NICOLET BANKSHARES INC (NIC) FY 2023 MD&A

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 presented elsewhere in this report.

The Company’s financial performance and certain balance sheet line items were impacted by the timing and size of Nicolet’s 2022 and 2021 acquisitions. Nicolet acquired Charter Bankshares, Inc. (“Charter”) on August 26, 2022, County Bancorp, Inc. (“County”) on December 3, 2021, and Mackinac Financial Corporation (“Mackinac”) on September 3, 2021. Certain income statement results, average balances and related ratios for 2022 include partial contributions from Charter, while 2021 results include partial contributions from County and Mackinac, each from the respective acquisition date. Additional information on Nicolet’s recent acquisition activity is included in Note 2, “Acquisitions” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

The detailed financial discussion that follows focuses on 2023 results compared to 2022. For a discussion of 2022 results compared to 2021, see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023, which information under that caption is incorporated herein by reference. Historical results of operations are not necessarily predictive of future results.

Overview

Economic Outlook and Recent Industry Developments

For 2023, economic growth was stronger than expected, driven by spending within the consumer sector. The labor market remained strong with competitive compensation and low unemployment putting pressure on business profit margins, as the higher payroll costs outpaced increases in revenue. Consumer spending was stronger than expected with continued demand for goods and services; however, consumer sentiment showed some indications of slowing near the end of the year from mounting pressures of higher interest rates, declining savings, rising cost of food and energy, and increasing credit card debt.

The Federal Reserve tightened monetary policy to combat inflation by aggressively raising interest rates from a target range of 0.00%-0.25% in early March 2022 to 5.25%-5.50% at the end of 2023, and inflation did slow from the start of the year. Given the decreasing inflationary pressures, the Federal Reserve is likely finished with raising interest rates, and expectations are currently high that the Federal Reserve may cut rates beginning in mid-2024. Current projections are also indicating no recession for 2024 or 2025. However, short-term market risks could change the current outlook (e.g., if the Fed rate cuts do not happen as quickly as expected, a slow growth economy is vulnerable to external shocks, and corporate earnings growth is likely to prove disappointing).

These ongoing macroeconomic challenges and uncertainties fueled additional concerns within the banking sector. During first quarter 2023, the banking industry experienced significant volatility with high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking system. The banking world continues to experience challenges from tightening credit conditions, indications of declining asset quality, slowing economic demand, interest rate risk management, and potential for higher capital requirements, which further complicates the current economic outlook. In addition, the ongoing geopolitical issues have the potential for further economic disruptions.

2023 Highlights

2023 was not the year we thought it would be, but we certainly made the most of the year it became. Nicolet saw strong loan growth, solid growth in fee income, resilience in our credit quality, and a continued increase in quarterly net interest margin (increasing from a low of 2.91% for first quarter to 3.30% for fourth quarter), partly from the balance sheet repositioning in first quarter 2023. On March 7, 2023, Nicolet executed the sale of $500 million (par value) U.S. Treasury held to maturity securities for a pre-tax loss of $38 million or an after-tax loss of $28 million to reposition the balance sheet for future growth. The $500 million portfolio yielded approximately 88 bps with scheduled maturities in 2024 and 2025 (or an average duration of 2 years). Proceeds from the sale were used to reduce existing FHLB borrowings with the remainder held in investable cash.

Nicolet’s 2023 results were also impacted by the Wisconsin State Budget signed in July 2023 and retroactive to January 1, 2023, which included language that provides financial institutions with an exemption from state taxable income for interest, fees, and penalties earned on loans to existing Wisconsin-based business or agriculture purpose loans that are $5 million or less in balance on January 1, 2023, and to new loans that meet the criteria. The impact of this tax law change to Nicolet moving forward will be a reduction / elimination of State income taxes being expensed, resulting in an estimated effective tax rate of 19.5% (compared to a 25% effective tax rate previously). However, the elimination of State income tax expense also required a valuation allowance to be established for the State-related deferred tax asset as of the effective date of the legislation, and a one-time $9.1 million charge to state income tax expense was recognized in third quarter to establish this valuation allowance.

