical incurred credit losses model. See section Recent Accounting Pronouncements Adopted within Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8 for additional information on this new accounting standard.
The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ACL-Loans and includes allocations for individually evaluated credit-deteriorated loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative and environmental factors. The methodology includes evaluation and consideration of several factors, including but not limited to: management’s ongoing review and grading of the loan portfolio, evaluation of facts and issues related to specific loans, consideration of historical loan loss and delinquency experience on each portfolio segment, trends in past due and nonaccrual loans, the risk characteristics of specific loans or various loan segments, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, the fair value of underlying collateral, existing economic conditions, and other qualitative and quantitative factors which could affect expected credit losses. In addition, with adoption of CECL in 2020, the model also now considers reasonable and supportable forecasts to assess the collectability of future cash flows. While management uses the best information available to make its evaluation, future adjustments to the ACL-Loans may be necessary if there are significant changes in economic conditions (both existing and forecast) or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ACL-Loans is made for analytical purposes and is not necessarily indicative of the trend of future credit losses in any particular loan category. The ACL-Loans is available to absorb losses from any segment of the loan portfolio. Management believes the ACL-Loans is appropriate at December 31, 2020. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements.
Consolidated net income and stockholders’ equity could be affected if management’s estimate of the ACL-Loans necessary to cover expected credit losses is subsequently materially different, requiring a change in the level of provision for credit losses to be recorded. While management uses currently available information to recognize expected credit losses on loans, future adjustments to the ACL-Loans may be necessary based on newly received appraisals, updated commercial customer financial statements, rapidly deteriorating customer cash flow, and changes in economic conditions or forecassts that affect Nicolet’s customers. As an integral part of their examination process, federal regulatory agencies also review the ACL-Loans. Such agencies may require additions to the ACL-Loans or may require that certain loan balances be charged-off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examination.
Income Taxes
The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings.
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Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Nicolet may also recognize a liability for unrecognized tax benefits from uncertainty in income taxes. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Future Accounting Pronouncements
Recent accounting pronouncements adopted are included in Note 1, “Nature of Business and Significant Accounting Policies” of the Notes to Consolidated Financial Statements under Part II, Item 8.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The updated guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company continues to evaluate the impact of reference rate reform on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For additional disclosure, see section, “Interest Rate Sensitivity Management and Impact of Inflation,” of the Management’s Discussion and Analysis of Financial Condition and Results of Operation under Part II, Item 7.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NICOLET BANKSHARES, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)December 31, 2020December 31, 2019
Assets
Cash and due from banks$88,460 $75,433 
Interest-earning deposits714,399 106,626 
Federal funds sold0 
   Cash and cash equivalents802,859 182,059 
Certificates of deposit in other banks29,521 19,305 
Securities available for sale (“AFS”), at fair value539,337 449,302 
Other investments27,619 24,072 
Loans held for sale21,450 2,706 
Loans2,789,101 2,573,751 
Allowance for credit losses - loans (“ACL-Loans”)(32,173)(13,972)
   Loans, net2,756,928 2,559,779 
Premises and equipment, net59,944 56,469 
Bank owned life insurance (“BOLI”)83,262 78,140 
Goodwill and other intangibles, net175,353 165,967 
Accrued interest receivable and other assets55,516 39,461 
   Total assets$4,551,789 $3,577,260 
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits$1,212,787 $819,055 
Interest-bearing deposits2,697,612 2,135,398 
   Total deposits3,910,399 2,954,453 
Short-term borrowings0 
Long-term borrowings53,869 67,629 
Accrued interest payable and other liabilities48,332 38,188 
Total liabilities4,012,600 3,060,270 
Stockholders’ Equity:
Common stock100 106 
Additional paid-in capital273,390 312,733 
Retained earnings252,952 199,005 
Accumulated other comprehensive income (loss)12,747 4,418 
   Total Nicolet Bankshares, Inc. stockholders’ equity539,189 516,262 
Noncontrolling interest0 728 
   Total stockholders’ equity and noncontrolling interest539,189 516,990 
   Total liabilities, noncontrolling interest and stockholders’ equity$4,551,789 $3,577,260 
Preferred shares authorized (no par value)10,000,000 10,000,000 
Preferred shares issued and outstanding0 
Common shares authorized (par value $0.01 per share)30,000,000 30,000,000 
Common shares outstanding10,011,342 10,587,738 
Common shares issued10,030,267 10,610,259 

 See accompanying Notes to Consolidated Financial Statements.
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NICOLET BANKSHARES, INC.
Consolidated Statements of Income
Years Ended December 31,
(In thousands, except share and per share data)December 31, 2020December 31, 2019December 31, 2018
Interest income:
Loans, including loan fees$136,372 $125,524 $113,953 
Investment securities:
     Taxable8,118 7,584 6,068 
     Tax-exempt2,101 2,075 2,296 
Other interest income2,611 3,405 3,220 
       Total interest income149,202 138,588 125,537 
Interest expense:
Deposits16,641 18,965 15,420 
Short-term borrowings66 
Long-term borrowings3,157 3,540 3,460 
       Total interest expense19,864 22,510 18,889 
          Net interest income129,338 116,078 106,648 
Provision for credit losses10,300 1,200 1,600 
       Net interest income after provision for credit losses119,038 114,878 105,048 
Noninterest income:
Trust services fee income6,463 6,227 6,498 
Brokerage fee income9,753 8,115 7,042 
Mortgage income, net29,807 11,878 6,344 
Service charges on deposit accounts4,208 4,824 4,845 
Card interchange income6,998 6,498 5,665 
BOLI income2,710 2,369 2,418 
Asset gains (losses), net(1,805)7,897 1,169 
Other income4,492 5,559 5,528 
       Total noninterest income62,626 53,367 39,509 
Noninterest expense:
Personnel57,121 54,437 49,476 
Occupancy, equipment and office16,718 14,788 14,574 
Business development and marketing5,396 5,685 5,324 
Data processing10,694 9,950 9,514 
Intangibles amortization3,567 3,872 4,389 
Other expense7,223 8,067 6,481 
       Total noninterest expense100,719 96,799 89,758 
       Income before income tax expense80,945 71,446 54,799 
Income tax expense20,476 16,458 13,446 
       Net income60,469 54,988 41,353 
Less: Net income attributable to noncontrolling interest347 347 317 
       Net income attributable to Nicolet Bankshares, Inc.$60,122 $54,641 $41,036 
Earnings per common share:
Basic$5.82 $5.71 $4.26 
Diluted$5.70 $5.52 $4.12 
Weighted average common shares outstanding:
Basic10,337,138 9,561,978 9,640,258 
Diluted10,541,251 9,900,319 9,956,353 
 
See accompanying Notes to Consolidated Financial Statements.

45


NICOLET BANKSHARES, INC.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
(In thousands)202020192018
Net income$60,469 $54,988 $41,353 
Other comprehensive income (loss), net of tax:
   Unrealized gains (losses) on securities AFS:
     Net unrealized holding gains (losses)11,803 13,758 (3,715)
     Net (gains) losses included in income(395)22 212 
     Income tax (expense) benefit(3,079)(3,722)946 
Total other comprehensive income (loss), net of tax8,329 10,058 (2,557)
Comprehensive income$68,798 $65,046 $38,796 
 
See accompanying Notes to Consolidated Financial Statements.