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Net income for the year ended December 31, 2023 was $62 million and earnings per diluted common share was $4.08, compared to net income of $94 million and earnings per diluted common share of $6.56 for 2022. Net income for both years reflected non-core items and the related tax effect of each, including the first quarter U.S. Treasury securities sale loss (balance sheet repositioning), the change in Wisconsin state tax law during third quarter, gain on sale of Nicolet’s member interest in UFS, LLC, expected loss (provision expense) on a bank subordinated debt investment, an early contract termination charge, Day 2 credit provision expense required under the CECL model, merger-related expenses, branch optimization costs, as well as gains (losses) on other assets and investments. For the full year, non-core items negatively impacted diluted earnings per common share $2.64 for 2023 and $0.34 for 2022.

At December 31, 2023, Nicolet had total assets of $8.5 billion, a decrease of $295 million (3%) from December 31, 2022. Total loans of $6.4 billion at December 31, 2023 increased $173 million (3%) from December 31, 2022, with strong organic loan growth. Total deposits of $7.2 billion increased slightly ($19 million) from December 31, 2022, while total borrowings decreased $375 million. Total stockholders’ equity was $1.0 billion at December 31, 2023, an increase of $66 million since December 31, 2022, mostly due to solid earnings, partly offset by payment of a quarterly common stock dividend (beginning in second quarter 2023).

Nonperforming assets were $28 million and represented 0.33% of total assets at December 31, 2023, compared to $40 million or 0.46% at year-end 2022. The allowance for credit losses-loans increased to $64 million (1.00% of loans) at December 31, 2023, compared to $62 million (1.00% of loans) at December 31, 2022.

After an unpredictable and volatile year for the banking industry in 2023, Nicolet is well positioned heading into 2024. Due to several strategic moves made during the past year, including the large balance sheet repositioning in March, as well as additional smaller securities and noncore investment sales during the year, Nicolet’s strong financial performance to close out the year provides for ample flexibility to assess and take advantage of opportunities that may arise in 2024 and beyond. Despite a difficult start to 2023, Nicolet’s core profitability improved each quarter during the year, which was led by a gradual improvement in the net interest margin. This contrasts with much of the banking industry, as many banks faced a decline in profitability due to higher funding costs and depressed margins. While Nicolet’s funding costs also continued to rise throughout much of 2023, its yield on its loan portfolio and earning assets grew at a faster pace as its largely fixed rate loan portfolio slowly repriced. Heading into 2024, the expectation is that the quarterly net interest margin will continue to improve, albeit at a slower pace that in 2023. Additionally, the outlook for interest rates has also changed with the Federal Reserve pausing rate hikes in the latter half of 2023 and signaling potential interest rate cuts beginning in mid-2024. Nicolet’s forecast for improved margin and higher net income during 2024 is largely agnostic to unchanged or a slight decline in interest rates. However, like the uncertainty caused by a rapid increase in rates from 2022 to 2023, additional uncertainty would remain should the Federal Reserve need to lower rates at a rapid pace.

This past year was unique as it was the first full year since 2018 where Nicolet didn’t announce or close an acquisition. As an acquisitive organization, Nicolet is routinely involved in some stage of an acquisition at most times. However, 2023 presented some unique challenges to the bank M&A market, but also allowed the Board and executive management to take a much-needed “time out” from its acquisition strategy. First, the overall banking market was not conducive to M&A. The combination of a volatile stock market, and thus bank valuations, as well as the mark-to-market accounting challenges posed by a rapid increase in interest rates led to the slowest bank M&A year in decades. Additionally, the minor banking crisis that befell the industry in the Spring of 2023 also contributed to many banks focusing more on making internal investments, finding efficiencies, and strategic financial repositioning rather than the unique challenges of M&A. This self-imposed pause on M&A and inward focus was especially true at Nicolet, and came at a beneficial time as we were coming off back-to-back-to-back acquisitions of $1.0+ billion in asset banks in 2021 and 2022. Nicolet more than doubled in size since the end of 2019, and grew its employee base by more than 75% since 2020. Taking a pause from acquisitive growth allowed the Board and senior management the opportunity to conduct an in-depth review of the organization. The result was greater efficiency in, and the elimination of duplicative processes, roles, and systems. It also allowed Nicolet the opportunity to prepare for the near future, including the ability to eclipse the $10 billion asset threshold.

Nicolet is poised to take advantage of opportunities in 2024. While much uncertainty remains, including significant geopolitical risks, continued inflationary pressures (albeit more muted), a weakening economy, and a pivotal election year, the banking industry is likely to experience continued volatility in 2024. However, as it relates to Nicolet, the Board and management remain optimistic for its near-term outlook. As we closed out 2023, we recorded the highest core net income quarter in Nicolet’s history, the net interest margin showed strong support during the last quarter, we ended the year with a tangible common equity ratio of nearly 8.0%, and asset quality remained remarkably resilient owing to the quality of the customers we serve in a lower-risk, more stable market of the Upper Midwest. Additionally, our share price outperformed most bank indices during the year, and we were able to maintain the well-deserved market premium in our valuation. All of these factors, coupled with a more favorable bank M&A environment potentially mean a return to M&A for Nicolet during 2024. While M&A discussions remain high level, and the Board remains highly selective in its potential targets, we are hopeful 2024 presents more opportunities to complement our sustained organic growth with highly accretive M&A. However, the Board and management plan to remain disciplined with pricing, as well as which geographical markets we may enter or expand in. Additionally, as an $8.5 billion asset bank, the size of the target is of

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utmost importance. Targeting a bank that is too small potentially creates a high opportunity cost by missing on a bank that is of more strategic importance to Nicolet. Additionally, acquiring a target that places Nicolet at or just over the $10 billion threshold also is much less appealing than slower organic growth. As such, while we may have regained our appetite for bank M&A, our list of potential M&A partners remains smaller than in the past. In the meantime, the Board expects to remain diligent as to how it allocates shareholder capital, whether it be through organic growth, M&A, share repurchases, an increase to the shareholder dividend, or most likely, some combination of the four.

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Table 1: Earnings Summary and Selected Financial Data

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

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

(3) Provision expense for 2023 is attributable to the expected loss on a bank subordinated debt investment, and the provision expense for 2022 and 2021 is attributable to the Day 2 allowance from acquisition transactions.

(4) The effective tax rate for periods prior to the January 1, 2023, effective date of the Wisconsin tax law change (as detailed further in the Overview section above) assumed an effective tax rate of 25%, and periods subsequent to the effective date assumed an effective tax rate of 19.5%.

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Non-GAAP Financial Measures

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

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

INCOME STATEMENT ANALYSIS

Net Interest Income

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

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

(1)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.

(2)The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% and adjusted for the disallowance of interest expense.

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

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

(2)Nonaccrual loans and loans held for sale are included in the daily average loan balances outstanding.

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

Comparison of 2023 versus 2022

The Federal Reserve raised short-term interest rates a total of 425 bps during 2022, increasing the Federal Funds rate to a range of 4.25% to 4.50% as of December 31, 2022. Additional increases totaling 100 bps were made during 2023, resulting in a Federal Funds range of 5.25% to 5.50% as of December 31, 2023.

Tax-equivalent net interest income was $244 million for 2023, an increase of $2 million (1%) over 2022. The increase in tax-equivalent net interest income was attributable to net favorable volumes (which added $41 million, mostly from the full year impact of the Charter acquisition and loan growth) offset by net unfavorable rates (which decreased net interest income $40 million from higher deposit costs and the lag in repricing the loan portfolio to current market interest rates).