46


NICOLET BANKSHARES, INC.
Consolidated Statements of Changes in Stockholders’ Equity
 Nicolet Bankshares, Inc. Stockholders’ Equity 
(In thousands)Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
Interest
Total
Balances at December 31, 2017$98 $263,835 $102,391 $(2,146)$701 $364,879 
Comprehensive income:
   Net income41,036 317 41,353 
   Other comprehensive income (loss)(2,557)(2,557)
Stock-based compensation expense4,901 4,901 
Exercise of stock options, net1,517 1,518 
Issuance of common stock282 282 
Purchase and retirement of common stock(4)(22,745)(22,749)
Distribution to noncontrolling interest— — (275)(275)
Adoption of new accounting pronouncement937 (937)
Balances at December 31, 2018$95 $247,790 $144,364 $(5,640)$743 $387,352 
Comprehensive income:
   Net income54,641 347 54,988 
   Other comprehensive income (loss)10,058 10,058 
Stock-based compensation expense5,038 5,038 
Exercise of stock options, net8,147 8,150 
Issuance of common stock in acquisitions, net of capitalized issuance costs of $16312 79,622 79,634 
Issuance of common stock592 592 
Purchase and retirement of common stock(4)(28,456)(28,460)
Distribution to noncontrolling interest— — (362)(362)
Balances at December 31, 2019$106 $312,733 $199,005 $4,418 $728 $516,990 
Comprehensive income:
   Net income60,122 347 60,469 
   Other comprehensive income (loss)8,329 8,329 
Stock-based compensation expense5,700 5,700 
Exercise of stock options, net 1,474 1,474 
Issuance of common stock581 581 
Purchase and retirement of common stock(6)(42,082)(42,088)
Purchase of noncontrolling interest (5,016)  (860)(5,876)
Distribution to noncontrolling interest  (215)(215)
Adoption of new accounting
pronouncement (See Note 1)
  (6,175)0  (6,175)
Balances at December 31, 2020$100 $273,390 $252,952 $12,747 $0 $539,189 
 
See accompanying Notes to Consolidated Financial Statements.
47


NICOLET BANKSHARES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31,
(In thousands)202020192018
Cash Flows From Operating Activities:
Net income$60,469 $54,988 $41,353 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion10,685 7,311 6,282 
Provision for credit losses10,300 1,200 1,600 
Provision for deferred taxes3,127 (2,652)(1,521)
Increase in cash surrender value of life insurance(2,199)(1,967)(1,857)
Stock-based compensation expense5,700 5,038 4,901 
Assets (gains) losses, net1,805 (7,897)(1,169)
Gain on sale of loans held for sale, net(29,966)(11,244)(5,499)
Proceeds from sale of loans held for sale854,608 425,530 241,739 
Origination of loans held for sale(848,337)(418,229)(234,416)
Net change in accrued interest receivable and other assets6,991 (2,951)(666)
Net change in accrued interest payable and other liabilities5,716 9,010 242 
     Net cash provided by (used in) operating activities78,899 58,137 50,989 
Cash Flows From Investing Activities:
Net (increase) decrease in certificates of deposit in other banks9,167 (1,924)753 
Purchases of securities AFS(170,518)(95,627)(76,564)
Proceeds from sales of securities AFS19,045 23,405 5,280 
Proceeds from calls and maturities of securities AFS94,818 53,933 66,706 
Net (increase) decrease in loans(125,020)(57,156)(71,629)
Purchases of other investments(4,360)(2,669)(1,550)
Proceeds from sales of other investments0 17,144 807 
Net increase in premises and equipment(10,791)(4,392)(4,260)
Proceeds from sales of other real estate and other assets343 457 2,824 
Purchase of BOLI0 (5,000)
Proceeds from redemption of BOLI440 1,348 561 
Net cash (paid) received in business combination(21,820)7,331 
     Net cash provided by (used in) investing activities(208,696)(63,150)(77,072)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits815,094 49,259 143,153 
Net increase (decrease) in short-term borrowings0 (4,233)
Proceeds from long-term borrowings367,842 
Repayments of long-term borrowings(384,091)(87,237)(1,253)
Distribution to noncontrolling interest(215)(362)(275)
Purchase of noncontrolling interest(8,000)
Capitalized issuance costs, net0 (163)
Purchase and retirement of common stock(42,088)(28,460)(22,749)
Proceeds from issuance of common stock, net2,055 8,742 1,800 
     Net cash provided by (used in) financing activities750,597 (62,454)120,676 
     Net increase (decrease) in cash and cash equivalents620,800 (67,467)94,593 
Beginning cash and cash equivalents182,059 249,526 154,933 
Ending cash and cash equivalents *$802,859 $182,059 $249,526 
Supplemental Disclosures of Cash Flow Information:
   Cash paid for interest$23,485 $22,334 $18,537 
   Cash paid for taxes21,969 16,140 10,821 
   Transfer of loans and bank premises to other real estate owned2,608 1,025 607 
   Capitalized mortgage servicing rights5,256 2,876 1,203 
Acquisitions:
   Fair value of assets acquired$160,000 $412,000 $
   Fair value of liabilities assumed146,000 377,000 
   Net assets acquired$14,000 $35,000 $
   Common stock issued in acquisitions0 79,797 
* Cash and cash equivalents at December 31, 2020 include restricted cash of $1.9 million pledged as collateral on interest rate swaps and 0 reserve balance was required with the Federal Reserve. At December 31, 2019 cash and cash equivalents included restricted cash of $1.3 million pledged as collateral on interest rate swaps and $6.0 million for the reserve balance required with the Federal Reserve, while at December 31, 2018, cash and cash equivalents included $6.3 million for the reserve balance required with the Federal Reserve and 0 cash was pledged as collateral on interest rate swaps.  
See accompanying Notes to Consolidated Financial Statements.
48


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements

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

At December 31, 2020, the Company had two wholly owned subsidiaries, the Bank and Nicolet Advisory Services, LLC (“Nicolet Advisory”). At December 31, 2020, the Bank wholly owns an investment subsidiary based in Nevada, a subsidiary in Green Bay that provides a web-based investment management platform for financial advisor trades and related activity, and an entity that owns the building in which Nicolet is headquartered, Nicolet Joint Ventures, LLC (the “JV”). The JV was owned 50% by a real estate development and investment firm (the “Firm”) through the JV until late 2020 when the Bank became the 100% owner and sole managing member of the JV. The Firm is considered a related party, as one of its principals is a Board member and shareholder of the Company. See Note 14 for additional related party disclosures, including details of the 50% interest purchased from the Firm.

Nicolet Advisory is a registered investment advisor subsidiary that provides brokerage and investment advisory services to customers. In late 2020, to improve process efficiencies and organizational structure, the Company dissolved its wholly owned subsidiary, Brookfield Investment Partners, LLC, which provided limited investment services (transactional and strategy) to a few smaller banks, and Nicolet Advisory assumed those additional investment services contracts.

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

Operating Segment: The consolidated income of the Company is derived principally from the Bank, which conducts lending (primarily commercial-based loans, as well as residential and consumer loans) and deposit gathering (including other banking- and deposit-related products and services, such as ATMs, safe deposit boxes, check cashing, wires, and debit cards) to businesses, consumers and governmental units principally in its trade area of northeastern and central Wisconsin, and Menominee, Michigan, trust services, brokerage services (delivered through the Bank and Nicolet Advisory), and the support to deliver, fund and manage all such banking and wealth management services to its customer base. The individual contribution from wealth management was not significant to the consolidated balance sheet or net income for 2020, 2019, or 2018. While the chief operating decision makers monitor the revenue streams of the various products and services, and evaluate costs, balance sheet positions and quality, all such products, services and activities are directly or indirectly related to the business of community banking, with no regular, formal or material segment delineations. Operations are managed and financial performance is evaluated on a company-wide basis, and accordingly, all the financial service operations are considered by management to be aggregated in one reportable operating segment.