Average interest-earning assets increased to $7.7 billion for 2023, $564 million (8%) higher than 2022, primarily due to the timing of the acquisition of Charter (in August 2022). Average loans increased $1.0 billion (19%) to $6.2 billion, mostly due to the timing of the Charter acquisition (which added loans of $827 million at acquisition) and solid loan growth. Average investment securities decreased $512 million largely from the first quarter 2023 balance sheet repositioning, while other interest-earning assets increased $99 million, mostly investable cash. As a result, the mix of average interest-earning assets shifted to 81% loans, 15% investment securities, and 4% other interest-earning assets (mostly cash) for 2023, compared to 74%, 23%, and 3%, respectively, for 2022.

Average interest-bearing liabilities were $5.3 billion for 2023, an increase of $560 million (12%) from 2022, also primarily due to the timing of the Charter acquisition. Average interest-bearing core deposits increased $430 million and average brokered deposits grew $124 million, reflecting the impact of the Charter acquisition and brokered funding to support the loan growth. Wholesale funding increased $5 million. The mix of average interest-bearing liabilities was 83% core deposits, 11% brokered deposits, and 6% other funding for 2023, compared to 84% core deposits, 10% brokered deposits, and 6% other funding in 2022.

The interest rate spread decreased 80 bps between the periods, as our liabilities have repriced faster than our assets in the rapidly rising interest rate environment. The interest-earning asset yield increased 114 bps to 5.02% for 2023, due to the changing mix of interest-earning assets (noted above), as well as the higher interest rate environment. The loan yield improved 84 bps to 5.48% for 2023, largely due to the repricing of new and renewed loans in a rising interest rate environment. The yield on investment securities increased 66 bps to 2.36%, and the yield on other interest-earning assets increased 337 to 5.28%. The cost of funds increased 194 bps to 2.65% for 2023, also reflecting the rising interest rate environment and the migration of customer deposits into higher rate

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deposit products. The contribution from net free funds increased 58 bps, mostly due to the higher value in a rising interest rate environment. As a result, the net interest margin was 3.18% for 2023, down 22 bps compared to 3.40% for 2022.

Tax-equivalent interest income was $385 million, up $109 million (40%) over 2022, comprised of $46 million higher volumes and $63 million higher average rates (mostly in the loan portfolio). Interest income on loans increased $98 million (40%) over 2022, due to higher average balances from the Charter acquisition and solid loan growth, as well as higher rates from the rising interest rate environment. Interest expense was $141 million for 2023, a $107 million increase over 2022, mostly due to a much higher cost of funds. Interest expense on deposits increased $104 million from 2022 due to the rising interest rate environment and the migration of customer deposits into higher rate deposit products.

Provision for Credit Losses

The provision for credit losses for 2023 was $5.0 million (comprised of $2.7 million related to the ACL-Loans and $2.3 million for the ACL on securities AFS). The 2022 provision for credit losses included $8 million for the required Day 2 ACL increase from the acquisition of Charter, and the remaining increase to support the strong loan growth. Comparatively, the 2021 provision for credit losses was largely due to the required Day 2 ACL increase from the acquisitions of County and Mackinac. Asset quality trends have been solid and net charge-offs were negligible for both years.

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

Noninterest Income

Table 4: Noninterest Income

Comparison of 2023 versus 2022

Noninterest income was $36 million for 2023, a decrease of $22 million (38%) from 2022, primarily due to the balance sheet repositioning. Excluding net asset gains (losses), noninterest income for 2023 was $69 million, a $14 million (26%) increase over 2022. Notable contributions to the change in noninterest income were:

•Wealth management fee income was $24 million for 2023, up $3 million (14%) from 2022, on growth in accounts and assets under management.

•Mortgage income includes 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 $7 million for 2023, down $1 million (16%) between the years, mostly due to the rising interest rate environment reducing secondary market volumes and the related gains on sales. See also “Off-Balance Sheet

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Arrangements, Lending-Related Commitments and Contractual Obligations” and Note 6, “Goodwill and Other Intangibles and Servicing Rights” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

•Card interchange income grew $1 million (12%) to $13 million in 2023 largely due to higher volume and activity.

•BOLI income increased $1 million (18%) to $5 million for 2023, attributable to higher average balances from BOLI acquired with the Charter acquisition.