Use of Estimates: Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for credit losses, valuation of loans in acquisition transactions, useful lives for depreciation and amortization, fair value of financial instruments, impairment calculations, valuation of deferred tax assets, uncertain income tax positions, and contingencies. Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses-loans, determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions; therefore, these are critical accounting policies. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: external market factors such as market interest rates and employment rates, changes to operating policies and procedures, changes in applicable banking or tax regulations, and changes to deferred tax estimates. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.
49


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements

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

Cash and Cash Equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits in other banks with original maturities of less than 90 days, if any, and federal funds sold. The Bank maintains amounts in due from banks which, at times, may exceed federally insured limits. Management monitors these correspondent relationships. The Bank has not experienced any losses in such accounts. The Bank may have restrictions on cash and due from banks as it is required to maintain certain vault cash and reserve balances with the Federal Reserve Bank to meet specific reserve requirements. At December 31, 2020, 0 reserve balance was required with the Federal Reserve Bank (as the Federal Reserve’s board authorized a reduction to the reserve requirement ratios to 0% effective March 26, 2020 to provide monetary stimulus in response to the economic disruptions resulting from the pandemic), while at December 31, 2019, the required reserve balance was approximately $6.0 million, of which there was sufficient cash to cover the reserve requirement. In addition, cash and cash equivalents includes restricted cash of $1.9 million and $1.3 million pledged as collateral on an interest rate swap at December 31, 2020 and 2019, respectively.

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

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

Other Investments: Other investments include equity securities with readily determinable fair values, “restricted” equity securities, and private company securities. At December 31, 2020, other investments included $3.6 million of equity securities with readily determinable fair values, $20.2 million of “restricted“ equity securities, and $3.9 million of private company securities. As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These equity securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost. Also included are investments in other private companies that do not have quoted market prices, which are carried at cost less impairment charges, if any. Management’s evaluation of these other investments for impairment includes consideration of the financial condition and other available relevant information of the issuer.

50


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value as determined on an aggregate basis and generally consist of current production of certain fixed-rate residential first mortgages. The amount by which cost exceeds fair value is recorded as a valuation allowance and charged to earnings. Changes, if any, in the valuation allowance are included in earnings in the period in which the change occurs. As of December 31, 2020 and 2019, no valuation allowance was necessary. Loans held for sale may be sold servicing retained or servicing released, and are generally sold without recourse. The carrying value of mortgage loans sold with servicing retained is reduced by the amount allocated to the servicing right at the time of sale. Gains and losses on sales of mortgage loans held for sale are included in earnings in mortgage income, net.

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

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

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

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

Prior to January 1, 2020, the Company initially classified acquired loans as either purchased credit impaired (“PCI”) loans (i.e., loans that reflect credit deterioration since origination and for which it was probable at acquisition that the Company would be unable to collect all contractually required payments) or purchased non-impaired loans (i.e., “performing acquired loans”). The Company estimated the fair value of PCI loans based on the amount and timing of expected principal, interest and other cash flows for each loan. The excess of the loan’s contractual principal and interest payments over all cash flows expected to be collected at acquisition was considered an amount that should not be accreted. These credit discounts (“nonaccretable marks”) were included in the determination of the initial fair value for acquired loans; therefore, no allowance for credit losses was recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that were not credit-based (“accretable marks”) were subsequently accreted to interest income over the estimated life of the loans. Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date resulted in a move of the discount from nonaccretable to accretable, while decreases in expected cash flows after the acquisition date were recognized through the provision for credit losses.

Allowance for Credit Losses - Loans: The ACL-Loans represents management’s estimate of expected credit losses over the lifetime of the loan based on loans in the Company’s loan portfolio at the balance sheet date. The Company estimates the ACL-Loans based
51


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL-Loans. Estimating the amount of the ACL-Loans is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change. Actual credit losses, net of recoveries, are deducted from the ACL-Loans. Loans are charged-off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ACL-Loans. A provision for credit losses, which is a charge against income, is recorded to bring the ACL-Loans to a level that, in management’s judgment, is appropriate to absorb expected credit losses in the loan portfolio.

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

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

To assess the overall appropriateness of the ACL-Loans, management applies an allocation methodology which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management's ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonaccrual loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect expected credit losses. Assessing these numerous factors involves significant judgment.

Management allocates the ACL-Loans by pools of risk within each loan portfolio segment. The allocation methodology consists of the following components. First, a specific reserve is established for individually evaluated PCD and other credit-deteriorated loans, which management defines as nonaccrual credit relationships over $250,000, collateral dependent loans, and other loans with evidence of credit deterioration. The specific reserve in the ACL-Loans for these credit deteriorated loans is equal to the aggregate collateral or discounted cash flow shortfall. Management allocates the ACL-Loans with historical loss rates by loan segment. The loss factors are measured on a quarterly basis and applied to each loan segment based on current loan balances and projected for their expected remaining life. Next, management allocates the ACL-Loans using the qualitative and environmental factors mentioned above. Consideration is given to those current qualitative or environmental factors that are likely to cause estimated credit losses at the evaluation date to differ from the historical loss experience of each loan segment. Lastly, management considers reasonable and supportable forecasts to assess the collectability of future cash flows. See Note 4 for additional information and disclosures on the ACL-Loans.

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

Credit-Related Financial Instruments: In the ordinary course of business the Company has entered into financial instruments consisting of commitments to extend credit, financial standby letters of credit, and performance standby letters of credit. Financial standby letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party, while performance standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third
52


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
party. Such financial instruments are recorded in the consolidated financial statements when they are funded. See Note 13 for additional information and disclosures on credit-related financial instruments.

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

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

Estimated useful lives of new premises and equipment generally range as follows:
Building and improvements 25 – 40 years
Leasehold improvements 5 – 15 years
Furniture and equipment 3 – 10 years

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

Other Real Estate Owned (“OREO”): OREO acquired through partial or total satisfaction of loans or bank facilities no longer in use are carried at fair value less estimated costs to sell. Any write-down in the carrying value of loans or vacated bank premises at the time of transfer to OREO is charged to the ACL-Loans or to write-down of assets, respectively. OREO properties acquired in conjunction with acquisition transactions were recorded at fair value on the date of acquisition. Any subsequent write-downs to reflect current fair value, as well as gains or losses on disposition and revenues and expenses incurred to hold and maintain such properties, are treated as period costs. At December 31, 2020 and 2019, OREO was $3.6 million and $1.0 million, respectively.

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

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

53


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

The Company periodically evaluates its MSRs for impairment. At each reporting date impairment is assessed based on estimated fair value using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate). The value of MSRs is adversely affected when mortgage interest rates decline and mortgage loan prepayments increase.  A valuation allowance is established through a charge to earnings (included in mortgage income, net) to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification.  If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings, though not beyond the net amortized cost carried.  An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan payoff activity) is recognized as a write-down of the MSRs and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings.  A direct write-down permanently reduces the carrying value of the MSRs and valuation allowance, precluding subsequent recoveries.  A valuation allowance of $1 million was recorded for 2020, while 0 valuation allowance or impairment charge was recorded for 2019. See Note 6 for additional information on MSRs.

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

Short-term Borrowings: Short-term borrowings consist primarily of overnight Federal funds purchased and securities sold under agreements to repurchase (“repos”), or other short-term borrowing arrangements with an original maturity of one year or less. Repos are with commercial deposit customers, and are treated as financing activities carried at the amounts that will be subsequently repurchased as specified in the respective agreements. Repos generally mature within one to four days from the transaction date. The Company may be required to provide additional collateral based on the fair value of the underlying securities. There were no outstanding agreements at December 31, 2020 or 2019.

Stock-based Compensation: Stock-based payments to employees, including grants of restricted stock or stock options, are valued at fair value of the award on the date of grant and expensed on a straight-line basis as compensation expense over the applicable vesting period. A Black-Scholes model is utilized to estimate the fair value of stock options and the quoted market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. See Note 10 for additional information on stock-based compensation.

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

Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed quarterly for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies.

54


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

The Company may also recognize a liability for unrecognized tax benefits from uncertainty in income tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the consolidated financial statements. At December 31, 2020, the Company determined it had no significant uncertainty in income tax positions. Interest and penalties related to unrecognized tax benefits are classified as income tax expense. See Note 12 for additional information on income taxes.

Earnings per Common Share: Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares adjusted for the dilutive effect of outstanding common stock awards, if any. See Note 19 for additional information on earnings per common share.

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

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

Revenue Recognition: Accounting principles (Revenue from Contracts with Customers, Topic 606) require that an entity recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance includes a five-step model to apply to revenue recognition, consisting of the following: (1) identify the contract; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when or as the performance obligation is satisfied. See Note 20 for additional information on revenue recognition.

Reclassifications: Certain amounts in the 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 presentation.

New Accounting Pronouncements Adopted: In August 2018, the FASB issued Accounting Standards Update (“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 was effective for annual reporting periods, including interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the updated guidance effective January 1, 2020, with no material impact on its consolidated financial statements as the new ASU only revises disclosure requirements. See Note 17 for fair value disclosures.

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 replaced the incurred loss impairment model (which recognized losses when a probable threshold was 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 is based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new accounting standard on January 1, 2020, as required, and recorded a cumulative-effect adjustment of $6 million to retained earnings. See Securities Available for Sale, Loans, and Allowance for Credit Losses above for changes to accounting policies and see Notes 3 and 4 for additional disclosures related to this new accounting pronouncement.
55


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 2. ACQUISITIONS
Completed Acquisitions:
Advantage Community Bancshares, Inc. (“Advantage”): On August 21, 2020, Nicolet completed its merger with Advantage, pursuant to the terms of the definitive merger agreement dated March 2, 2020, whereby Advantage merged with and into Nicolet, and Advantage Community Bank, the wholly owned bank subsidiary of Advantage, was merged with and into the Company's banking subsidiary, Nicolet National Bank. Advantage’s 4 branches in Dorchester, Edgar, Mosinee, and Wausau opened as Nicolet National Bank branches on August 24, 2020, expanding our presence in Central Wisconsin and the Wausau area. Due to the small size of the transaction, terms of the all-cash deal were not disclosed.
Upon consummation, Advantage added total assets of approximately $172 million (representing 4% of Nicolet’s then pre-merger asset size), loans of $88 million, deposits of $141 million, core deposit intangible of $1 million, and goodwill of $12 million.
Choice Bancorp, Inc. (“Choice”): On November 8, 2019, the Company consummated its merger with Choice, pursuant to the terms of the Agreement and Plan of Merger dated June 26, 2019, (the “Choice Merger Agreement”), whereby Choice (at 12% of Nicolet’s then pre-merger asset size) was merged with and into Nicolet, and Choice Bank, the wholly owned bank subsidiary of Choice, was merged with and into the Bank. The system integration was completed, and the 2 branches of Choice opened on November 12, 2019, as Nicolet National Bank branches, expanding its presence in the Oshkosh marketplace. The Company closed its legacy Oshkosh location concurrently with the consummation of the Choice merger.
The purpose of the merger was to continue Nicolet’s interest in strategic growth, consistent with its plan to improve profitability through efficiency, leverage the strengths of each bank across the combined customer base, and add shareholder value. With the merger, Nicolet became the leading community bank to serve the Oshkosh marketplace.
Pursuant to the Choice Merger Agreement, the final purchase price consisted of issuing 1,184,102 shares of the Company’s common stock (given the final stock-for-stock exchange ratio of 0.497, and not exchanging the Choice shares owned by the Company immediately prior to the time of the merger), for common stock consideration of $79.8 million (based on $67.39 per share, the volume weighted average closing price of the Company’s common stock over the preceding 30 trading day period) plus cash consideration of $1.7 million. Approximately $0.2 million in direct stock issuance costs for the merger were incurred and charged against additional paid-in capital.
Upon consummation, Choice added $457 million in assets, including $348 million in loans, $289 million in deposits, $1.7 million in core deposit intangible, and $45 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Choice prior to the consummation date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective estimated fair values at the date of acquisition.
Terminated Acquisition:
Commerce Financial Holdings, Inc. (“Commerce”): On February 17, 2020, Nicolet entered into a definitive merger agreement (“Merger Agreement”) with Commerce pursuant to which Nicolet would acquire Commerce and its wholly owned bank subsidiary, Commerce State Bank. On May 18, 2020, Nicolet and Commerce announced a mutual agreement to terminate their Merger Agreement. Nicolet paid Commerce $0.5 million and surrendered its $0.1 million of Commerce common stock.
NOTE 3.  SECURITIES AVAILABLE FOR SALE
Amortized cost and fair value of securities available for sale are summarized as follows.
 December 31, 2020
(in thousands)Amortized
Cost
Gross Unrealized GainsGross Unrealized LossesFair
Value
Fair Value as % of Total
U.S. government agency securities$63,162 $289 $$63,451 12 %
State, county and municipals226,493 5,386 11 231,868 43 %
Mortgage-backed securities156,148 6,425 78 162,495 30 %
Corporate debt securities76,073 5,450 81,523 15 %
 $521,876 $17,550 $89 $539,337 100 %
56


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
 December 31, 2019
(in thousands)Amortized
Cost
Gross Unrealized GainsGross Unrealized LossesFair
Value
Fair Value as % of Total
U.S. government agency securities$16,516 $$60 $16,460 %
State, county and municipals155,501 1,049 157 156,393 35 %
Mortgage-backed securities193,223 2,492 697 195,018 43 %
Corporate debt securities78,009 3,422 81,431 18 %
 $443,249 $6,967 $914 $449,302 100 %
All mortgage-backed securities included in the tables above were issued by U.S. government agencies and corporations. Securities AFS with a fair value of $146 million and $166 million as of December 31, 2020 and 2019, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. Accrued interest on securities AFS totaled $2.3 million and $2.2 million at December 31, 2020 and 2019, respectively, and is included in accrued interest receivable and other assets on the consolidated balance sheets.