•The Company sponsors a nonqualifed deferred compensation (“NQDC”) plan for certain employees, that fluctuates based upon market valuations of the underlying plan assets. See also “Noninterest Expense” for the offsetting fair value change to the NQDC plan liabilities and Note 10, “Employee and Director Benefit Plans” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for additional information on the NQDC plan.

•Loan servicing rights (“LSR”) income includes agricultural loan servicing fees net of the related LSR amortization. LSR income increased $6 million over 2022 mostly due to lower amortization from the much slower prepayment speeds in the higher interest rate environment. See also Note 6, “Goodwill and Other Intangibles and Servicing Rights” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for additional information on the LSR asset.

•Other income grew $1 million to $8 million for 2023, and included increases in card incentives income, swap fees, crop insurance sales and broker fees, as well as a gain on the early extinguishment of debt.

•Net asset losses of $33 million in 2023 were primarily attributable to losses of $38 million on the sale of approximately $500 million (par value) U.S. Treasury held to maturity securities executed in early March as part of a balance sheet repositioning, as well as net losses of $3 million on the sale of certain available for sale securities, partly offset by a $9 million gain on the sale of Nicolet’s member interest in UFS, LLC. Net asset gains in 2022 of $3 million were primarily attributable to gains on sales of other real estate owned (mostly closed bank branch locations). Additional information on the net gains is also included in Note 16, “Asset Gains (Losses), Net,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Noninterest Expense

Table 5: Noninterest Expense

Comparison of 2023 versus 2022

Noninterest expense was $186 million, an increase of $25 million (16%) over 2022. Personnel costs increased $10 million (12%), while non-personnel expenses combined increased $15 million (21%) over 2022. Notable contributions to the change in noninterest expense were:

•Personnel expense was $99 million for 2023, an increase of $10 million (12%) over 2022. Salary expense increased $6 million (9%) over 2022, reflecting higher salaries from the larger employee base (with average full-time equivalent employees up 8%, mostly due to the Charter acquisition), merit increases between the years, and investments in our wealth team, partly offset by lower incentive compensation commensurate with the lower current year earnings. Fringe benefits increased $4 million (32%) over 2022, reflecting higher overall health care expenses as well as the larger employee base. Personnel expense was also impacted by the change in the fair value of the NQDC plan liabilities. See also “Noninterest Income” for the offsetting fair value change to the NQDC plan assets and Note 10, “Employee and Director Benefit Plans” in the Notes to Consolidated Financial Statements, under Part II, Item 8, for additional information on the NQDC plan.

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•Occupancy, equipment and office expense was $36 million for 2023, up $7 million (22%) from 2022, largely due to the expanded branch network with the Charter acquisition, as well as additional expense for software and technology solutions.

•Business development and marketing expense was $8 million for 2023, down $1 million (8%) from 2022, largely due to timing and extent of marketing donations, promotions, and media.

•Data processing expense was $20 million for 2023, up $5 million (37%) over 2022, mostly due to a $3 million early contract termination charge and volume-based increases in core processing charges.

•Intangible amortization increased $1 million (22%) between the years, due to higher amortization from the intangibles added with the Charter acquisition.

•Other expense was $11 million for 2023, an increase of $2 million (17%) over 2022, mostly due to higher professional fees.

Income Taxes

Income tax expense was $25 million (effective tax rate of 29.0%) for 2023, compared to $31 million (effective tax rate of 25.0%) for 2022. The change in income tax expense was due to lower pretax earnings, and also included a $9 million charge to income tax expense to establish a tax valuation allowance related to the Wisconsin tax law change noted in the “Overview” section.