The following tables present gross unrealized losses and the related estimated fair value of investment securities AFS for which an allowance for credit losses has not been recorded, aggregated by investment category and the length of time the individual securities have been in a continuous unrealized loss position.
 December 31, 2020
 Less than 12 months12 months or moreTotal
($ in thousands)Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Number of Securities
State, county and municipals$5,181 $11 $$$5,181 $11 
Mortgage-backed securities10,612 71 492 11,104 78 22 
 $15,793 $82 $492 $$16,285 $89 31 
 December 31, 2019
 Less than 12 months12 months or moreTotal
($ in thousands)Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Fair ValueUnrealized
Losses
Number of Securities
U.S. government agency securities$1,035 $$11,091 $58 $12,126 $60 
State, county and municipals22,451 132 7,605 25 30,056 157 56 
Mortgage-backed securities49,626 245 47,271 452 96,897 697 150 
 $73,112 $379 $65,967 $535 $139,079 $914 212 
The Company evaluates securities AFS in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
As of December 31, 2020, 0 allowance for credit losses on securities AFS was recognized. The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads, and market conditions subsequent to purchase, not credit deterioration. Furthermore, the Company does not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. There were 0 other-than-temporary impairment charges recognized in earnings on securities AFS during 2019 or 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. See Note 17 for additional information on the Company’s fair value measurements.
57


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
 December 31, 2020
(in thousands)Amortized CostFair Value
Due in less than one year$85,317 $85,712 
Due in one year through five years168,302 174,975 
Due after five years through ten years97,662 100,445 
Due after ten years14,447 15,710 
 365,728 376,842 
Mortgage-backed securities156,148 162,495 
   Securities AFS$521,876 $539,337 
Proceeds and realized gains / losses from the sale of securities AFS were as follows.
 Years Ended December 31,
(in thousands)202020192018
Gross gains$395 $152 $
Gross losses(174)(212)
   Gains (losses) on sales of securities AFS, net$395 $(22)$(212)
Proceeds from sales of securities AFS$19,045 $23,405 $5,280 

58


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 4. LOANS, ALLOWANCE FOR CREDIT LOSSES - LOANS, AND CREDIT QUALITY
Loans:
The loan composition was as follows.
 December 31, 2020December 31, 2019
(in thousands)Amount% of TotalAmount% of Total
Commercial & industrial$750,718 27 %$806,189 31 %
Paycheck Protection Program (“PPP”) loans186,016 
Owner-occupied commercial real estate (“CRE”)521,300 19 496,372 19 
Agricultural109,629 95,450 
CRE investment460,721 16 443,218 17 
Construction & land development131,283 92,970 
Residential construction41,707 54,403 
Residential first mortgage444,155 16 432,167 17 
Residential junior mortgage111,877 122,771 
Retail & other31,695 30,211 
   Loans2,789,101 100 %2,573,751 100 %
Less ACL-Loans32,173 13,972 
   Loans, net$2,756,928 $2,559,779 
ACL-Loans to loans1.15 %0.54 %

Accrued interest on loans totaled $7 million at both December 31, 2020 and December 31, 2019, and is included in accrued interest receivable and other assets on the consolidated balance sheets. See Note 1 for the Company’s accounting policy on loans and the allowance for credit losses.

Allowance for Credit Losses-Loans:
The majority of the Company’s loans, commitments, and letters of credit have been granted to customers in the Company’s market area. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of underlying collateral, if any.
A roll forward of the allowance for credit losses - loans was as follows.
 Years Ended December 31,
(in thousands)202020192018
Beginning balance$13,972 $13,153 $12,653 
Adoption of CECL8,488 — — 
Initial PCD ACL797 — — 
   Total impact for adoption of CECL9,285 — — 
Provision for credit losses10,300 1,200 1,600 
Charge-offs(1,689)(927)(1,213)
Recoveries305 546 113 
    Net (charge-offs) recoveries(1,384)(381)(1,100)
Ending balance$32,173 $13,972 $13,153 
59


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The following table presents the balance and activity in the ACL-Loans by portfolio segment.
Year Ended December 31, 2020
(in thousands)Commercial
& industrial
Owner-
occupied
CRE
AgriculturalCRE
investment
Construction & land
development
Residential
construction
Residential
first mortgage
Residential
junior
mortgage
Retail
& other
Total
ACL-Loans *
Beginning balance$5,471 $3,010 $579 $1,600 $414 $368 $1,669 $517 $344 $13,972 
Adoption of CECL2,962 1,249 361 1,970 51 124 1,286 351 134 8,488 
Initial PCD ACL797 797 
Provision3,106 2,062 455 2,061 519 (71)1,809 151 208 10,300 
Charge-offs(812)(530)(190)(2)(155)(1,689)
Recoveries120 81 11 67 26 305 
Net (charge-offs) recoveries(692)(449)(190)67 (129)(1,384)
Ending balance$11,644 $5,872 $1,395 $5,441 $984 $421 $4,773 $1,086 $557 $32,173 
As % of ACL-Loans36 %18 %%17 %%%15 %%%100 %
* The PPP loans are fully guaranteed by the SBA; thus, no ACL-Loans has been allocated to these loans.

For comparison purposes, the following table presents the balance and activity in the ACL-Loans by portfolio segment for the prior year-end period.
Year Ended December 31, 2019
(in thousands)Commercial
& industrial
Owner-
occupied
CRE
AgriculturalCRE
investment
Construction & land
development
Residential
construction
Residential
first mortgage
Residential
junior
mortgage
Retail
& other
Total
ACL-Loans
Beginning balance$5,271 $2,847 $422 $1,470 $510 $211 $1,646 $472 $304 $13,153 
Provision(61)254 157 130 (96)383 86 338 1,200 
Charge-offs(159)(93)(226)(22)(80)(347)(927)
Recoveries420 36 39 49 546 
Net (charge-offs) recoveries261 (91)(226)14 (41)(298)(381)
Ending balance$5,471 $3,010 $579 $1,600 $414 $368 $1,669 $517 $344 $13,972 
As % of ACL-Loans39 %22 %%11 %%%12 %%%100 %

The ACL-Loans at December 31, 2020 was estimated using the current expected credit loss model, while the ACL-Loans at December 31, 2019 was estimated using the incurred loss model. See Note 1 for the Company’s accounting policy on loans and the allowance for credit losses.

A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation as of December 31, 2020.

60


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
December 31, 2020Collateral Type
(in thousands)Real EstateOther Business AssetsTotalWithout an AllowanceWith an AllowanceAllowance Allocation
Commercial & industrial$$2,195 $2,195 $501 $1,694 $1,241 
PPP loans
Owner-occupied CRE3,519 3,519 3,519 
Agricultural584 797 1,381 1,378 
CRE investment1,474 1,474 1,474 
Construction & land development308 308 308 
Residential construction
Residential first mortgage
Residential junior mortgage
Retail & other
Total loans$5,885 $2,992 $8,877 $7,180 $1,697 $1,244 

The following table presents impaired loans and their respective allowance for credit loss allocations at December 31, 2019, as determined in accordance with historical accounting guidance.
 December 31, 2019
(in thousands)Recorded
Investment
Unpaid  Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest Income
Recognized
Commercial & industrial$5,932 $7,950 $625 $5,405 $1,170 
Owner-occupied CRE3,430 4,016 3,677 256 
Agricultural2,134 2,172 116 2,311 37 
CRE investment2,426 2,790 2,497 364 
Construction & land development382 382 460 
Residential construction
Residential first mortgage2,357 2,629 2,412 178 
Residential junior mortgage218 349 224 58 
Retail & other12 12 12 
Total$16,891 $20,300 $741 $16,998 $2,063 