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 and assumptions concerning accounting pronouncements and federal and state tax codes; therefore, income taxes are considered a critical accounting estimate. The Company had a $9 million valuation allowance at December 31, 2023, while no valuation allowance was determined to be necessary at December 31, 2022. Additional information on the subjectivity of income taxes is discussed further under “Critical Accounting Estimates-Income Taxes.” The Company’s income taxes accounting policy is described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional disclosures relative to income taxes are included in Note 13, “Income Taxes” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

BALANCE SHEET ANALYSIS

Loans

Nicolet services a diverse customer base primarily throughout Wisconsin, Michigan and Minnesota. 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”) and the U.S. Department of Agriculture’s Farm Service Agency (“FSA”). In addition to the discussion that follows, accounting policies, general loan portfolio characteristics, and credit risk are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional loan related 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.

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

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Table 6: Period End Loan Composition

As noted in Table 6 above, the loan portfolio at December 31, 2023 was 76% commercial-based and 24% retail-based, compared to 78% commercial-based and 22% retail-based at December 31, 2022. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Total loans were $6.4 billion at December 31, 2023, an increase of $173 million (3%), compared to total loans of $6.2 billion at December 31, 2022, with growth in residential mortgage and agricultural loans. At December 31, 2023, commercial and industrial loans represented the largest segment of Nicolet’s loan portfolio at 20% of the total portfolio, followed by residential mortgage at 19% of the total portfolio. The loan portfolio is widely diversified and included the following industries: manufacturing, wholesaling, paper, packaging, food production and processing, agriculture, forest products, hospitality, retail, service, and businesses supporting the general building industry. The following chart provides the distribution of our commercial loan portfolio at December 31, 2023.

Commercial Loan Portfolio by Industry Type (based on NAICS codes)

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Table 7: Loan Maturity Distribution

The following table presents the maturity distribution of the loan portfolio at December 31, 2023.

* The residential construction loans with a loan maturity after five years represent a construction to permanent loan product.

Allowance for Credit Losses - Loans

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

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

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

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

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

At December 31, 2023, the ACL-Loans was $64 million (representing 1.00% of period end loans) compared to $62 million (representing 1.00% of period end loans) at December 31, 2022. The increase in the ACL-Loans during 2023 was due to solid organic loan growth, while the increase in the ACL-Loans during 2022 was largely due to the acquisition of Charter, which added $8 million of provision for the Day 2 allowance and $2 million related to purchased credit deteriorated loans. Net charge-offs (0.01% of average loans) remain negligible. The components of the ACL-Loans are detailed further in Tables 8 and 9 below.

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Table 8: Allowance for Credit Losses - Loans

The allocation of the ACL-Loans by loan category for each of the past three years is shown in Table 9. The largest portions of the ACL-Loans were allocated to commercial & industrial loans, agricultural, and CRE investment loans, representing 24% , 20%, and 20%, respectively, of the ACL-Loans at December 31, 2023. In comparison, the largest portions of the ACL-Loans were allocated to commercial & industrial loans and CRE investment loans, representing 26% and 21%, respectively, of the ACL-Loans at December 31, 2022. This change in allocated ACL-Loans was attributable to the change in loan portfolio composition, as well as changes in current and forecasted risk trends within loan categories.

Table 9: Allocation of the Allowance for Credit Losses - 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 identify problem loans early and minimize the risk of loss. Management continues to actively work with customers and monitor credit risk from the ongoing macroeconomic challenges. In addition to the discussion that follows, accounting policies for

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loans and the ACL-Loans are described in Note 1, “Nature of Business and Significant Accounting Policies,” and additional credit quality disclosures are included in Note 4, “Loans, Allowance for Credit Losses - Loans, and Credit Quality,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonperforming assets include nonperforming loans and other real estate owned. At December 31, 2023, nonperforming assets were $28 million and represented 0.33% of total assets, compared to $40 million or 0.46% of total assets at December 31, 2022. The reduction in nonperforming assets between the years was mostly due to the sale of specific nonaccrual loans.

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 $68 million and $53 million at December 31, 2023 and 2022, respectively, with the increase primarily due to the downgrade of one commercial credit relationship. Potential problem loans require heightened management review given the pace at which a credit may deteriorate, the potential duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 10: Nonperforming Assets

Investment Securities Portfolio

The investment securities portfolio is intended to provide Nicolet with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to Nicolet. All investment securities are classified at the time of purchase as available for sale (“AFS”) or held to maturity (“HTM”). In addition to the discussion that follows, the investment securities portfolio accounting policies are described in Note 1, “Nature of Business and Significant Accounting

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Policies,” and additional disclosures are included in Note 3, “Securities and Other Investments,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

At December 31, 2023, the investment securities portfolio totaled $803 million (representing 9% of total assets), all classified as securities AFS, compared to investment securities of $1.6 billion (representing 18% of total assets) at December 31, 2022, comprised of $918 million securities AFS and $679 million securities HTM. The primary change in the investment securities portfolio during 2023 was related to the first quarter sale of $500 million (par value) U.S. Treasury HTM securities for a pre-tax loss of $38 million or an after-tax loss of $28 million to reposition the balance sheet for future growth. As a result of the sale of securities previously classified as HTM, the remaining unsold portfolio of HTM securities (with a book value of $177 million) was reclassified to AFS (with a carrying value of approximately $157 million). The unrealized loss on this portfolio of $20 million (at the time of reclassification) increased the balance of accumulated other comprehensive loss $15 million, net of the deferred tax effect, and is subject to future market changes with the rest of the AFS portfolio. The fair value of the total securities AFS portfolio was an unrealized loss of $73 million at December 31, 2023, a slight improvement from the unrealized loss of $79 million at December 31, 2022.

Nicolet also had other investments of $58 million and $65 million at December 31, 2023 and 2022, 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.

Table 11: Investment Securities Portfolio Maturity Distribution (1)

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

Deposits

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

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Table 12: Period End Deposit Composition

Total deposits were $7.2 billion at December 31, 2023, up slightly ($19 million) over year-end 2022, and included a shift to higher rate deposit products (mostly to money market and time deposits).

On average, deposits grew $474 million (7%) between 2023 and 2022 (as detailed in Table 2), primarily due to the timing of the Charter acquisition (in August 2022) and brokered funding to support loan growth. Average customer deposits (core) increased $349 million (6%), while average brokered deposits increased $124 million (25%) over the prior year.

At December 31, 2023, Nicolet had $310 million of time deposits that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000. The following table provides information on the maturity distribution of those time deposits, including the portion of those time deposits in excess of the FDIC insurance limits (over $250,000) as of December 31, 2023.

Table 13: Maturity Distribution of Uninsured Time Deposits

Estimated total uninsured deposits were $2.1 billion (representing 29% of total deposits) and $2.3 billion (representing 32% of total deposits) as of December 31, 2023 and 2022, respectively.

Other Funding Sources

Other funding sources include short-term and long-term borrowings. Short-term borrowings (with an original contractual maturity of one year or less) generally may consist of short-term FHLB advances, customer repurchase agreements or federal funds purchased. Long-term borrowings (with an original contractual maturity of over one year) include FHLB advances, junior subordinated debentures, and subordinated notes. The interest on all long-term borrowings is current.

Short-term borrowings were $317 million (all in FHLB advances) at December 31, 2022, compared to none at December 31, 2023. Long-term borrowings were $167 million and $225 million at December 31, 2023 and 2022, respectively. See Note 9, “Short and Long-Term Borrowings,” of the Notes to Consolidated Financial Statements under Part II, Item 8 for additional disclosures and see section “Liquidity Management,” for information on available funding sources at December 31, 2023.

RISK MANAGEMENT AND CAPITAL

Liquidity Management

Liquidity management refers to the ability to ensure that adequate liquid funds are available to meet the current and future cash flow obligations arising in the daily operations of the Company. These cash flow obligations include the ability to meet the commitments to borrowers for extensions of credit, accommodate deposit cycles and trends, fund capital expenditures, pay dividends to stockholders (if any), and satisfy other operating expenses. The Company’s most liquid assets are cash and due from banks and

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interest-earning deposits, which totaled $491 million and $155 million at December 31, 2023 and 2022, respectively. Balances of these liquid assets are dependent on our operating, investing, and financing activities during any given period.