Past Due and Nonaccrual Loans:
The following tables present past due loans by portfolio segment.
 December 31, 2020
(in thousands)30-89 Days Past
Due (accruing)
90 Days & Over
or nonaccrual
CurrentTotal
Commercial & industrial$$2,646 $748,072 $750,718 
PPP loans186,016 186,016 
Owner-occupied CRE1,869 519,431 521,300 
Agricultural1,830 107,792 109,629 
CRE investment1,488 459,233 460,721 
Construction & land development327 130,956 131,283 
Residential construction41,707 41,707 
Residential first mortgage613 823 442,719 444,155 
Residential junior mortgage43 384 111,450 111,877 
Retail & other102 88 31,505 31,695 
Total loans$765 $9,455 $2,778,881 $2,789,101 
Percent of total loans%0.4 %99.6 %100.0 %
61


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
 
 December 31, 2019
(in thousands)30-89 Days Past
Due (accruing)
90 Days & Over
or nonaccrual
CurrentTotal
Commercial & industrial$1,729 $6,249 $798,211 $806,189 
Owner-occupied CRE112 3,311 492,949 496,372 
Agricultural1,898 93,552 95,450 
CRE investment1,073 442,145 443,218 
Construction & land development2,063 20 90,887 92,970 
Residential construction302 54,101 54,403 
Residential first mortgage2,736 1,090 428,341 432,167 
Residential junior mortgage217 480 122,074 122,771 
Retail & other110 30,100 30,211 
Total loans$7,269 $14,122 $2,552,360 $2,573,751 
Percent of total loans0.3 %0.5 %99.2 %100.0 %
The following table presents nonaccrual loans by portfolio segment. The nonaccrual loans without a related allowance for credit losses have been reflected in the collateral dependent loans table above.
 Total Nonaccrual Loans
(in thousands)December 31, 2020% to TotalDecember 31, 2019% to Total
Commercial & industrial$2,646 28 %$6,249 44 %
PPP loans
Owner-occupied CRE1,869 20 3,311 23 
Agricultural1,830 19 1,898 14 
CRE investment1,488 16 1,073 
Construction & land development327 20 
Residential construction
Residential first mortgage823 1,090 
Residential junior mortgage384 480 
Retail & other88 
   Nonaccrual loans$9,455 100 %$14,122 100 %
Percent of total loans0.4 %0.5 %
62


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
Credit Quality Information:
The following table presents total loans by risk categories and year of origination.
December 31, 2020Amortized Cost Basis by Origination Year
(in thousands)20202019201820172016PriorRevolvingRevolving to TermTOTAL
Commercial & industrial (a)
Grades 1-4$348,274 $121,989 $98,920 $72,027 $21,613 $39,454 $183,858 $$886,135 
Grade 51,416 2,239 4,486 527 1,638 4,151 18,994 33,451 
Grade 669 19 735 5,315 29 32 1,923 8,122 
Grade 7334 1,126 1,389 663 122 3,103 2,289 9,026 
Total$350,093 $125,373 $105,530 $78,532 $23,402 $46,740 $207,064 $$936,734 
Owner-occupied CRE
Grades 1-4$90,702 $74,029 $78,013 $52,911 $45,042 $150,624 $870 $$492,191 
Grade 542 623 1,349 7,541 1,102 5,842 16,499 
Grade 61,710 706 2,416 
Grade 72,987 675 176 835 5,521 10,194 
Total$93,731 $75,327 $79,538 $62,997 $46,144 $162,693 $870 $$521,300 
Agricultural
Grades 1-4$13,719 $5,652 $7,580 $9,745 $2,613 $32,702 $21,513 $$93,524 
Grade 51,034 701 169 644 6,131 356 9,035 
Grade 6329 390 719 
Grade 726 110 1,111 5,042 62 6,351 
Total$14,753 $5,652 $8,307 $10,353 $4,758 $43,875 $21,931 $$109,629 
CRE investment
Grades 1-4$82,518 $78,841 $40,881 $69,643 $31,541 $137,048 $5,255 $$445,727 
Grade 547 1,284 1,828 9,073 12,232 
Grade 6796 796 
Grade 71,966 1,966 
Total$82,518 $78,841 $40,928 $71,723 $33,369 $148,087 $5,255 $$460,721 
Construction & land development
Grades 1-4$67,578 $30,733 $15,209 $2,204 $2,083 $7,266 $3,675 $$128,748 
Grade 5373 660 545 23 455 2,056 
Grade 6
Grade 7479 479 
Total$67,578 $31,106 $15,869 $2,749 $2,083 $7,768 $4,130 $$131,283 
Residential construction
Grades 1-4$31,687 $9,185 $395 $121 $$264 $$$41,652 
Grade 555 55 
Grade 6
Grade 7
Total$31,687 $9,185 $395 $176 $$264 $$$41,707 
Residential first mortgage
Grades 1-4$146,744 $64,013 $40,388 $41,245 $41,274 $103,094 $287 $$437,050 
Grade 5925 2,245 256 364 1,714 5,504 
Grade 6
Grade 7437 197 16 942 1,601 
Total$146,744 $65,375 $42,830 $41,517 $41,647 $105,750 $287 $$444,155 
Residential junior mortgage
Grades 1-4$4,936 $4,338 $3,663 $1,060 $869 $3,131 $91,816 $1,648 $111,461 
Grade 532 32 
Grade 6
Grade 727 232 125 384 
Total$4,936 $4,338 $3,663 $1,087 $869 $3,395 $91,941 $1,648 $111,877 
Retail & other
Grades 1-4$8,083 $5,213 $1,942 $1,676 $752 $1,339 $12,602 $$31,607 
Grade 5
Grade 6
Grade 716 22 50 88 
Total$8,099 $5,213 $1,964 $1,676 $752 $1,389 $12,602 $$31,695 
Total loans$800,139 $400,410 $299,024 $270,810 $153,024 $519,961 $344,080 $1,653 $2,789,101 
(a) For purposes of this table, the $186 million net carrying value of PPP loans were originated in 2020, have a Pass risk grade (Grades 1-4) and have been included with the Commercial & industrial loan category.
63


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The following tables present total loans by risk categories.
 December 31, 2020
(in thousands)Grades 1-4Grade 5Grade 6Grade 7Total
Commercial & industrial$700,119 $33,451 $8,122 $9,026 $750,718 
PPP loans186,016 186,016 
Owner-occupied CRE492,191 16,499 2,416 10,194 521,300 
Agricultural93,524 9,035 719 6,351 109,629 
CRE investment445,727 12,232 796 1,966 460,721 
Construction & land development128,748 2,056 479 131,283 
Residential construction41,652 55 41,707 
Residential first mortgage437,050 5,504 1,601 444,155 
Residential junior mortgage111,461 32 384 111,877 
Retail & other31,607 88 31,695 
Total loans$2,668,095 $78,864 $12,053 $30,089 $2,789,101 
Percent of total loans95.7 %2.8 %0.4 %1.1 %100.0 %
 December 31, 2019
(in thousands)Grades 1-4Grade 5Grade 6Grade 7Total
Commercial & industrial$765,073 $20,199 $7,663 $13,254 $806,189 
Owner-occupied CRE464,661 20,855 953 9,903 496,372 
Agricultural77,082 6,785 3,275 8,308 95,450 
CRE investment430,794 8,085 2,578 1,761 443,218 
Construction & land development90,523 2,213 15 219 92,970 
Residential construction53,286 1,117 54,403 
Residential first mortgage424,044 4,677 668 2,778 432,167 
Residential junior mortgage122,249 35 487 122,771 
Retail & other30,210 30,211 
Total loans$2,457,922 $63,966 $15,152 $36,711 $2,573,751 
Percent of total loans95.5 %2.5 %0.6 %1.4 %100.0 %

An internal loan review function rates loans using a grading system based on different risk categories. Loans with a Substandard grade are considered to have a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits. Such loans are constantly monitored by the loan review function to ensure early identification of any deterioration. 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.
64


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
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.
Troubled Debt Restructurings:
At December 31, 2020, there were 11 loans classified as troubled debt restructurings with a current outstanding balance of $5.5 million (including $3.4 million on nonaccrual and $2.1 million performing) and a pre-modification balance of $6.5 million. In comparison, at December 31, 2019, there were 5 loans classified as troubled debt restructurings with an outstanding balance of $1.1 million (all nonaccrual) and a pre-modification balance of $1.4 million. There were 0 loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during 2020. As of December 31, 2020, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment, less accumulated depreciation and amortization, is summarized as follows.
(in thousands)December 31, 2020December 31, 2019
Land$6,344 $7,418 
Land improvements3,950 3,865 
Building and improvements54,989 50,818 
Leasehold improvements4,381 4,580 
Furniture and equipment22,701 20,262 
 92,365 86,943 
Less accumulated depreciation and amortization32,421 30,474 
Premises and equipment, net$59,944 $56,469 
Depreciation and amortization expense was $4.4 million in 2020, $3.8 million in 2019, and $4.4 million in 2018. The Company and certain of its subsidiaries are obligated under non-cancelable operating leases for facilities, certain of which provide for rental adjustments based upon increases in cost of living adjustments and other indices. Rent expense under leases totaled $1.0 million in 2020, $1.2 million in 2019, and $1.4 million in 2018. See Note 1 for the Company’s accounting policy on premises and equipment.
Nicolet leases space under non-cancelable operating lease agreements for certain bank and nonbank branch facilities with remaining lease terms of 1 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. The lease asset and liability considers renewal options when they are reasonably certain of being exercised. See Note 1 for the Company’s accounting policy on operating leases.
A summary of net lease cost and selected other information related to operating leases was as follows.
Years Ended
($ in thousands)December 31, 2020December 31, 2019
Net lease cost:
Operating lease cost$834 $970 
Variable lease cost169 233 
  Net lease cost$1,003 $1,203 
Selected other operating lease information:
Weighted average remaining lease term (years)5.14.3
Weighted average discount rate2.0 %2.5 %
65


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
The following table summarizes the maturity of remaining lease liabilities.
Years Ending December 31,(in thousands)
2021$920 
2022780 
2023497 
2024391 
2025106 
Thereafter507 
    Total future minimum lease payments3,201 
Less: amount representing interest(63)
   Present value of net future minimum lease payments$3,138 
During 2020, the Company permanently closed 8 branch locations (5 owned locations and 3 leased locations) given changing customer needs, partly from the pandemic. These closures resulted in accelerated depreciation of $0.5 million (recorded to occupancy, equipment and office expense), a $1.0 million lease termination charge (recorded to other expense), and a $1.0 million write-down upon transfer of the owned locations to OREO (recorded to asset gains (losses), net). During 2019, a $0.7 million lease termination charge was recorded to other expense due to the closure of a branch, concurrent with the consummation date of the Choice merger.
NOTE 6. 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. During 2020, management considered the potential impact of the COVID-19 pandemic on the valuation of our franchise value, stability of deposits, and of the wealth client base, underlying our goodwill, core deposit intangibles, and customer list intangibles, and determined no impairments were indicated. However, the impacts of the COVID-19 pandemic, which began in March 2020, continue to evolve.
A summary of goodwill and other intangibles was as follows. 
(in thousands)December 31, 2020December 31, 2019
Goodwill$163,151 $151,198 
Core deposit intangibles8,837 10,897 
Customer list intangibles3,365 3,872 
Other intangibles12,202 14,769 
Goodwill and other intangibles, net$175,353 $165,967 
Goodwill: Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if certain events or circumstances occur. During 2020, goodwill increased due to the Advantage acquisition, while during 2019, goodwill increased from the Choice acquisition and impairment was recognized on goodwill initially recorded in 2008 for a change in business strategy. See Note 1 for the Company’s accounting policy for goodwill and see Note 2 for additional information on the Company’s acquisitions.
(in thousands)December 31, 2020December 31, 2019
Goodwill:  
Goodwill at beginning of year$151,198 $107,366 
Acquisition11,953 44,594 
Impairment(762)
Goodwill at end of year$163,151 $151,198 
Other intangibles: Other intangible assets, consisting of core deposit intangibles and customer list intangibles, are amortized over their estimated finite lives. During 2020, core deposit intangibles increased due to the Advantage acquisition, while during 2019, core deposit intangibles increased from the Choice acquisition. See Note 1 for the Company’s accounting policy for other intangibles and see Note 2 for additional information on the Company’s acquisitions.
66


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
(in thousands)December 31, 2020December 31, 2019
Core deposit intangibles:  
Gross carrying amount$31,715 $30,715 
Accumulated amortization(22,878)(19,818)
Net book value$8,837 $10,897 
Additions during the period$1,000 $1,700 
Amortization during the period$3,060 $3,365 
Customer list intangibles:  
Gross carrying amount$5,523 $5,523 
Accumulated amortization(2,158)(1,651)
Net book value$3,365 $3,872 
Amortization during the period$507 $507 
Mortgage servicing rights: A summary of the changes in the MSR asset was as follows.
(in thousands)December 31, 2020December 31, 2019
MSR asset:  
MSR asset at beginning of year$5,919 $3,749 
Capitalized MSR5,256 2,876 
MSR asset acquired529 160 
Amortization during the period(1,474)(866)
MSR asset at end of year$10,230 $5,919 
Valuation allowance at beginning of year$$
Additions(1,000)
Valuation allowance at end of year$(1,000)$
MSR asset, net$9,230 $5,919 
Fair value of MSR asset at end of period$9,276 $8,420 
Residential mortgage loans serviced for others$1,250,206 $847,756 
Net book value of MSR asset to loans serviced for others0.74 %0.70 %
The Company periodically evaluates its mortgage servicing rights asset for impairment. A valuation allowance of $1.0 million was recorded for 2020, while 0 valuation allowance was recorded for 2019. See Note 1 for the Company’s accounting policy for MSRs, see Note 2 for additional information on the Company’s acquisitions, and see Note 17 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 December 31, 2020. 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
Years Ending December 31,   
2021$2,643 $507 $1,771 
20222,150 507 1,740 
20231,633 483 1,635 
20241,130 449 1,225 
2025670 449 876 
Thereafter611 970 2,983 
Total$8,837 $3,365 $10,230 
67


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE 7. DEPOSITS
At December 31, 2020, the scheduled maturities of time deposits were as follows.
Years Ending December 31,(in thousands)
2021$335,433 
2022118,898 
2023114,432 
202437,169 
202517,544 
Thereafter997 
Total time deposits$624,473 
Time deposits of $250,000 or more were $55.6 million and $91.2 million at December 31, 2020 and 2019, respectively.
NOTE 8. SHORT AND LONG-TERM BORROWINGS
Short-Term Borrowings:
The Company did 0t have any short-term borrowings (borrowing with an original contractual maturity of one year or less) outstanding at December 31, 2020 or 2019.

Long-Term Borrowings:
The components of long-term borrowings (borrowing with an original contractual maturity greater than one year) were as follows.
(in thousands)December 31, 2020December 31, 2019
FHLB advances$29,000 $25,061 
Junior subordinated debentures24,869 30,575 
Subordinated notes11,993 
Total long-term borrowings$53,869 $67,629 
PPP Liquidity Facility (“PPPLF”): To support the effectiveness of the PPP loans, the Federal Reserve introduced the PPPLF to extend credit to financial institutions that made PPP loans, with the related PPP loans used as collateral on the borrowings. The PPPLF borrowings had a fixed interest rate of 0.35% and a maturity date equal to the maturity date of the related PPP loans, with the PPP loans maturing either two or five years from the origination date of the PPP loan. The Company received PPPLF funds of $344 million during second quarter 2020 which was subsequently repaid in full during fourth quarter 2020, given the level of all other funding.
FHLB Advances: The FHLB advances bear fixed rates, require interest-only monthly payments, and have maturity dates through March 2027. The weighted average rate of the FHLB advances was 0.73% and 1.57% at December 31, 2020 and 2019, respectively. The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which had a pledged balance of $272.9 million and $273.5 million at December 31, 2020 and 2019, respectively.
The following table shows the maturity schedule of the FHLB advances as of December 31, 2020.
Maturing in:(in thousands)
2021$4,000 
2022
2023
2024
20255,000 
Thereafter20,000 
 $29,000 
The Company has a $10 million line of credit with a third party bank, bearing a variable rate of interest and quarterly payments of interest only. At December 31, 2020, the interest rate was based on the Prime Rate plus a 0.25% margin, and subject to a floor rate of 3.50%, while at December 31, 2019, the interest rate was based on one-month LIBOR plus a 2.25% margin and subject to a floor
68


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
rate of 3.25%. At December 31, 2020, the available line was $10 million. The outstanding balance was 0 at December 31, 2020 and 2019, and the line was not used during 2020 or 2019.
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 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. On December 31, 2020, the Company redeemed in full its 2004 Nicolet Bankshares Statutory Trust junior subordinated debentures.
  Junior Subordinated Debentures
(in thousands)Maturity
Date
Par
12/31/2020
Unamortized
Discount
12/31/2020
Carrying
Value
12/31/2019
Carrying
Value
2004 Nicolet Bankshares Statutory Trust(1)
7/15/2034$$$$6,186 
2005 Mid-Wisconsin Financial Services, Inc.(2)
12/15/203510,310 (2,972)7,338 7,138 
2006 Baylake Corp.(3)
9/30/203616,598 (3,647)12,951 12,715 
2004 First Menasha Bancshares, Inc.(4)
3/17/20345,155 (575)4,580 4,536 
Total$32,063 $(7,194)$24,869 $30,575 
(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 1.65% and 3.32% as of December 31, 2020 and 2019, 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 1.59% and 3.31% as of December 31, 2020 and 2019, 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 rate was 3.02% and 4.69% as of December 31, 2020 and 2019, respectively.
Each of the junior subordinated debentures was issued to an underlying statutory trust (the “statutory trusts”), which issued trust preferred securities and common securities and used the proceeds from the issuance of the common and the trust preferred securities to purchase the junior subordinated debentures of the Company. The debentures represent the sole asset of the statutory trusts. All of the common securities of the statutory trusts are owned by the Company. The statutory trusts are not included in the consolidated financial statements. The net effect of all the documents entered into with respect to the trust preferred securities is that the Company, through payments on its debentures, is liable for the distributions and other payments required on the trust preferred securities. At December 31, 2020 and 2019, $23.9 million and $29.4 million, respectively, of trust preferred securities qualify as Tier 1 capital.
Subordinates 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, had a fixed annual interest rate of 5% payable quarterly, and were callable on or after the fifth anniversary of their respective issuances dates. On November 16, 2020, the Company fully redeemed the subordinated Notes.
NOTE 9. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company sponsors 2 deferred compensation plans, one for certain key management employees and another for directors. Under the management plan, employees designated by the Board of Directors may elect to defer compensation and the Company may at its discretion make nonelective contributions on behalf of one or more eligible plan participants. Upon retirement, termination of employment or at their election, the employee shall become entitled to receive the deferred amounts plus earnings thereon. The liability for the cumulative employee contributions and earnings thereon at December 31, 2020 and 2019 totaled approximately $1.5 million and $0.9 million, respectively, and is included in other liabilities on the consolidated balance sheets. The Company made discretionary contributions totaling $1.4 million and $1.8 million during 2020 and 2019, respectively, to selected recipients, which vested immediately and were fully expensed upon grant.
Under the director plan, participating directors may defer up to 100% of their Board compensation towards the purchase of Company common stock at market prices on a quarterly basis that is held in a Rabbi Trust and distributed when each such participating director ends his or her board service. During 2020 and 2019, the director plan purchased 2,561 and 3,769 shares of Company common stock valued at approximately $149,000 and $220,000, respectively. Common stock valued at approximately $20,157 (and representing 282 shares) and $33,000 (and representing 672 shares) was distributed to past directors during 2020 and 2019, respectively. The common stock outstanding and the related director deferred compensation liability are offsetting
69


NICOLET BANKSHARES, INC.
Notes to Consolidated Financial Statements
components of the Company’s equity in the amount of $1.2 million at December 31, 2020 and $1.0 million at December 31, 2019 representing 31,481 shares and 29,202 shares, respectively.
The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 100% of salary compensation on either a pre-tax or after-tax basis, subject to certain IRS limits. Under the plan, the Company matches 100% of participating employee contributions up to 6% of the participant’s eligible compensation. The Company contribution vests over five years. The Company can make additional annual discretionary profit sharing contributions, as determined by the Board of Directors. During 2020, 2019 and 2018, the Company’s 401(k) expense was approximately $2.2 million (including a $0.5 million profit sharing contribution), $2.9 million (including a $1.1 million profit sharing contribution), and $1.8 million, respectively.
NOTE 10. 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. The Company’s stock-based compensation plans at December 31, 2020 are described below.
2011 Long-Term Incentive Plan (“2011 LTIP”): The Company’s 2011 LTIP, as subsequently amended with shareholder approval, has reserved 3,000,000 shares of the Company’s common stock for potential stock-based awards. This plan provides for certain stock-based awards such as, but not limited to, stock options, stock appreciation rights and restricted common stock, as well as cash performance awards. As of December 31, 2020, approximately 1.3 million shares were available for grant under this plan.
2002 Stock Incentive Plan: The Company’s 2002 Stock Incentive Plan, as subsequently amended with shareholder approval, reserved a total of 1,175,000 shares of the Company’s common stock for potential stock options. This plan became fully utilized in 2012 and no further awards may be granted under this plan.
Acquired Equity Incentive Plan: In 2016, the Company assumed sponsorship of an equity incentive plan of an acquired company to allow for that company’s already granted awards that became exercisable upon acquisition to be honored. No further awards may be granted under this assumed plan.
In general, for stock option grants the exercise price will not be less than the fair value of the Company’s common stock on the date of grant, the options will become exercisable based upon vesting terms determined by the committee, and the options will expire ten years after the date of grant. In general, for restricted stock grants the shares are issued at the fair value of the Company’s common stock on the date of grant, are restricted as to transfer, but are not restricted as to dividend payments or voting rights, and the transfer restrictions lapse over time, depending upon vesting terms provided for in the grant and contingent upon continued employment.
A Black-Scholes model is utilized to estimate the fair value of stock option grants. See Note 1 for the Company’s accounting policy on stock-based compensation. The weighted average assumptions used in the model for valuing stock option grants were as follows.