The $337 million increase in cash and cash equivalents since year-end 2022 included $108 million net cash provided by operating activities (mostly earnings) and $591 million net cash provided by investing activities (mostly investment sales from the balance sheet repositioning), partially offset by $363 million net cash used in financing activities (mostly repayment of FHLB advances from the balance sheet repositioning). As of December 31, 2023, management believed that adequate liquidity existed to meet all projected cash flow obligations.

Nicolet’s primary sources of funds include the core deposit base, repayment and maturity of loans, investment securities calls, maturities, and sales, and procurement of brokered deposits or other wholesale funding. At December 31, 2023, approximately 45% of the investment securities portfolio was pledged as collateral to secure public deposits and borrowings, as applicable, and for liquidity or other purposes as required by regulation. Liquidity sources available to the Company at December 31, 2023, are presented in Table 14 below.

Table 14: Liquidity Sources

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, 2023, the Parent Company had $88 million in cash. Additional cash sources available to the Parent Company include access to the public or private markets to issue new equity, subordinated notes or other debt. Dividends from the Bank and, to a lesser extent, stock option exercises, represent significant sources of cash flows for the Parent Company. The Bank is required by federal law to obtain prior approval of the OCC for payments of dividends if the total of all dividends declared by the Bank in any year will exceed certain thresholds, as more fully described in “Business—Regulation of the Bank – Payment of Dividends” and in Note 17, “Regulatory Capital Requirements,” in the Notes to the Consolidated Financial Statements under Part II, Item 8. Management does not believe that regulatory restrictions on dividends from the Bank will adversely affect its ability to meet its cash obligations.

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

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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. 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, 2023 and 2022, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 15 below. The results were within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table 15: Interest Rate Sensitivity

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

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

Capital

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

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

The Company’s and the Bank’s regulatory capital ratios remain above minimum regulatory ratios, including the capital conservation buffer. At December 31, 2023, 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 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 16.

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Table 16: Capital

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, dividends, or repayment of equity-equivalent debt) in light of strategic plans. Through an ongoing repurchase program, the Board has authorized the repurchase of Nicolet’s common stock as an alternative use of capital. At December 31, 2023, there remained $46 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, 2023, interest rate lock commitments to originate residential mortgage loans held for sale of $13 million (included in the commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale of $13 million are considered derivative instruments. Further information and discussion of these commitments is included in Note 14, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, under Part II, Item 8.

The table below outlines the principal amounts and timing of Nicolet’s contractual obligations. The amounts presented below exclude amounts due for interest, if applicable, and include any unamortized premiums / discounts or other similar carrying value adjustments. As of December 31, 2023, Nicolet had the following contractual obligations. Further discussion of the nature of each obligation is included in the referenced note of the Notes to Consolidated Financial Statements, under Part II, Item 8.

Table 17: Contractual Obligations

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on historical experience, current information, and other factors deemed to be relevant; accordingly, as this information changes, actual results could differ from those estimates. Nicolet considers accounting estimates to be critical to reported financial results if the accounting estimate requires management to make assumptions about matters that are highly uncertain and different estimates that management reasonably could have used for the accounting

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estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements. The accounting estimates we consider to be critical include business combinations and the valuation of loans acquired, the determination of the allowance for credit losses, and income taxes. In addition to the discussion that follows, the accounting policies related to these critical estimates are included in Note 1, “Nature of Business and Significant Accounting Policies,” in the Notes to Consolidated Financial Statements, under Part II, Item 8.

Business Combinations and Valuation of Loans Acquired in Business Combinations

We account for acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at the estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Management finalizes 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 and assumptions based on information available as of the acquisition date. Loans acquired in a business combination 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 inherently subjective as it requires material estimates and assumptions. This evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect our estimate of lifetime expected 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.

The allowance 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, the model considers reasonable and supportable economic 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 current 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, 2023. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements.

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

Income Taxes

Nicolet is subject to the federal income tax laws of the United States, and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different

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interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company’s income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management’s analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities.