UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2018

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

For the transition period from…………to………………

Commission file number 001-37700

NICOLET BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

WISCONSIN	47-0871001
(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)

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)
Emerging Growth Company x

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

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

As of April 24, 2018 there were 9,643,374 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

TABLE OF CONTENTS

			PAGE
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Consolidated Balance Sheets March 31, 2018 (unaudited) and December 31, 2017	3
		Consolidated Statements of IncomeThree Months Ended March 31, 2018 and 2017 (unaudited)	4
		Consolidated Statements of Comprehensive IncomeThree Months Ended March 31, 2018 and 2017 (unaudited)	5
		Consolidated Statement of Stockholders’ Equity Three Months Ended March 31, 2018 (unaudited)	6
		Consolidated Statements of Cash FlowsThree Months Ended March 31, 2018 and 2017 (unaudited)	7
		Notes to Unaudited Consolidated Financial Statements	8-28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29-43
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
	Item 4.	Controls and Procedures	43
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	43
	Item 1A.	Risk Factors	43
	Item 2.	Unregistered Sales of Equity Securities and Use of  Proceeds	44
	Item 3.	Defaults Upon Senior Securities	44
	Item 4.	Mine Safety Disclosures	44
	Item 5.	Other Information	44
	Item 6.	Exhibits	44
		Signatures	45

2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS:

NICOLET BANKSHARES, INC.

Consolidated Balance Sheets
(In thousands, except share and per share data)

	March 31, 2018 (Unaudited)			December 31, 2017 (Audited)
Assets
Cash and due from banks	$	51,523		$	86,191
Interest-earning deposits		380,755			68,008
Federal funds sold		737			734
Cash and cash equivalents		433,015			154,933
Certificates of deposit in other banks		1,248			1,746
Securities available for sale (“AFS”), at fair value		401,130			405,153
Other investments		17,431			14,837
Loans held for sale		7,880			4,666
Loans		2,100,597			2,087,925
Allowance for loan losses		(12,765	)		(12,653	)
Loans, net		2,087,832			2,075,272
Premises and equipment, net		46,263			47,151
Bank owned life insurance (“BOLI”)		64,895			64,453
Goodwill and other intangibles, net		127,224			128,406
Accrued interest receivable and other assets		37,017			35,816
Total assets	$	3,223,935		$	2,932,433
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits	$	899,481		$	631,831
Interest-bearing deposits		1,865,609			1,839,233
Total deposits		2,765,090			2,471,064
Short-term borrowings		-			-
Long-term borrowings		77,112			78,046
Accrued interest payable and other liabilities		17,082			18,444
Total liabilities		2,859,284			2,567,554
Stockholders’ Equity:
Common stock		97			98
Additional paid-in capital		257,470			263,835
Retained earnings		112,905			102,391
Accumulated other comprehensive loss		(6,484	)		(2,146	)
Total Nicolet Bankshares, Inc. stockholders’ equity		363,988			364,178
Noncontrolling interest		663			701
Total stockholders’ equity and noncontrolling interest		364,651			364,879
Total liabilities, noncontrolling interest and stockholders’ equity	$	3,223,935		$	2,932,433
Preferred shares authorized (no par value)		10,000,000			10,000,000
Preferred shares issued and outstanding		-			-
Common shares authorized (par value $0.01 per share)		30,000,000			30,000,000
Common shares outstanding		9,698,997			9,818,247
Common shares issued		9,726,783			9,849,167

See accompanying notes to unaudited consolidated financial statements.

3

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Income

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

	Three Months Ended March 31,
	2018		2017
Interest income:
Loans, including loan fees	$	28,454	$	21,095
Investment securities:
Taxable		1,342		1,069
Tax-exempt		588		565
Other interest income		401		354
Total interest income		30,785		23,083
Interest expense:
Deposits		3,089		1,187
Short-term borrowings		3		21
Long-term borrowings		819		558
Total interest expense		3,911		1,766
Net interest income		26,874		21,317
Provision for loan losses		510		450
Net interest income after provision for loan losses		26,364		20,867
Noninterest income:
Service charges on deposit accounts		1,190		1,008
Mortgage income, net		1,080		842
Trust services fee income		1,606		1,467
Brokerage fee income		1,604		1,259
Card interchange income		1,243		980
BOLI income		442		401
Rent income		308		272
Gain (loss) on sale, disposal or write-down of assets, net		204		(6	)
Other income		1,147		546
Total noninterest income		8,824		6,769
Noninterest expense:
Personnel		12,492		9,933
Occupancy, equipment and office		3,787		2,831
Business development and marketing		1,342		929
Data processing		2,320		1,983
FDIC assessments		273		232
Intangibles amortization		1,182		1,163
Other expense		1,246		1,252
Total noninterest expense		22,642		18,323
Income before income tax expense		12,546		9,313
Income tax expense		2,908		3,032
Net income		9,638		6,281
Less: Net income attributable to noncontrolling interest		61		73
Net income attributable to Nicolet Bankshares, Inc.	$	9,577	$	6,208
Earnings per common share:
Basic	$	0.98	$	0.72
Diluted	$	0.94	$	0.69
Weighted average common shares outstanding:
Basic		9,765,375		8,584,289
Diluted		10,224,788		8,958,425

See accompanying notes to unaudited consolidated financial statements.

4

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

	Three Months Ended March 31,
	2018			2017
Net income	$	9,638		$	6,281
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities AFS:
Net unrealized holding gains (losses) arising during the period		(4,658	)		2,870
Income tax (expense) benefit		1,257			(1,120	)
Total other comprehensive income (loss)		(3,401	)		1,750
Comprehensive income	$	6,237		$	8,031

See accompanying notes to unaudited consolidated financial statements.

5

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands) (Unaudited)

	Nicolet Bankshares, Inc. Stockholders’ Equity
	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Noncontrolling Interest			Total
Balance December 31, 2017	$	98		$	263,835		$	102,391	$	(2,146	)	$	701		$	364,879
Comprehensive income:
Net income		-			-			9,577		-			61			9,638
Other comprehensive loss		-			-			-		(3,401	)		-			(3,401	)
Stock compensation expense		-			1,220			-		-			-			1,220
Exercise of stock options, net		-			427			-		-			-			427
Issuance of common stock		-			51			-		-			-			51
Purchase and retirement of common stock		(1	)		(8,063	)		-		-			-			(8,064	)
Distribution from noncontrolling interest		-			-			-		-			(99	)		(99	)
Adoption of ASU 2016-01 (See Notes 1 and 5)		-			-			937		(937	)		-			-
Balance, March 31, 2018	$	97		$	257,470		$	112,905	$	(6,484	)	$	663		$	364,651

See accompanying notes to unaudited consolidated financial statements.

6

ITEM 1. Financial Statements Continued:

NICOLET BANKSHARES, INC.

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Three Months Ended March 31,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	9,638		$	6,281
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		1,741			1,598
Provision for loan losses		510			450
Increase in cash surrender value of life insurance		(442	)		(401	)
Stock compensation expense		1,220			384
(Gain) loss on sale, disposal or write-down of assets, net		(204	)		6
Gain on sale of loans held for sale, net		(905	)		(553	)
Proceeds from sale of loans held for sale		47,396			39,269
Origination of loans held for sale		(49,808	)		(38,857	)
Net change in:
Accrued interest receivable and other assets		(985	)		(377	)
Accrued interest payable and other liabilities		(105	)		(904	)
Net cash provided by operating activities		8,056			6,896
Cash Flows From Investing Activities:
Net decrease in certificates of deposit in other banks		498			749
Purchases of securities AFS		(15,901	)		(48,222	)
Proceeds from calls and maturities of securities AFS		11,835			11,133
Proceeds from sales of other investments		-			5,829
Purchases of other investments		(36	)		-
Net increase in loans		(11,313	)		(44,795	)
Net (increase) decrease in premises and equipment		(400	)		344
Net (increase) decrease in other real estate and other assets		(15	)		224
Net cash used by investing activities		(15,332	)		(74,738	)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits		294,105			(23,715	)
Net increase in short-term borrowings		-			6,000
Repayments of long-term borrowings		(1,062	)		-
Purchase and retirement of common stock		(8,064	)		(79	)
Proceeds from issuance of common stock, net		478			812
Distribution from noncontrolling interest		(99	)		-
Net cash provided (used) by financing activities		285,358			(16,982	)
Net increase (decrease) in cash and cash equivalents		278,082			(84,824	)
Cash and cash equivalents:
Beginning	$	154,933		$	129,103
Ending *	$	433,015		$	44,279
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	3,956		$	1,938
Cash paid for taxes		54			-
Transfer of loans and bank premises to other real estate owned		32			513
Capitalized mortgage servicing rights		103			185
Transfer of loans from held for sale to held for investment		-			3,236

* Cash and cash equivalents include restricted cash of $7.5 million and $0 million at March 31, 2018 and 2017, respectively, for the reserve balance required with the Federal Reserve Bank.

See accompanying notes to unaudited consolidated financial statements.

7

NICOLET BANKSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

General

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

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

Critical Accounting Policies and Estimates

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

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

Recent Accounting Developments Adopted

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718). ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification to the terms and conditions of a share-based payment award. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the updated guidance effective January 1, 2018 with no material impact on its consolidated financial statements.

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

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

8

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

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

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should 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. In August 2015, the FASB issued an amendment to defer the effective date for all entities by one year. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the updated guidance using the modified retrospective approach effective January 1, 2018 with no material impact on its consolidated financial statements. See Note 10 for the new disclosures related to this ASU.

Operating Segment

While the chief 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.

Reclassifications

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

Note 2 – Acquisition

On April 28, 2017, the Company consummated its merger with First Menasha Bancshares, Inc. (“First Menasha”) pursuant to the Agreement and Plan of Merger by and between the Company and First Menasha dated November 3, 2016, (the “Merger Agreement”), whereby First Menasha was merged with and into the Company, and The First National Bank-Fox Valley, the wholly owned commercial bank subsidiary of First Menasha serving the Fox Valley area of Wisconsin, was merged with and into Nicolet National Bank (the “Bank”). The system integration was completed, and five branches of First Menasha opened on May 1, 2017, as Nicolet National Bank branches, expanding its presence in Calumet and Winnebago Counties, Wisconsin. The Company closed one of its Calumet County locations concurrently with the First Menasha merger.

9

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 Fox Valley area of Wisconsin.

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

Upon consummation, the Company added $480 million in assets, $351 million in loans, $375 million in deposits, $4 million in core deposit intangible, and $41 million of goodwill. The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of First Menasha prior to the consummation date were not 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.

Note 3 – Earnings per Common Share

Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of shares adjusted for the dilutive effect of common stock awards (outstanding stock options and unvested restricted stock), if any. Presented below are the calculations for basic and diluted earnings per common share.

	Three Months Ended March 31,
(In thousands except per share data)	2018		2017
Net income attributable to Nicolet Bankshares, Inc.	$	9,577	$	6,208
Weighted average common shares outstanding		9,765		8,584
Effect of dilutive common stock awards		460		374
Diluted weighted average common shares outstanding		10,225		8,958
Basic earnings per common share*	$	0.98	$	0.72
Diluted earnings per common share*	$	0.94	$	0.69

*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.

For the three months ended March 31, 2018, options to purchase approximately 0.1 million shares are excluded from the calculation of diluted earnings per common share as the effect of their exercise would have been anti-dilutive. There was no anti-dilutive effect of options outstanding at March 31, 2017.

10

Note 4 – Stock-based Compensation

The Company may grant stock options and restricted stock under its stock-based compensation plans to certain officers, employees and directors. A Black-Scholes model is utilized to estimate the fair value of stock option grants, while the market price of the Company’s stock at the date of grant is used to estimate the value of restricted stock awards. The weighted average assumptions used in the Black-Scholes model for valuing stock option grants for the three months ended March 31, 2018 were as follows. There were no stock options granted during the three months ended March 31, 2017.

	Three Months Ended March 31, 2018
Dividend yield		0	%
Expected volatility		25	%
Risk-free interest rate		2.48	%
Expected average life		7 years
Weighted average per share fair value of options	$	17.60

Activity in the Company’s Stock Incentive Plans is summarized in the following tables:

Stock Options	Option Shares Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Life (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding – December 31, 2017		1,643,255		$	39.82
Granted		10,000			54.06
Exercise of stock options *		(19,796	)		21.61
Forfeited		(3,500	)		42.32
Outstanding – March 31, 2018		1,629,959		$	40.12		7.9	$	24,569
Exercisable – March 31, 2018		380,909		$	23.63		5.3	$	11,674

* The terms of the stock option agreements permit having a number of shares of stock withheld, the fair market value of which as of the date of exercise is sufficient to satisfy the exercise price and/or tax withholding requirements, and accordingly no share were surrendered to the Company for the three months ended March 31, 2018.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options. The intrinsic value of options exercised for the three months ended March 31, 2018 and 2017 was approximately $0.7 million and $1.2 million, respectively.

Restricted Stock	Weighted- Average Grant Date Fair Value		Restricted Shares Outstanding
Outstanding – December 31, 2017	$	34.26		30,920
Granted		56.01		3,000
Vested *		31.45		(6,134	)
Forfeited		-		-
Outstanding – March 31, 2018	$	37.24		27,786

* The terms of the restricted stock agreements permit the surrender of shares to the Company upon vesting in order to satisfy applicable tax withholding requirements at the minimum statutory withholding rate, and accordingly, 1,492 shares were surrendered during the three months ended March 31, 2018.

The Company recognized approximately $1.2 million and $384,000 of stock-based compensation expense during the three months ended March 31, 2018 and 2017, respectively, associated with its common stock awards. As of March 31, 2018, there was approximately $15.8 million of unrecognized compensation cost related to equity award grants. The cost is expected to be recognized over the remaining vesting period of approximately four years. The Company recognized a tax benefit of approximately $0.2 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively, for the tax impact of stock option exercises and vesting of restricted stock.

11

Note 5 - Securities Available for Sale

Amortized costs and fair values of securities available for sale are summarized as follows:

	March 31, 2018
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross  Unrealized  Losses		Fair Value
U.S. government agency securities	$	26,707	$	-	$	522	$	26,185
State, county and municipals		179,951		75		4,117		175,909
Mortgage-backed securities		155,040		106		4,023		151,123
Corporate debt securities		48,314		210		611		47,913
Total	$	410,012	$	391	$	9,273	$	401,130

	December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agency securities	$	26,586	$	-	$	377	$	26,209
State, county and municipals		186,128		180		2,264		184,044
Mortgage-backed securities		157,705		160		2,333		155,532
Corporate debt securities		36,387		449		39		36,797
Equity securities *		1,287		1,284		-		2,571
Total	$	408,093	$	2,073	$	5,013	$	405,153

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. Such securities are no longer reflected as securities AFS. As a result of this accounting change, in the first quarter of 2018 the Company recognized a cumulative-effect adjustment from accumulated other comprehensive income to retained earnings of approximately $0.9 million in the consolidated statement of stockholders’ equity for the net of tax impact of the unrealized gain on equity securities as of the date of adoption and recognized a loss of $25,000 in the consolidated statements of income for the change in fair value on equity securities since adoption. In addition, the approximately $2.5 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets rather than as securities AFS. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard.

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

	March 31, 2018
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair  Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	10,364	$	162	$	15,821	$	360	$	26,185	$	522		2
State, county and municipals		110,719		2,137		48,123		1,980		158,842		4,117		468
Mortgage-backed securities		73,606		1,522		65,367		2,501		138,973		4,023		228
Corporate debt securities		31,632		611		-		-		31,632		611		16
Total	$	226,321	$	4,432	$	129,311	$	4,841	$	355,632	$	9,273		714

	December 31, 2017
	Less than 12 months				12 months or more				Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair  Value		Unrealized Losses		Number of Securities
U.S. government agency securities	$	26,209	$	377	$	-	$	-	$	26,209	$	377		2
State, county and municipals		110,157		1,097		49,326		1,167		159,483		2,264		465
Mortgage-backed securities		72,210		735		65,537		1,598		137,747		2,333		215
Corporate debt securities		10,172		39		-		-		10,172		39		5
Total	$	218,748	$	2,248	$	114,863	$	2,765	$	333,611	$	5,013		687

As of March 31, 2018, the Company does not consider its securities AFS with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. The Company has the ability and intent to hold its securities to maturity. There were no other-than-temporary impairments charged to earnings during the three-month periods ended March 31, 2018 or 2017.

12

The amortized cost and fair values of securities AFS by contractual maturity at March 31, 2018 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.

	March 31, 2018
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	17,307	$	17,278
Due in one year through five years		128,152		126,324
Due after five years through ten years		102,246		98,947
Due after ten years		7,267		7,458
		254,972		250,007
Mortgage-backed securities		155,040		151,123
Securities available for sale	$	410,012	$	401,130

There were no sales of securities during the three-month periods ended March 31, 2018 or 2017.

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

The loan composition as of March 31, 2018 and December 31, 2017 is summarized as follows.

	Total
	March 31, 2018						December 31, 2017
(in thousands)	Amount			% of Total			Amount			% of Total
Commercial & industrial	$	650,197			31.0	%	$	637,337			30.5	%
Owner-occupied commercial real estate (“CRE”)		437,672			20.8			430,043			20.6
Agricultural (“AG”) production		33,741			1.6			35,455			1.7
AG real estate		53,412			2.5			51,778			2.5
CRE investment		323,048			15.4			314,463			15.1
Construction & land development		77,708			3.7			89,660			4.3
Residential construction		31,075			1.5			36,995			1.8
Residential first mortgage		365,318			17.4			363,352			17.4
Residential junior mortgage		105,903			5.0			106,027			5.1
Retail & other		22,523			1.1			22,815			1.0
Loans	$	2,100,597			100.0	%	$	2,087,925			100.0	%
Less allowance for loan losses		12,765						12,653
Loans, net	$	2,087,832					$	2,075,272
Allowance for loan losses to loans		0.61	%					0.61	%

	March 31, 2018												December 31, 2017
(in thousands)	Originated  Amount			% of  Total			Acquired  Amount			% of  Total			Originated  Amount			% of  Total			Acquired  Amount			% of  Total
Commercial & industrial	$	507,460			39.2	%	$	142,737			17.7	%	$	488,600			39.3	%	$	148,737			17.6	%
Owner-occupied CRE		247,049			19.1			190,623			23.7			237,548			19.1			192,495			22.8
AG production		10,515			0.8			23,226			2.9			11,102			0.9			24,353			2.9
AG real estate		30,014			2.3			23,398			2.9			27,831			2.2			23,947			2.8
CRE investment		131,426			10.2			191,622			23.8			113,862			9.2			200,601			23.8
Construction & land development		50,348			3.9			27,360			3.4			56,061			4.5			33,599			4.0
Residential construction		29,104			2.2			1,971			0.2			33,615			2.7			3,380			0.4
Residential first mortgage		202,567			15.7			162,751			20.2			191,186			15.4			172,166			20.4
Residential junior mortgage		67,654			5.2			38,249			4.7			65,643			5.3			40,384			4.8
Retail & other		18,611			1.4			3,912			0.5			18,254			1.4			4,561			0.5
Loans		1,294,748			100.0	%		805,849			100.0	%		1,243,702			100.0	%		844,223			100.0	%
Less ALLL		10,699						2,066						10,542						2,111
Loans, net	$	1,284,049					$	803,783					$	1,233,160					$	842,112
ALLL to loans		0.83	%					0.26	%					0.85	%					0.25	%

13

A roll forward of the allowance for loan losses for the three months ended March 31, 2018 and 2017, and the year ended December 31, 2017, respectively, is summarized as follows.

	Three Months Ended						Year Ended
(in thousands)	March 31, 2018			March 31, 2017			December 31, 2017
Beginning balance	$	12,653		$	11,820		$	11,820
Provision for loan losses		510			450			2,325
Charge-offs		(430	)		(111	)		(1,604	)
Recoveries		32			30			112
Net charge-offs		(398	)		(81	)		(1,492	)
Ending balance	$	12,765		$	12,189		$	12,653

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

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment at or for the three months ended March 31, 2018:

	TOTAL – Three Months Ended March 31, 2018
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653
Provision		545			34			(8	)		16			133			(232	)		(39	)		19			(31	)		73			510
Charge-offs		(343	)		(31	)		-			-			-			-			-			-			-			(56	)		(430	)
Recoveries		1			1			-			-			-			-			-			-			28			2			32
Net charge-offs		(342	)		(30	)		-			-			-			-			-			-			28			(54	)		(398	)
Ending balance	$	5,137		$	2,611		$	121		$	312		$	1,521		$	494		$	212		$	1,628		$	485		$	244		$	12,765
As percent of ALLL		40.2	%		20.5	%		0.9	%		2.4	%		11.9	%		3.9	%		1.7	%		12.8	%		3.8	%		1.9	%		100.0	%
ALLL:
Individually evaluated	$	115		$	-		$	-		$	-		$	35		$	-		$	-		$	-		$	-		$	-		$	150
Collectively evaluated		5,022			2,611			121			312			1,486			494			212			1,628			485			244			12,615
Ending balance	$	5,137		$	2,611		$	121		$	312		$	1,521		$	494		$	212		$	1,628		$	485		$	244		$	12,765
Loans:
Individually evaluated	$	6,273		$	1,886		$	-		$	235		$	2,798		$	1,049		$	80		$	3,060		$	87		$	12		$	15,480
Collectively evaluated		643,924			435,786			33,741			53,177			320,250			76,659			30,995			362,258			105,816			22,511			2,085,117
Total loans	$	650,197		$	437,672		$	33,741		$	53,412		$	323,048		$	77,708		$	31,075		$	365,318		$	105,903		$	22,523		$	2,100,597
Less ALLL	$	5,137		$	2,611		$	121		$	312		$	1,521		$	494		$	212		$	1,628		$	485		$	244		$	12,765
Net loans	$	645,060		$	435,061		$	33,620		$	53,100		$	321,527		$	77,214		$	30,863		$	363,690		$	105,418		$	22,279		$	2,087,832

14

As a further breakdown, the March 31, 2018 ALLL is summarized by originated and acquired as follows:

	Originated – Three Months Ended March 31, 2018
(in thousands)	Commercial  & industrial			Owner- occupied CRE			AG production			AG real  estate			CRE investment			Construction &  land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail &  other			Total
ALLL:
Beginning balance	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542
Provision		565			47			(6	)		16			116			(216	)		(30	)		20			(28	)		73			557
Charge-offs		(343	)		(31	)		-			-			-			-			-			-			-			(56	)		(430	)
Recoveries		-			-			-			-			-			-			-			-			28			2			30
Net charge-offs		(343	)		(31	)		-			-			-			-			-			-			28			(54	)		(400	)
Ending balance	$	4,414		$	2,131		$	106		$	251		$	1,270		$	412		$	170		$	1,317		$	409		$	219		$	10,699
As percent of ALLL		41.3	%		19.9	%		1.0	%		2.3	%		11.9	%		3.9	%		1.6	%		12.3	%		3.8	%		2.0			100.0	%
ALLL:
Individually evaluated	$	115		$	-		$	-		$	-		$	35		$	-		$	-		$	-		$	-		$	-		$	150
Collectively evaluated		4,299			2,131			106			251			1,235			412			170			1,317			409			219			10,549
Ending balance	$	4,414		$	2,131		$	106		$	251		$	1,270		$	412		$	170		$	1,317		$	409		$	219		$	10,699
Loans:
Individually evaluated	$	2,686		$	343		$	-		$	-		$	1,522		$	-		$	-		$	511		$	-		$	-		$	5,062
Collectively evaluated		504,774			246,706			10,515			30,014			129,904			50,348			29,104			202,056			67,654			18,611			1,289,686
Total loans	$	507,460		$	247,049		$	10,515		$	30,014		$	131,426		$	50,348		$	29,104		$	202,567		$	67,654		$	18,611		$	1,294,748
Less ALLL	$	4,414		$	2,131		$	106		$	251		$	1,270		$	412		$	170		$	1,317		$	409		$	219		$	10,699
Net loans	$	503,046		$	244,918		$	10,409		$	29,763		$	130,156		$	49,936		$	28,934		$	201,250		$	67,245		$	18,392		$	1,284,049

	Acquired – Three Months Ended March 31, 2018
(in  thousands)	Commercial   & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL:
Beginning balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111
Provision		(20	)		(13	)		(2	)		-			17			(16	)		(9	)		(1	)		(3	)		-			(47	)
Charge-offs		-			-			-			-			-			-			-			-			-			-			-
Recoveries		1			1			-			-			-			-			-			-			-			-			2
Net charge-offs		1			1			-			-			-			-			-			-			-			-			2
Ending balance	$	723		$	480		$	15		$	61		$	251		$	82		$	42		$	311		$	76		$	25		$	2,066
As percent of ALLL		35.0	%		23.2	%		0.7	%		3.0	%		12.1	%		4.0	%		2.0	%		15.1	%		3.7	%		1.2	%		100.0	%
ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		723			480			15			61			251			82			42			311			76			25			2,066
Ending balance	$	723		$	480		$	15		$	61		$	251		$	82		$	42		$	311		$	76		$	25		$	2,066
Loans:
Individually evaluated	$	3,587		$	1,543		$	-		$	235		$	1,276		$	1,049		$	80		$	2,549		$	87		$	12		$	10,418
Collectively evaluated		139,150			189,080			23,226			23,163			190,346			26,311			1,891			160,202			38,162			3,900			795,431
Total loans	$	142,737		$	190,623		$	23,226		$	23,398		$	191,622		$	27,360		$	1,971		$	162,751		$	38,249		$	3,912		$	805,849
Less ALLL	$	723		$	480		$	15		$	61		$	251		$	82		$	42		$	311		$	76		$	25		$	2,066
Net loans	$	142,014		$	190,143		$	23,211		$	23,337		$	191,371		$	27,278		$	1,929		$	162,440		$	38,173		$	3,887		$	803,783

15

The following tables present the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment at or for the year ended December 31, 2017:

	TOTAL – Year Ended December 31, 2017
(in thousands)	Commercial  & industrial			Owner-  occupied CRE			AG  production			AG real  estate			CRE  investment			Construction  & land  development			Residential  construction			Residential  first  mortgage			Residential  junior  mortgage			Retail &  other			Total
ALLL
Beginning balance	$	3,919		$	2,867		$	150		$	285		$	1,124		$	774		$	304		$	1,784		$	461		$	152		$	11,820
Provision		2,419			(290	)		(21	)		11			263			(35	)		(53	)		(192	)		96			127			2,325
Charge-offs		(1,442	)		-			-			-			-			(13	)		-			(8	)		(72	)		(69	)		(1,604	)
Recoveries		38			30			-			-			1			-			-			25			3			15			112
Net charge-offs		(1,404	)		30			-			-			1			(13	)		-			17			(69	)		(54	)		(1,492	)
Ending balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653
As percent of ALLL		39.0	%		20.6	%		1.0	%		2.3	%		11.0	%		5.7	%		2.0	%		12.7	%		3.9	%		1.8	%		100.0	%
ALLL:
Individually evaluated	$	163		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	163
Collectively evaluated		4,771			2,607			129			296			1,388			726			251			1,609			488			225			12,490
Ending balance	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653
Loans:
Individually evaluated	$	5,870		$	1,689		$	-		$	248		$	5,290		$	1,053		$	80		$	2,801		$	178		$	12		$	17,221
Collectively evaluated		631,467			428,354			35,455			51,530			309,173			88,607			36,915			360,551			105,849			22,803			2,070,704
Total loans	$	637,337		$	430,043		$	35,455		$	51,778		$	314,463		$	89,660		$	36,995		$	363,352		$	106,027		$	22,815		$	2,087,925
Less ALLL	$	4,934		$	2,607		$	129		$	296		$	1,388		$	726		$	251		$	1,609		$	488		$	225		$	12,653
Net loans	$	632,403		$	427,436		$	35,326		$	51,482		$	313,075		$	88,934		$	36,744		$	361,743		$	105,539		$	22,590		$	2,075,272

16

As a further breakdown, the December 31, 2017 ALLL is summarized by originated and acquired as follows:

	Originated – Year Ended December 31, 2017
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL
Beginning balance	$	3,150		$	2,263		$	122		$	222		$	893		$	656		$	266		$	1,372		$	373		$	132		$	9,449
Provision		2,429			(172	)		(10	)		13			261			(28	)		(66	)		(69	)		105			122			2,585
Charge-offs		(1,388	)		-			-			-			-			-			-			(8	)		(72	)		(69	)		(1,537	)
Recoveries		1			24			-			-			-			-			-			2			3			15			45
Net charge-offs		(1,387	)		24			-			-			-			-			-			(6	)		(69	)		(54	)		(1,492	)
Ending balance	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542
As percent of   ALLL		39.8	%		20.1	%		1.1	%		2.2	%		10.9	%		6.0	%		1.9	%		12.3	%		3.9	%		1.8	%		100.0	%
ALLL:
Individually evaluated	$	163		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	163
Collectively evaluated		4,029			2,115			112			235			1,154			628			200			1,297			409			200			10,379
Ending balance	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542
Loans:
Individually evaluated	$	2,189		$	-		$	-		$	-		$	549		$	-		$	-		$	253		$	12		$	-		$	3,003
Collectively evaluated		486,411			237,548			11,102			27,831			113,313			56,061			33,615			190,933			65,631			18,254			1,240,699
Total loans	$	488,600		$	237,548		$	11,102		$	27,831		$	113,862		$	56,061		$	33,615		$	191,186		$	65,643		$	18,254		$	1,243,702
Less ALLL	$	4,192		$	2,115		$	112		$	235		$	1,154		$	628		$	200		$	1,297		$	409		$	200		$	10,542
Net loans	$	484,408		$	235,433		$	10,990		$	27,596		$	112,708		$	55,433		$	33,415		$	189,889		$	65,234		$	18,054		$	1,233,160

	Acquired – Year Ended December 31, 2017
(in thousands)	Commercial & industrial			Owner- occupied CRE			AG production			AG real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
ALLL
Beginning balance	$	769		$	604		$	28		$	63		$	231		$	118		$	38		$	412		$	88		$	20		$	2,371
Provision		(10	)		(118	)		(11	)		(2	)		2			(7	)		13			(123	)		(9	)		5			(260	)
Charge-offs		(54	)		-			-			-			-			(13	)		-			-			-			-			(67	)
Recoveries		37			6			-			-			1			-			-			23			-			-			67
Net charge-offs		(17	)		6			-			-			1			(13	)		-			23			-			-			-
Ending balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111
As percent of ALLL		35.1	%		23.3	%		0.8	%		2.9	%		11.1	%		4.6	%		2.4	%		14.8	%		3.7	%		1.3	%		100.0	%
ALLL:
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		742			492			17			61			234			98			51			312			79			25			2,111
Ending balance	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111
Loans:
Individually evaluated	$	3,681		$	1,689		$	-		$	248		$	4,741		$	1,053		$	80		$	2,548		$	166		$	12		$	14,218
Collectively evaluated		145,056			190,806			24,353			23,699			195,860			32,546			3,300			169,618			40,218			4,549			830,005
Total loans	$	148,737		$	192,495		$	24,353		$	23,947		$	200,601		$	33,599		$	3,380		$	172,166		$	40,384		$	4,561		$	844,223
Less ALLL	$	742		$	492		$	17		$	61		$	234		$	98		$	51		$	312		$	79		$	25		$	2,111
Net loans	$	147,995		$	192,003		$	24,336		$	23,886		$	200,367		$	33,501		$	3,329		$	171,854		$	40,305		$	4,536		$	842,112

17

The following table presents nonaccrual loans by portfolio segment in total and then as a further breakdown by originated or acquired as of March 31, 2018 and December 31, 2017.

	Total Nonaccrual Loans
(in thousands)	March 31, 2018			% of Total			December 31, 2017			% of Total
Commercial & industrial	$	6,434			55.2	%	$	6,016			46.0	%
Owner-occupied CRE		744			6.4			533			4.1
AG production		-			-			-			-
AG real estate		175			1.5			186			1.4
CRE investment		2,105			18.1			4,531			34.6
Construction & land development		-			-			-			-
Residential construction		108			0.9			80			0.6
Residential first mortgage		1,883			16.1			1,587			12.1
Residential junior mortgage		212			1.8			158			1.2
Retail & other		-			-			4			-
Nonaccrual loans		11,661			100.0	%		13,095			100.0	%
Percent of total loans		0.6	%					0.6	%

	March 31, 2018										December 31, 2017
(in thousands)	Originated  Amount		% of  Total			Acquired  Amount		% of  Total			Originated  Amount		% of  Total			Acquired  Amount		% of  Total
Commercial & industrial	$	2,814		51.7	%	$	3,620		58.3	%	$	2,296		70.0	%	$	3,720		37.9	%
Owner-occupied CRE		411		7.5			333		5.4			86		2.6			447		4.6
AG production		-		-			-		-			-		-			-		-
AG real estate		-		-			175		2.8			-		-			186		1.9
CRE investment		1,522		28.0			583		9.3			549		16.8			3,982		40.6
Construction & land development		-		-			-		-			-		-			-		-
Residential construction		28		0.5			80		1.3			-		-			80		0.8
Residential first mortgage		672		12.3			1,211		19.5			331		10.1			1,256		12.8
Residential junior mortgage		-		-			212		3.4			12		0.4			146		1.4
Retail & other		-		-			-		-			4		0.1			-		-
Nonaccrual loans	$	5,447		100.0	%	$	6,214		100.0	%	$	3,278		100.0	%	$	9,817		100.0	%

18

The following tables present past due loans by portfolio segment as of March 31, 2018 and December 31, 2017:

	March 31, 2018
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	470		$	6,434		$	643,293		$	650,197
Owner-occupied CRE		-			744			436,928			437,672
AG production		-			-			33,741			33,741
AG real estate		-			175			53,237			53,412
CRE investment		-			2,105			320,943			323,048
Construction & land development		437			-			77,271			77,708
Residential construction		-			108			30,967			31,075
Residential first mortgage		1,258			1,883			362,177			365,318
Residential junior mortgage		72			212			105,619			105,903
Retail & other		127			-			22,396			22,523
Total loans	$	2,364		$	11,661		$	2,086,572		$	2,100,597
Percent of total loans		0.1	%		0.6	%		99.3	%		100.0	%

	December 31, 2017
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	211		$	6,016		$	631,110		$	637,337
Owner-occupied CRE		671			533			428,839			430,043
AG production		30			-			35,425			35,455
AG real estate		-			186			51,592			51,778
CRE investment		-			4,531			309,932			314,463
Construction & land development		76			-			89,584			89,660
Residential construction		587			80			36,328			36,995
Residential first mortgage		1,039			1,587			360,726			363,352
Residential junior mortgage		14			158			105,855			106,027
Retail & other		4			4			22,807			22,815
Total loans	$	2,632		$	13,095		$	2,072,198		$	2,087,925
Percent of total loans		0.1	%		0.6	%		99.3	%		100.0	%

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

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

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

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

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

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

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

19

The following tables present total loans by risk categories as of March 31, 2018 and December 31, 2017:

	March 31, 2018
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	610,654		$	18,692		$	11,621		$	9,230		$	-	$	-	$	650,197
Owner-occupied CRE		399,911			28,718			4,566			4,477			-		-		437,672
AG production		28,348			2,342			1,383			1,668			-		-		33,741
AG real estate		45,924			2,645			2,316			2,527			-		-		53,412
CRE investment		312,103			7,220			1,215			2,510			-		-		323,048
Construction & land development		73,832			3,092			17			767			-		-		77,708
Residential construction		30,967			-			-			108			-		-		31,075
Residential first mortgage		360,169			1,522			672			2,955			-		-		365,318
Residential junior mortgage		105,659			17			-			227			-		-		105,903
Retail & other		22,523			-			-			-			-		-		22,523
Total loans	$	1,990,090		$	64,248		$	21,790		$	24,469		$	-	$	-	$	2,100,597
Percent of total		94.7	%		3.1	%		1.0	%		1.2	%		-		-		100.0	%

	December 31, 2017
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	597,854		$	12,999		$	16,129		$	10,355		$	-	$	-	$	637,337
Owner-occupied CRE		397,357			23,340			6,442			2,904			-		-		430,043
AG production		30,431			4,000			-			1,024			-		-		35,455
AG real estate		44,321			4,873			-			2,584			-		-		51,778
CRE investment		299,926			8,399			190			5,948			-		-		314,463
Construction & land development		86,011			2,758			17			874			-		-		89,660
Residential construction		36,915			-			-			80			-		-		36,995
Residential first mortgage		358,067			1,868			683			2,734			-		-		363,352
Residential junior mortgage		105,736			117			-			174			-		-		106,027
Retail & other		22,811			-			-			4			-		-		22,815
Total loans	$	1,979,429		$	58,354		$	23,461		$	26,681		$	-	$	-	$	2,087,925
Percent of total		94.8	%		2.8	%		1.1	%		1.3	%		-		-		100.0	%

20

The following tables present impaired loans as of March 31, 2018 and December 31, 2017.

	Total Impaired Loans – March 31, 2018
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	6,273	$	10,457	$	115	$	6,535	$	164
Owner-occupied CRE		1,886		2,397		-		1,908		45
AG production		-		9		-		-		-
AG real estate		235		295		-		242		12
CRE investment		2,798		4,142		35		2,811		128
Construction & land development		1,049		1,049		-		1,051		12
Residential construction		80		983		-		80		-
Residential first mortgage		3,060		3,847		-		3,062		55
Residential junior mortgage		87		407		-		88		7
Retail & Other		12		14		-		12		-
Total	$	15,480	$	23,600	$	150	$	15,789	$	423
Originated impaired loans	$	5,062	$	5,062	$	150	$	5,283	$	74
Acquired impaired loans		10,418		18,538		-		10,506		349
Total	$	15,480	$	23,600	$	150	$	15,789	$	423

	Total Impaired Loans – December 31, 2017
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial & industrial	$	5,870	$	10,063	$	163	$	6,586	$	718
Owner-occupied CRE		1,689		2,256		-		1,333		132
AG production		-		10		-		-		-
AG real estate		248		307		-		233		26
CRE investment		5,290		8,102		-		5,411		465
Construction & land development		1,053		1,053		-		813		57
Residential construction		80		983		-		91		27
Residential first mortgage		2,801		3,653		-		2,177		180
Residential junior mortgage		178		507		-		154		17
Retail & Other		12		14		-		12		1
Total	$	17,221	$	26,948	$	163	$	16,810	$	1,623
Originated impaired loans	$	3,003	$	3,003	$	163	$	2,964	$	241
Acquired impaired loans		14,218		23,945		-		13,846		1,382
Total	$	17,221	$	26,948	$	163	$	16,810	$	1,623

Total purchased credit impaired loans (in aggregate since the Company’s 2013 acquisitions) were initially recorded at a fair value of $43.6 million on their respective acquisition dates, net of an initial $34.4 million non-accretable mark and a zero accretable mark. At March 31, 2018, $10.4 million of the $43.6 million remain in impaired loans.

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

	Three Months Ended						Year Ended
(in thousands)	March 31, 2018			March 31, 2017			December 31, 2017
Balance at beginning of period	$	9,471		$	14,327		$	14,327
Acquired balance, net		-			-			8,352
Accretion to loan interest income		(1,544	)		(2,160	)		(7,995	)
Transferred to accretable		(55	)		-			(1,936	)
Disposals of loans		-			(242	)		(3,277	)
Balance at end of period	$	7,872		$	11,925		$	9,471

21

Troubled Debt Restructurings

At March 31, 2018, there were seven loans classified as troubled debt restructurings with a current outstanding balance of $2.1 million and pre-modification balance of $3.4 million. In comparison, at December 31, 2017, there were eight loans classified as troubled debt restructurings with an outstanding balance of $5.6 million and pre-modification balance of $6.9 million. There were no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended March 31, 2018. As of March 31, 2018, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructurings.

Note 7 – Goodwill and Other Intangibles and Mortgage Servicing Rights

Management periodically reviews the carrying value of its intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. The Company’s quarterly assessment indicated no impairment charge on goodwill, core deposit intangibles or customer list intangibles was required for the year ended December 31, 2017 or the three months ended March 31, 2018.

	Three Months Ended		Year Ended
(in thousands)	March 31, 2018		December 31, 2017
Goodwill	$	107,366	$	107,366
Core deposit intangibles		15,407		16,477
Customer list intangibles		4,451		4,563
Other intangibles		19,858		21,040
Goodwill and other intangibles, net	$	127,224	$	128,406

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

Other intangible assets: Other intangible assets, consisting of core deposit intangibles (related to branch or bank acquisitions) and customer list intangibles (related to the customer relationships acquired in connection with the 2016 financial advisor business acquisition), are amortized over their estimated finite lives. During 2017, core deposit intangibles increased due to the First Menasha acquisition and customer list intangibles increased due to a modification to the contingent earn-out payment on the financial advisor business acquired in 2016, fixing the previously variable earn-out payment on a portion of the purchase price. See Note 2 for additional information on the First Menasha acquisition.

	Three Months Ended			Year Ended
(in thousands)	March 31, 2018			December 31, 2017
Core deposit intangibles:
Gross carrying amount	$	29,015		$	29,015
Accumulated amortization		(13,608	)		(12,538	)
Net book value	$	15,407		$	16,477
Additions during the period	$	-		$	3,670
Amortization during the period	$	1,070		$	4,294
Customer list intangibles:
Gross carrying amount	$	5,233		$	5,233
Accumulated amortization		(782	)		(670	)
Net book value	$	4,451		$	4,563
Additions during the period	$	-		$	870
Amortization during the period	$	112		$	401

22

Mortgage servicing rights: Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date, with the amortization recorded in mortgage income, net, in the consolidated statements of income. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets in the consolidated balance sheets. Activity in the mortgage servicing rights asset for the year ended December 31, 2017 and the three months ended March 31, 2018 was as follows:

	Three Months Ended			Year Ended
(in thousands)	March 31, 2018			December 31, 2017
Mortgage servicing rights (MSR) asset:
MSR asset at beginning of year	$	3,187		$	1,922
Capitalized MSR		103			876
MSR asset acquired		-			874
Amortization during the period		(150	)		(485	)
MSR asset at end of period	$	3,140		$	3,187
Fair value of MSR asset at end of period	$	4,039		$	4,097
Residential mortgage loans serviced for others	$	515,263		$	518,419
Net book value of MSR asset to loans serviced for others		0.61	%		0.61	%

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

The following table shows the estimated future amortization expense for amortizing intangible assets and the MSR asset. The projections are based on existing asset balances, the current interest rate environment and prepayment speeds as of the March 31, 2018. 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
Year ending December 31,
2018 (remaining nine months)	$	2,845	$	337	$	434
2019		3,337		449		578
2020		2,657		449		728
2021		2,167		449		326
2022		1,735		449		326
Thereafter		2,666		2,318		748
Total	$	15,407	$	4,451	$	3,140

23

Note 8 – Short and Long-Term Borrowings

Short-Term Borrowings:

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

Long-Term Borrowings:

The components of long-term borrowings (borrowing with an original maturity greater than one year) at March 31, 2018 and December 31, 2017 were as follows:

(in thousands)	March 31, 2018		December 31, 2017
FHLB advances	$	35,445	$	36,509
Junior subordinated debentures		29,736		29,616
Subordinated notes		11,931		11,921
Total long-term borrowings	$	77,112	$	78,046

FHLB Advances: The FHLB advances bear fixed rates and require interest-only monthly payments. The weighted average rate of the FHLB advances was 1.72% and 1.71% at March 31, 2018 and December 31, 2017, respectively.

The following table shows the maturity schedule of the FHLB advances as of March 31, 2018.

Maturing in:	(in thousands)
2018 (remaining nine months)	$	17
2019		-
2020		10,000
2021		-
2022		25,428
	$	35,445

Junior Subordinated Debentures: The following table shows the breakdown of junior subordinated debentures as of March 31, 2018 and December 31, 2017. Interest on all debentures is current. Any applicable discounts (initially recorded to carry an acquired debenture at its then estimated fair market value) are being accreted to interest expense over the remaining life of the debentures. All the debentures below are currently callable and may be redeemed in part or in full at par plus any accrued but unpaid interest.

		Junior Subordinated Debentures
(in thousands)	Maturity Date	Par		3/31/2018 Unamortized Discount			3/31/2018 Carrying Value		12/31/2017 Carrying Value
2004 Nicolet Bankshares Statutory Trust(1)	7/15/2034	$	6,186	$	-		$	6,186	$	6,186
2005 Mid-Wisconsin Financial Services, Inc.(2)	12/15/2035		10,310		(3,521	)		6,789		6,739
2006 Baylake Corp.(3)	9/30/2036		16,598		(4,297	)		12,301		12,242
2004 First Menasha Bancshares, Inc.(4)	3/17/2034		5,155		(695	)		4,460		4,449
Total		$	38,249	$	(8,513	)	$	29,736	$	29,616

⁽¹⁾ The interest rate is 8.00% fixed.

⁽²⁾ The debentures, assumed in April 2013 as the result of an acquisition, have a floating rate of the three-month LIBOR plus 1.43%, adjusted quarterly. The interest rates were 3.55% and 3.02% as of March 31, 2018 and December 31, 2017, respectively.

⁽³⁾ The debentures, assumed in April 2016 as a result of an acquisition, have a floating rate of the three-month LIBOR plus 1.35%, adjusted quarterly. The interest rates were 3.66% and 3.04% as of March 31, 2018 and December 31, 2017, 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 4.98% and 4.39% as of March 31, 2018 and December 31, 2017, respectively.

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

24

Note 9 - Fair Value Measurements

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

The Company records and/or discloses financial instruments on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are: Level 1 - quoted market prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date; Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; Level 3 – significant unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the fair value measurement is based on inputs from different levels, the level within which the entire fair value measurement will be categorized is based on the lowest level input that is significant to the fair value measurement in its entirety; this assessment of the significance of an input requires management judgment.

Recurring basis fair value measurements:

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

(in thousands)			Fair Value Measurements Using
Measured at Fair Value on a Recurring Basis:	Total		Level 1		Level 2		Level 3
March 31, 2018:
U.S. government agency securities	$	26,185	$	-	$	26,185	$	-
State, county and municipals		175,909		-		175,778		131
Mortgage-backed securities		151,123		-		151,123		-
Corporate debt securities		47,913		-		39,449		8,464
Securities AFS	$	401,130	$	-	$	392,535	$	8,595
Other investments (equity securities) *	$	2,546	$	2,546	$	-	$	-
December 31, 2017:
U.S. government agency securities	$	26,209	$	-	$	26,209	$	-
State, county and municipals		184,044		-		183,386		658
Mortgage-backed securities		155,532		-		155,529		3
Corporate debt securities		36,797		-		28,307		8,490
Equity securities  *		2,571		2,571		-		-
Securities AFS	$	405,153	$	2,571	$	393,431	$	9,151

* Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. In addition, the approximately $2.5 million current fair value of equity securities is now reflected within other investments on the consolidated balance sheets compared to securities AFS at December 31, 2017. Prior periods have not been restated for the impact of this accounting change. See Note 1 for additional information on this new accounting standard and see Note 5 for additional information on the impact to securities AFS.

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

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

(in thousands)	Three Months Ended			Year Ended
Level 3 Fair Value Measurements:	March 31, 2018			December 31, 2017
Balance at beginning of year	$	9,151		$	9,108
Acquired balance		-			189
Paydowns/Sales/Settlements		(556	)		(146	)
Balance at end of period	$	8,595		$	9,151

Nonrecurring basis fair value measurements:

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

			Fair Value Measurements Using
Measured at Fair Value on a Nonrecurring Basis:	Total		Level 1		Level 2		Level 3
(in thousands)
March 31, 2018:
Impaired loans	$	15,330	$	-	$	-	$	15,330
Other real estate owned (“OREO”)		1,367		-		-		1,367
MSR asset		3,140		-		-		3,140
December 31, 2017:
Impaired loans	$	17,058	$	-	$	-	$	17,058
OREO		1,294		-		-		1,294
MSR asset		3,187		-		-		3,187

The following is a description of the valuation methodologies used by the Company for the items noted in the table above. For individually evaluated impaired loans, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, the estimated fair value of the underlying collateral for collateral-dependent loans, or the estimated liquidity of the note. For OREO, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell. To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of the expected future cash flows for each stratum.

Financial instruments:

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

March 31, 2018
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	433,015	$	433,015	$	433,015	$	-	$	-
Certificates of deposit in other banks		1,248		1,234		-		1,234		-
Securities AFS		401,130		401,130		-		392,535		8,595
Other investments, including equity securities		17,431		17,431		2,546		13,177		1,708
Loans held for sale		7,880		7,920		-		7,920		-
Loans, net		2,087,832		2,082,372		-		-		2,082,372
BOLI		64,895		64,895		64,895		-		-
MSR asset		3,140		4,039		-		-		4,039
Financial liabilities:
Deposits	$	2,765,090	$	2,763,061	$	-	$	-	$	2,763,061
FHLB advances		35,445		35,447		-		35,447		-
Junior subordinated debentures		29,736		29,141		-		-		29,141
Subordinated notes		11,931		11,504		-		-		11,504

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December 31, 2017
(in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	154,933	$	154,933	$	154,933	$	-	$	-
Certificates of deposit in other banks		1,746		1,746		-		1,746		-
Securities AFS		405,153		405,153		2,571		393,431		9,151
Other investments		14,837		14,837		-		13,142		1,695
Loans held for sale		4,666		4,750		-		4,750		-
Loans, net		2,075,272		2,068,382		-		-		2,068,382
BOLI		64,453		64,453		64,453		-		-
MSR asset		3,187		4,097		-		-		4,097
Financial liabilities:
Deposits	$	2,471,064	$	2,469,456	$	-	$	-	$	2,469,456
FHLB advances		36,509		36,510		-		36,510		-
Junior subordinated debentures		29,616		29,024		-		-		29,024
Subordinated notes		11,921		11,495		-		-		11,495

Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, bank owned life insurance, short-term borrowings, and nonmaturing deposits. For those financial instruments not previously disclosed the following is a description of the valuation methodologies used.

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

Other investments: The valuation methodologies utilized for exchange-traded equity securities are discussed under “Recurring Basis Fair Value Measurements” above. The carrying amount of Federal Reserve Bank, Bankers Bank, Federal Agricultural Mortgage Corporation, and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a Level 2 measurement. The carrying amount of the remaining other investments (particularly common stocks of companies or other banks that are not publicly traded) approximates their fair value, determined primarily by analysis of company financial statements and recent capital issuances of the respective companies or banks, if any, and represents a Level 3 measurement.

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

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

MSR asset: To estimate the fair value of the MSR asset, the underlying serviced loan pools are stratified by interest rate tranche and term of the loan, and a valuation model is used to calculate the present value of expected future cash flows for each stratum. When the carrying value of the MSR asset related to a stratum exceeds its fair value, the stratum is recorded at fair value, generally through a valuation allowance. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, ancillary income, default rates and losses, and prepayment speeds. Although some of these assumptions are based on observable market data, other assumptions are based on unobservable estimates of what market participants would use to measure fair value. As a result, the fair value measurement of MSR asset is considered a Level 3 measurement.

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

FHLB advances: The fair value of the FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities and represents a Level 2 measurement.

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Junior subordinated debentures and subordinated notes: The fair values of these debt instruments utilize a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality. Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement.

Lending-related commitments: At March 31, 2018 and December 31, 2017, the estimated fair value of letters of credit, loan commitments on which the committed interest rate is less than the current market rate, and outstanding mandatory commitments to sell residential mortgage loans into the secondary market was insignificant.

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

Note 10 – Revenue Recognition

As of January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

The main types of revenue contracts are:

Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will be either party. The contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

Trust services and brokerage fee income: A contract between the Company and its customers for fiduciary and / or investment administration services on trust accounts and brokerage accounts. Trust services and brokerage fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust or brokerage account is serviced. Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

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

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

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

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

Forward-Looking Statements

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

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

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

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

· potential difficulties in integrating the operations of Nicolet with those of acquired entities, if any;

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

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

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

Overview

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

The timing of Nicolet’s April 2017 acquisition of First Menasha Bancshares, Inc. (“First Menasha”), at approximately 20% of pre-merger assets at the time of acquisition, impacts financial comparisons. Certain income statement results, average balances and related ratios for the first quarter of 2018 and for the third and fourth quarters of 2017 each include three months of First Menasha operations, versus no contribution of First Menasha in the first quarter 2017 period and two months of contribution in the second quarter of 2017. Given the merger activity, quarterly results included non-recurring other direct merger and integration pre-tax expenses of $0.2 million and $0.3 million in the first and second quarters of 2017, respectively.

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Performance Summary

Table 1: Earnings Summary and Selected Financial Data

(In thousands, except per share data)	At and for the Quarter Ended
	March 31, 2018			December 31, 2017			September 30, 2017			June 30, 2017			March 31, 2017
Results of operations:
Interest income	$	30,785		$	29,836		$	29,454		$	26,880		$	23,083
Interest expense		3,911			3,329			3,063			2,353			1,766
Net interest income		26,874			26,507			26,391			24,527			21,317
Provision for loan losses		510			450			975			450			450
Net interest income after provision for loan losses		26,364			26,057			25,416			24,077			20,867
Noninterest income		8,824			8,621			10,164			9,085			6,769
Noninterest expense		22,642			21,858			20,862			20,313			18,323
Income before income tax expense		12,546			12,820			14,718			12,849			9,313
Income tax expense		2,908			3,662			5,133			4,440			3,032
Net income		9,638			9,158			9,585			8,409			6,281
Net income attributable to noncontrolling interest		61			55			74			81			73
Net income attributable to Nicolet Bankshares, Inc.	$	9,577		$	9,103		$	9,511		$	8,328		$	6,208
Earnings per common share:
Basic	$	0.98		$	0.93		$	0.97		$	0.88		$	0.72
Diluted	$	0.94		$	0.88		$	0.91		$	0.83		$	0.69
Common Shares:
Basic weighted average		9,765			9,805			9,837			9,516			8,584
Diluted weighted average		10,225			10,368			10,409			9,992			8,958
Outstanding		9,699			9,818			9,799			9,863			8,605
Period-End Balances:
Loans	$	2,100,597		$	2,087,925		$	2,051,122		$	2,009,964		$	1,618,279
Allowance for loan losses		12,765			12,653			12,610			12,591			12,189
Goodwill and other intangibles, net		127,224			128,406			129,588			128,871			86,776
Total assets		3,223,935			2,932,433			2,845,730			2,825,917			2,292,644
Deposits		2,765,090			2,471,064			2,366,951			2,389,971			1,946,271
Stockholders’ equity		363,988			364,178			360,426			352,384			285,022
Book value per common share		37.53			37.09			36.78			35.73			33.12
Tangible book value per common share		24.41			24.01			23.56			22.66			23.04
Average Balances:
Loans	$	2,114,345		$	2,066,974		$	2,035,277		$	1,888,320		$	1,599,701
Interest-earning assets		2,584,070			2,531,066			2,505,073			2,336,124			2,028,291
Goodwill and other intangibles, net		127,801			128,980			129,158			115,698			87,344
Total assets		2,896,533			2,852,400			2,825,542			2,635,925			2,272,836
Deposits		2,436,103			2,385,821			2,377,229			2,214,865			1,929,062
Interest-bearing liabilities		1,925,443			1,835,375			1,854,340			1,779,366			1,526,780
Stockholders’ equity		366,002			361,455			358,227			329,201			280,188
Financial Ratios *:
Return on average assets		1.34	%		1.27	%		1.34	%		1.27	%		1.11	%
Return on average common equity		10.61	%		9.99	%		10.53	%		10.15	%		8.99	%
Return on average tangible common equity		16.31	%		15.53	%		16.47	%		15.64	%		13.06	%
Stockholders’ equity to assets		11.29	%		12.42	%		12.67	%		12.47	%		12.43	%
Average equity to average assets		12.64	%		12.67	%		12.68	%		12.49	%		12.33	%
Net interest margin		4.20	%		4.21	%		4.24	%		4.27	%		4.32	%
Net loan charge-offs to average loans		0.08	%		0.08	%		0.19	%		0.01	%		0.02	%
Nonperforming loans to total loans		0.56	%		0.63	%		0.70	%		0.84	%		0.85	%
Nonperforming assets to total assets		0.40	%		0.49	%		0.55	%		0.66	%		0.70	%
Effective tax rate		23.18	%		28.56	%		34.88	%		34.56	%		32.56	%
Selected Tax Items:
Tax expense (benefit) on stock-based compensation	$	(159	)	$	(1,678	)	$	(15	)	$	(64	)	$	(97	)
Tax expense (benefit) of tax reform items		-			896			-			-			-

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

Net income was $9.6 million for the first quarter of 2018, up $0.5 million over $9.1 million for the fourth quarter of 2017. Net income increased 5% between the linked quarters, while diluted weighted average shares declined 1%, resulting in a 7% increase in diluted earnings per share of $0.94 for first quarter 2018 compared to $0.88 for fourth quarter 2017. Compared to the first quarter of 2017, net income increased 54%, while diluted weighted average shares increased 14% from shares issued in the April 2017 acquisition offset partly by shares repurchased over the year, resulting in a 36% increase in diluted earnings per share between the first quarter periods.

· Net interest income increased $0.4 million or 1% over fourth quarter 2017, despite fewer earning days, comprised of a $0.9 million increase in interest income (attributable to $0.3 million higher aggregate discount income and higher earning asset volumes) and a $0.5 million increase in interest expense (driven mostly by rising rates). Compared to first quarter 2017, net interest income increased $5.6 million or 26%, predominantly due to the addition of acquired net interest-earning assets, as well as organic growth. For additional information regarding net interest income, see “Income Statement Analysis — Net Interest Income.”

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· Noninterest income increased $0.2 million or 2% over fourth quarter 2017, most notably due to $0.2 million of net gains on the sale of fixed assets and $0.3 million of annual card incentives, offset by $0.3 million lower net mortgage income on slower seasonal volumes. Compared to first quarter 2017, noninterest income grew $2.1 million or 30%, aided by the 2017 acquisition and stronger wealth management revenues, as well as the net gain and card incentive in first quarter 2018. For additional information regarding noninterest income, see “Income Statement Analysis — Noninterest Income.”

· Noninterest expense increased $0.8 million or 4% over fourth quarter 2017, as expenses reset with the new year, including increases of $0.4 million or 4% in personnel expense, $0.1 million in occupancy (largely elevated utilities and snowplowing), and $0.3 million or 4% across all other noninterest expense categories combined. Compared to first quarter 2017, noninterest expense was up $4.3 million or 24%, primarily attributable to the larger operating base resulting from the 2017 acquisition. For additional information regarding noninterest expense, see “Income Statement Analysis — Noninterest Expense.”

· Income tax expense for first quarter 2018 benefited from the lower corporate tax rate effective in 2018, due to the passage of the Tax Cuts and Jobs Act in December 2017, as well as a $0.2 million tax benefit for the tax impact of stock option exercises. Fourth quarter 2017 income tax expense was impacted by $0.9 million of additional tax expense from the Company’s evaluation of its deferred tax positions under the lower corporate tax rate and a $1.7 million benefit for the tax impact of large stock option exercises during that quarter. First quarter 2017 income tax expense included a $0.1 million tax benefit for the tax impact of stock option exercises. As a result, the effective tax rate was 23.2% for first quarter 2018, 28.6% for fourth quarter 2017, and 32.6% for first quarter 2017.

· At March 31, 2018, assets were $3.2 billion and deposits were $2.8 billion, both increasing $0.3 billion over December 31, 2017, attributable to a $0.3 billion short-term transaction deposit of a long-standing commercial customer. Excluding the impact of this deposit transaction, total assets and deposits were minimally changed compared to year-end 2017. Compared to March 31, 2017, assets increased $0.9 billion primarily due to the 2017 acquisition, organic growth and the customer deposit noted above.

· Loans were $2.1 billion at March 31, 2018, 1% higher than year-end 2017 and 30% higher than March 31, 2017 (primarily due to the 2017 acquisition and strong organic growth). Quarterly average loans continued on a rising trend, up 2% over fourth quarter 2017, or 9% annualized, and up 32% from first quarter 2017. For additional information regarding loans, see “Balance Sheet Analysis — Loans.”

· Total deposits were $2.8 billion at March 31, 2018, $0.3 billion or 12% higher than year-end 2017 (attributable to the customer deposit noted above) and $0.8 billion or 42% higher than March 31, 2017 (primarily due to the 2017 acquisition and strong organic growth). Quarterly average deposits grew 2% over fourth quarter 2017 and increased 26% from first quarter 2017. For additional information regarding deposits, see “Balance Sheet Analysis – Deposits.”

· Asset quality remains sound. Nonperforming assets declined to $13 million, representing 0.40% of total assets at March 31, 2018, down favorably from 0.49% at December 31, 2017 and 0.70% at March 31, 2017. For additional information regarding nonperforming assets, see “Balance Sheet Analysis – Nonperforming Assets.”

INCOME STATEMENT ANALYSIS

Net Interest Income

Tax-equivalent net interest income is a non-GAAP measure, but is a preferred industry measurement of net interest income (and its use in calculating a net interest margin) as it enhances the comparability of net interest income arising from taxable and tax-exempt sources.

Tables 2 through 4 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: Quarterly Average Balance Sheet and Net Interest Income Analysis – Tax-Equivalent Basis

	For the Three Months Ended March 31,
	2018							2017
(in thousands)	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
ASSETS
Earning assets
Loans, including loan fees (1)(2)	$	2,114,345	$	28,500		5.39	%	$	1,599,701	$	21,185		5.30	%
Investment securities:
Taxable		244,800		1,342		2.19	%		208,833		1,069		2.05	%
Tax-exempt (2)		156,314		840		2.15	%		159,308		1,062		2.67	%
Other interest-earning assets		68,611		401		2.35	%		60,449		354		2.35	%
Total interest-earning assets		2,584,070	$	31,083		4.81	%		2,028,291	$	23,670		4.67	%
Other assets, net		312,463							244,545
Total assets	$	2,896,533						$	2,272,836
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	273,145	$	218		0.32	%	$	224,889	$	58		0.10	%
Interest-bearing demand		561,638		1,073		0.77	%		405,439		402		0.40	%
Money market (“MMA”)		590,730		723		0.50	%		552,418		194		0.14	%
Core time deposits		303,723		866		1.16	%		274,940		510		0.75	%
Brokered deposits		117,987		209		0.72	%		22,510		23		0.41	%
Total interest-bearing deposits		1,847,223		3,089		0.68	%		1,480,196		1,187		0.33	%
Other interest-bearing liabilities		78,220		822		4.20	%		46,584		579		4.97	%
Total interest-bearing liabilities		1,925,443		3,911		0.82	%		1,526,780		1,766		0.47	%
Noninterest-bearing demand		588,880							448,866
Other liabilities		16,208							17,002
Stockholders’ equity		366,002							280,188
Total liabilities and stockholders’ equity	$	2,896,533						$	2,272,836
Net interest income and rate spread			$	27,172		3.99	%			$	21,904		4.20	%
Tax-equivalent adjustment			$	298						$	587
Net interest margin						4.20	%						4.32	%

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

(2) The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% for 2018 periods and 34% for 2017 periods and adjusted for the disallowance of interest expense.

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

	For the Three Months Ended March 31, 2018 Compared to March 31, 2017:
	Increase (Decrease) Due to Changes in
(in thousands)	Volume			Rate			Net (1)
Earning assets
Loans (2)	$	7,053		$	262		$	7,315
Investment securities:
Taxable		335			(62	)		273
Tax-exempt (2)		(20	)		(202	)		(222	)
Other interest-earning assets		4			43			47
Total interest-earning assets	$	7,372		$	41		$	7,413
Interest-bearing liabilities
Savings	$	14		$	146		$	160
Interest-bearing demand		197			474			671
MMA		14			515			529
Core time deposits		58			298			356
Brokered deposits		158			28			186
Total interest-bearing deposits		441			1,461			1,902
Other interest-bearing liabilities		205			38			243
Total interest-bearing liabilities		646			1,499			2,145
Net interest income	$	6,726		$	(1,458	)	$	5,268

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

(2) The yield on tax-exempt loans and tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 21% for 2018 periods and 34% for 2017 periods and adjusted for the disallowance of interest expense.

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Table 4: Interest Rate Spread, Margin and Average Balance Mix – Tax-Equivalent Basis

	For the Three Months Ended March 31,
	2018								2017
(in thousands)	Average Balance		% of Earning Assets			Yield/Rate			Average Balance		% of Earning Assets			Yield/Rate
Total loans	$	2,114,345		81.8	%		5.39	%	$	1,599,701		78.9	%		5.30	%
Securities and other earning assets		469,725		18.2	%		2.20	%		428,590		21.1	%		2.32	%
Total interest-earning assets	$	2,584,070		100.0	%		4.81	%	$	2,028,291		100.0	%		4.67	%
Interest-bearing liabilities	$	1,925,443		74.5	%		0.82	%	$	1,526,780		75.3	%		0.47	%
Noninterest-bearing funds, net		658,627		25.5	%					501,511		24.7	%
Total funds sources	$	2,584,070		100.0	%		0.61	%	$	2,028,291		100.0	%		0.35	%
Interest rate spread							3.99	%							4.20	%
Contribution from net free funds							0.21	%							0.12	%
Net interest margin							4.20	%							4.32	%

Net interest income in the consolidated statements of income (which excludes any tax-equivalent adjustment) was $26.9 million in the first three months of 2018, 26% higher than $21.3 million in the first three months of 2017. Tax-equivalent adjustments (adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that been subject to a 21% tax rate for 2018 periods and a 34% tax rate for 2017 periods) were $0.3 million for the first three months of 2018 and $0.6 million for the first three months of 2017, resulting in tax-equivalent net interest income of $27.2 million and $21.9 million, respectively.

Tax-equivalent net interest income increased $5.3 million or 24% versus the comparable period in 2017, with $6.7 million from favorable volume and mix variances (due to the addition of First Menasha net interest earning assets, as well as organic growth), partially offset by $1.4 million from unfavorable rate variances (driven mostly by rising rates on funding). Tax-equivalent interest income on earning assets increased $7.4 million or 31% between the three-month periods, primarily due to $7.3 million more interest from loans, including $7.0 million from greater volume and $0.3 million from rates, attributable to $0.3 million higher aggregate discount accretion income (with $0.3 million more related to accretable marks, $0.6 million less from favorably resolved PCI loan marks, and $0.6 million more recovered nonaccrual interest of resolved PCI loans between the periods). Interest expense increased $2.1 million, led by $1.5 million higher interest on interest-bearing liabilities from unfavorable rate variances (reflecting increases in select deposit rates since mid-2017 and general rate pressures influenced by a 100 bps increase in the federal funds rate since January 1, 2017) and $0.6 million of unfavorable volume variances (mostly acquired deposits and a higher proportion of brokered deposits).

The tax-equivalent net interest margin was 4.20% for the first three months of 2018, down 12 bps versus the first three months of 2017. The interest rate spread decreased 21 bps between the first quarter periods due to a higher cost of funds (up 35 bps to 0.82% for first quarter 2018), offset partly by a favorable increase in the earning asset yield (up 14 bps to 4.81% for first quarter 2018, slightly tempered by the lower tax-equivalent rate between 2018 and 2017). The contribution from net free funds increased 9 bps, due to the increase in noninterest-bearing demand deposits and the higher rate environment. Since January 1, 2017, the Federal Reserve raised short-term interest rates by 100 bps to 1.75% as of March 31, 2018 (up 25 bps in each of March 2017, June 2017, December 2017, and March 2018). These increases have impacted the rate earned on cash and variable rate loans, as well as the cost of short-term borrowings and variable rate funding, but have not ratably influenced rates further out on the yield curve; and thus, yields on new investments and pricing on new and renewing loans have improved, but to a lesser degree. Additionally, while both 2018 and 2017 periods experienced favorable income from discount accretion on acquired loans, particularly where such loans pay or resolve at better than their carrying values, such favorable interest flow can be sporadic and will diminish over time.

The earning asset yield was influenced largely by the mix of underlying earning assets, particularly carrying a higher proportion of loans and a lower proportion of investments and other interest-earning assets. Loans represented 82% and 79% of average earning assets for the first three months of 2018 and 2017, respectively, yielding 5.39% and 5.30%, respectively. Non-loan earning assets (investment securities and other interest earning assets combined) represented 18% and 21% of average earning assets for the first three months of 2018, and 2017, respectively, yielding 2.20% and 2.32%, respectively. The 9 bps increase in loan yield between the three-month periods was mostly due to new loans and renewals booked over the year in the rising rate environment and was partly due to the $0.3 million higher aggregate discount income. The 12 bps decrease in non-loan earning assets was primarily attributable to the lower corporate effective tax rate for 2018 reducing the benefit of tax-exempt investment securities.

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Average interest-earning assets were $2.6 billion for the first three months of 2018, $0.6 billion, or 27% higher than the first three months of 2017. The change consisted of a $0.5 billion increase in average loans (up 32% to $2.1 billion), a $33 million net increase in investment securities (up 9% to $401 million) and an $8 million increase in other interest-earning assets, predominantly low earning cash.

Nicolet’s cost of funds increased 35 bps to 0.82% for the first three months of 2018 compared to a year ago, driven by the cost of deposits. The average cost of interest-bearing deposits, was 0.68% and 0.33% for the first three months of 2018 and 2017, respectively. The 35 bps increase was partly attributable to the inclusion of higher-costing First Menasha deposits, as well as from increases in select deposit rates made in the second half of 2017 and again selectively in first quarter 2018, responding to general rate pressures influenced by the 100 bps increase in the federal funds rate since the start of 2017.

Average interest-bearing liabilities were $1.9 billion for the first three months of 2018, up $399 million or 26% from the comparable period in 2017, predominantly attributable to acquired balances and organic deposit growth. Interest-bearing deposits represented 96% and 97% of average interest-bearing liabilities for the first three months of 2018 and 2017, respectively, while the mix of average interest-bearing deposits moved largely from higher costing core time deposits to lower costing transaction accounts, and an increase in brokered deposits acquired.

Provision for Loan Losses

The provision for loan losses was $510,000 for the three months ended March 31, 2018, exceeding net charge-offs of $398,000. In comparison, the provision for loan losses for the three months ended March 31, 2017, was $450,000, exceeding net charge-offs of $81,000. Asset quality trends remained strong with continued resolutions of problem loans. The ALLL was $12.8 million (0.61% of loans) at March 31, 2018, compared to $12.7 million (0.61% of loans) at December 31, 2017 and $12.2 million (0.75% of loans) at March 31, 2017. The decline in this ratio from March 31, 2017 is primarily due to recording the First Menasha loan portfolio at fair value with no carryover of its allowance at the time of the merger.

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

Noninterest Income

Table 5: Noninterest Income

	Three Months Ended March 31,
(in thousands)	2018		2017			$ Change		% Change
Trust services fee income	$	1,606	$	1,467		$	139		9.5	%
Brokerage fee income		1,604		1,259			345		27.4
Mortgage income, net		1,080		842			238		28.3
Service charges on deposit accounts		1,190		1,008			182		18.1
Card interchange income		1,243		980			263		26.8
Bank owned life insurance (“BOLI”) income		442		401			41		10.2
Rent income		308		272			36		13.2
Other income		1,147		546			601		110.1
Noninterest income without net gains and losses	$	8,620	$	6,775		$	1,845		27.2	%
Gain (loss) on sale, disposal or write-down of assets, net		204		(6	)		210		N/M
Total noninterest income	$	8,824	$	6,769		$	2,055		30.4	%
N/M means not meaningful.

Noninterest income was $8.8 million for the first three months of 2018, compared to $6.8 million for the first three months of 2017, aided partly by the First Menasha acquisition.

Trust service fees were up $0.1 million or 10% between the first quarter periods due to higher assets under management. Between the first quarter periods, brokerage fees were up $0.3 million or 27%, attributable to growth within the financial advisor business.

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, offsetting MSR amortization, valuation changes, if any, and to a smaller degree some related income. Net mortgage income increased $0.2 million or 28% between the comparable first quarter periods due to higher secondary mortgage production (aided by a broader geographic footprint) and increased net servicing fees on the growing portfolio of mortgage loans serviced for others.

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Service charges on deposit accounts were $1.2 million for the first three months of 2018, up $0.2 million or 18% over the first three months of 2017, resulting from an increased number of accounts mostly from the First Menasha acquisition and an increase to the fee charged on overdrafts implemented during mid-2017. Card interchange income grew $0.3 million or 27% due to higher volume and activity.

BOLI income was up 10% over the first three months of 2017, commensurate with the growth in average BOLI investments. Other noninterest income was $1.1 million, up $0.6 million or 110% over the first quarter of 2017, mostly attributable to an increase of $0.3 million in income from the equity interest in UFS (a data processing company acquired in the 2016 Baylake merger) and $0.3 million of annual card contract incentives received in first quarter 2018.

The 2018 activity in net gain on sale, disposal or write-down of assets was attributable to $0.2 million of net gains on the sale of fixed assets; while the 2017 activity consisted of a $0.4 million gain on the sale of a former bank branch, offset by $0.4 million of net losses and write-downs on assets and OREO properties, predominantly the write-down on two closed bank branches transferred to OREO.

Noninterest Expense

Table 6: Noninterest Expense

	For the Three Months Ended March 31,
(in thousands)	2018		2017		Change			% Change
Personnel	$	12,492	$	9,933	$	2,559			25.8	%
Occupancy, equipment and office		3,787		2,831		956			33.8
Business development and marketing		1,342		929		413			44.5
Data processing		2,320		1,983		337			17.0
FDIC assessments		273		232		41			17.7
Intangibles amortization		1,182		1,163		19			1.6
Other expense		1,246		1,252		(6	)		(0.5	)
Total noninterest expense	$	22,642	$	18,323	$	4,319			23.6	%
Non-personnel expenses	$	10,150	$	8,390	$	1,760			21.0	%
Average full-time equivalent employees		544		488		56			11.5	%

Total noninterest expense was $22.6 million for the first three months of 2018, compared to $18.3 million for the first three months of 2017 (including approximately $0.2 million attributable to non-recurring, merger-based expenses such as legal and conversion processing costs related to the First Menasha merger). The $4.3 million, or 24%, increase between the first quarter periods was primarily attributable to the larger operating base as a result of the First Menasha acquisition.

Personnel expense was $12.5 million for the first three months of 2018, up $2.6 million or 26% compared to the first three months of 2017, partly due to the expanded workforce resulting from the 2017 acquisition, with average full-time equivalent employees up 11% between the comparable three-month periods. Additionally, the increase results from merit increases between the periods, additional competitive market-based wage increases made more broadly across staff positions at the start of 2018, cash and equity incentives timing, and higher health and other benefits costs.

Occupancy, equipment and office expense was $3.8 million for the first three months of 2018, up $1.0 million or 34% compared to 2017, primarily the result of the larger operating base and higher software and technology costs.

Business development and marketing expense increased $0.4 million, or 45%, between the comparable three-month periods, largely due to $0.3 million higher donation expense, as well as the expanded operating base influencing additional marketing, promotions and media.

Data processing expenses, which are primarily volume-based, rose $0.3 million or 17% between the first quarter periods; however, excluding the $0.1 million of merger-based processing expense from the 2017 period, data processing expense would have increased $0.4 million or 23%, in line with the higher volumes from the 2017 acquisition and organic growth.

Intangible amortization increased due to the addition of core deposit intangibles related to the First Menasha acquisition, offset partly by lower amortization on the aging intangibles of previous acquisitions. Other noninterest expense was minimally changed between the comparable first quarter periods; however, removing the $0.1 million of merger-based legal expenses from the 2017 period, other noninterest expense would have increased $0.1 million or 8% given the larger operating base offset by certain economies of scale.

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Income Taxes

Income tax expense was $2.9 million (effective tax rate of 23.2%) for the first three months of 2018, compared to $3.0 million (effective tax rate of 32.6%) for the comparable period of 2017. The underlying corporate tax rate declined to 21% (beginning in 2018) from 35% (for 2017) as a result of the Tax Cuts and Jobs Act passed in December 2017, impacting the effective tax rates between the years. Additionally, a tax benefit of $159,000 and $97,000 was recorded against income tax expense for the three months ended March 31, 2018 and 2017, respectively, related to the tax impact of stock option exercises and vesting of restricted stock.

BALANCE SHEET ANALYSIS

At March 31, 2018, assets were $3.2 billion and deposits were $2.8 billion, both increasing $0.3 billion over December 31, 2017, attributable to a $0.3 billion short-term transaction deposit of a long-standing commercial customer (included in demand deposits). Excluding the impact of this deposit transaction, total assets and deposits were minimally changed compared to year-end 2017. At March 31, 2018, loans were $2.1 billion, up $13 million or 1% over December 31, 2017.

Compared to March 31, 2017, assets increased $0.9 billion or 41%, with $480 million from First Menasha at acquisition, $0.3 billion from the noted customer deposit held in cash, and $0.1 billion from organic growth. Loans increased $0.5 billion or 30% from March 31, 2017, with $351 million from First Menasha at acquisition and $0.1 billion from organic growth, while deposits increased $0.8 billion or 42%, with $375 million from First Menasha at acquisition, $0.3 billion from the noted customer deposit, and $0.1 billion from organic growth.

Total stockholders’ equity was $364 million, relatively unchanged from December 31, 2017, largely due to stock repurchases and net fair value investment changes offsetting first quarter net income. Compared to March 31, 2017, stockholders’ equity increased $79 million, primarily due to earnings and $62 million of common stock consideration issued with the First Menasha acquisition, partially offset by stock repurchases over the year.

Loans

Nicolet services a diverse customer base throughout northeastern and central Wisconsin and in Menominee, Michigan. It continues to concentrate its efforts in originating loans in its local markets and assisting its current loan customers. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2018, no significant industry concentrations existed in Nicolet’s portfolio in excess of 10% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks. See also Note 6, “Loans, Allowance for Loan Losses and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements for additional disclosures on loans.

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

Table 7: Period End Loan Composition

	March 31, 2018					December 31, 2017					March 31, 2017
(in thousands)	Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial & industrial	$	650,197		31.0	%	$	637,337		30.5	%	$	468,265		29.0	%
Owner-occupied CRE		437,672		20.8			430,043		20.6			368,607		22.8
AG production		33,741		1.6			35,455		1.7			35,037		2.2
Commercial		1,121,610		53.4			1,102,835		52.8			871,909		54.0
AG real estate		53,412		2.5			51,778		2.5			48,499		3.0
CRE investment		323,048		15.4			314,463		15.1			191,274		11.8
Construction & land development		77,708		3.7			89,660		4.3			75,964		4.7
Commercial real estate		454,168		21.6			455,901		21.9			315,737		19.5
Commercial-based loans		1,575,778		75.0			1,558,736		74.7			1,187,646		73.5
Residential construction		31,075		1.5			36,995		1.8			18,390		1.1
Residential first mortgage		365,318		17.4			363,352		17.4			304,479		18.8
Residential junior mortgage		105,903		5.0			106,027		5.1			92,880		5.7
Residential real estate		502,296		23.9			506,374		24.3			415,749		25.6
Retail & other		22,523		1.1			22,815		1.0			14,884		0.9
Retail-based loans		524,819		25.0			529,189		25.3			430,633		26.5
Total loans	$	2,100,597		100.0	%	$	2,087,925		100.0	%	$	1,618,279		100.0	%

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Broadly, the loan portfolio is 75% commercial-based and 25% retail-based. Commercial-based loans are considered to have more inherent risk of default than retail-based loans, in part because of the broader list of factors that could impact a commercial borrower negatively. In addition, the commercial balance per borrower is typically larger than that for retail-based loans, implying higher potential losses on an individual customer basis. Credit risk on commercial-based loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial-based loans of $1.6 billion increased $17 million or 1% since December 31, 2017, primarily due to a $13 million or 2% increase in commercial and industrial and an $8 million or 2% increase in owner-occupied CRE. Commercial and industrial loans continue to be the largest segment of Nicolet’s portfolio and increased to 31.0% of the total portfolio at March 31, 2018, up from 30.5% at December 31, 2017.

Commercial real estate loans were down slightly ($2 million or less than 1%) from year-end 2017, with a shift in mix. CRE investment loans increased $9 million or 3%, while construction and land development loans decreased $12 million or 13%. Lending in the CRE investment and construction and development categories has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. The acquired First Menasha loan portfolio carried a higher proportion of commercial real estate, influencing the increase in mix after the April 2017 acquisition.

Residential real estate loans represented 23.9% of total loans at March 31, 2018, down slightly (1%) compared to year-end 2017. Residential first mortgage loans include conventional first-lien home mortgages and residential junior mortgage real estate loans consist mainly of home equity lines and term loans secured by junior mortgage liens. As part of its management of originating residential mortgage loans, Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market with or without retaining the servicing rights. Mortgage loans retained in the portfolio are typically of high quality and have historically had low net charge-off rates.

Retail and other loans represented approximately 1% of the total loan portfolio, and include predominantly short-term and other personal installment loans not secured by real estate. The loan balances in this portfolio remained relatively unchanged from December 31, 2017 to March 31, 2018.

Allowance for Loan Losses

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

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 on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, aids in the management of credit risk and minimization of loan losses.

The level of the ALLL represents management’s estimate of an amount of reserves that provides for estimated probable credit losses in the loan portfolio at the balance sheet date. To assess the appropriateness of the ALLL, an allocation methodology is applied by Nicolet which focuses on evaluation of qualitative and environmental factors, including but not limited to: (i) evaluation of facts and issues related to specific loans; (ii) management’s ongoing review and grading of the loan portfolio; (iii) consideration of historical loan loss and delinquency experience on each portfolio segment; (iv) trends in past due and nonperforming loans; (v) the risk characteristics of the various loan segments; (vi) changes in the size and character of the loan portfolio; (vii) concentrations of loans to specific borrowers or industries; (viii) existing and forecasted economic conditions; (ix) the fair value of underlying collateral; and (x) other qualitative and quantitative factors which could affect potential credit losses.

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

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At March 31, 2018, the ALLL was $12.8 million compared to $12.7 million at December 31, 2017. The three-month increase was a result of a first quarter 2018 provision of $510,000 offset by net charge-offs of $398,000. Comparatively, the provision for loan losses in the first three months of 2017 was $450,000 and net charge-offs were $81,000. Annualized net charge-offs as a percent of average loans were 0.08% in the first three months of 2018 compared to 0.02% for the first three months of 2017 and 0.08% for the entire 2017 year.

The ratio of the ALLL as a percentage of period-end loans was 0.61% at March 31, 2018 and December 31, 2017, and 0.75% at March 31, 2017. The ALLL to loans ratio is impacted by the accounting treatment of Nicolet’s bank acquisitions, which combined at their acquisition dates (from 2013 to 2017) added no ALLL to the numerator and $1.3 billion of loans into the denominator at their then estimated fair values. Remaining outstanding acquired loans were $806 million and $844 million at March 31, 2018 and December 31, 2017, respectively. The related allowance for acquired loans was $2.1 million at both March 31, 2018 and December 31, 2017, with the ALLL to loans ratio at 0.26% and 0.25%, respectively. Originated loans outstanding, the related allowance and the ALLL to loans ratio at March 31, 2018 were $1.3 billion, $10.7 million and 0.83%, respectively, compared to $1.2 billion, $10.5 million and 0.85%, respectively, at December 31, 2017.

Table 8: Allowance for Loan Losses

	For the Three Months Ended						Year Ended
(in thousands)	March 31, 2018			March 31, 2017			December 31, 2017
Allowance for loan losses (ALLL):
Balance at beginning of period	$	12,653		$	11,820		$	11,820
Provision for loan losses		510			450			2,325
Charge-offs		430			111			1,604
Recoveries		(32	)		(30	)		(112	)
Net charge-offs		398			81			1,492
Balance at end of period	$	12,765		$	12,189		$	12,653
Net loan charge-offs (recoveries):
Commercial & industrial	$	342		$	64		$	1,404
Owner-occupied CRE		30			(13	)		(30	)
Agricultural production		-			-			-
Agricultural real estate		-			-			-
CRE investment		-			-			(1	)
Construction & land development		-			13			13
Residential construction		-			-			-
Residential first mortgage		-			(3	)		(17	)
Residential junior mortgage		(28	)		(1	)		69
Retail & other		54			21			54
Total net loans charged-off	$	398		$	81		$	1,492
ALLL to total loans		0.61	%		0.75	%		0.61	%
ALLL to net charge-offs		3,207.3	%		15,048.1	%		848.1	%
Net charge-offs to average loans, annualized		0.08	%		0.02	%		0.08	%

Nonperforming Assets

As part of its overall credit risk management process, Nicolet’s management is committed to an aggressive problem loan identification philosophy. This philosophy has been implemented through the ongoing monitoring and review of all pools of risk in the loan portfolio to ensure that problem loans are identified early and the risk of loss is minimized. See also Note 6, “Loans, Allowance for Loan Losses and Credit Quality” of the Notes to Unaudited Consolidated Financial Statements for additional disclosures on credit quality.

Nonperforming loans are considered one indicator of potential future loan losses. Nonperforming loans are defined as nonaccrual loans, including those defined as impaired under current accounting standards, and loans 90 days or more past due but still accruing interest. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately. Nonaccrual loans decreased to $11.7 million (consisting of $5.5 million originated loans and $6.2 million acquired loans) at March 31, 2018 compared to $13.1 million at December 31, 2017 (consisting of $3.3 million originated loans and $9.8 million acquired loans), with the decline primarily attributable to the favorable resolution of a large purchased credit impaired commercial loan. Nonperforming assets (which include nonperforming loans and OREO) were $13.0 million at March 31, 2018 compared to $14.4 million at December 31, 2017. OREO was $1.4 million at March 31, 2018, up slightly from $1.3 million at year-end 2017, the majority of which is closed bank branch property. Nonperforming assets as a percent of total assets were 0.40% at March 31, 2018 compared to 0.49% at December 31, 2017.

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The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the ALLL. Potential problem loans are generally defined by management to include loans rated as Substandard by management but that are in performing status; however, there are circumstances present which might adversely affect the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that Nicolet expects losses to occur, but that management recognizes a higher degree of risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial-based loans covering a diverse range of businesses and real estate property types. Potential problem loans were $12.8 million (0.6% of loans) and $13.6 million (0.7% of loans) at March 31, 2018 and December 31, 2017, respectively. Potential problem loans require a heightened management review of the pace at which a credit may deteriorate, the duration of asset quality stress, and uncertainty around the magnitude and scope of economic stress that may be felt by Nicolet’s customers and on underlying real estate values.

Table 9: Nonperforming Assets

(in thousands)	March 31, 2018			December 31, 2017			March 31, 2017
Nonperforming loans:
Commercial & industrial	$	6,434		$	6,016		$	352
Owner-occupied CRE		744			533			2,612
AG production		—			—			4
AG real estate		175			186			197
CRE investment		2,105			4,531			6,662
Construction & land development		—			—			924
Residential construction		108			80			97
Residential first mortgage		1,883			1,587			2,666
Residential junior mortgage		212			158			219
Retail & other		—			4			2
Total nonaccrual loans		11,661			13,095			13,735
Accruing loans past due 90 days or more		—			—			—
Total nonperforming loans	$	11,661		$	13,095		$	13,735
OREO:
Commercial real estate owned	$	57		$	185		$	247
Construction & land development real estate owned		—			—			520
Residential real estate owned		70			70			50
Bank property real estate owned		1,240			1,039			1,481
Total OREO		1,367			1,294			2,298
Total nonperforming assets	$	13,028		$	14,389		$	16,033
Performing troubled debt restructurings	$	—		$	—		$	—
Ratios:
Nonperforming loans to total loans		0.56	%		0.63	%		0.85	%
Nonperforming assets to total loans plus OREO		0.62	%		0.69	%		0.99	%
Nonperforming assets to total assets		0.40	%		0.49	%		0.70	%
ALLL to nonperforming loans		109.5	%		96.6	%		88.7	%
ALLL to total loans		0.61	%		0.61	%		0.75	%

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Deposits

Deposits represent Nicolet’s largest source of funds. The deposit composition was as follows:

Table 10: Deposits

	March 31, 2018					December 31, 2017					March 31, 2017
(in thousands)	Amount		% of Total			Amount		% of Total			Amount		% of Total
Demand	$	899,481		32.5	%	$	631,831		25.6	%	$	452,915		23.3	%
Money market and NOW accounts		1,238,104		44.8	%		1,222,401		49.5	%		942,042		48.4	%
Savings		279,768		10.1	%		269,922		10.9	%		234,314		12.0	%
Time		347,737		12.6	%		346,910		14.0	%		317,000		16.3	%
Total deposits	$	2,765,090		100.0	%	$	2,471,064		100.0	%	$	1,946,271		100.0	%
Brokered transaction accounts	$	68,542		2.5	%	$	76,141		3.1	%	$	-		-	%
Brokered time deposits		41,807		1.5	%		44,645		1.8	%		50,645		2.6	%
Total brokered deposits	$	110,349		4.0	%	$	120,786		4.9	%	$	50,645		2.6	%

Lending-Related Commitments

As of March 31, 2018 and December 31, 2017, Nicolet had the following off-balance sheet lending-related commitments:

Table 11: Commitments

	March 31,		December 31,
(in thousands)	2018		2017
Commitments to extend credit	$	659,535	$	680,307
Financial standby letters of credit		8,768		8,783
Performance standby letters of credit		9,362		9,080

Interest rate lock commitments to originate residential mortgage loans held for sale (included above in commitments to extend credit) and forward commitments to sell residential mortgage loans held for sale are considered derivative instruments and represented $31.8 million and $9.8 million, respectively, at March 31, 2018. The fair value of these interest rate lock commitments and forward commitments was not significant at March 31, 2018.

Liquidity Management

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

Funds are available from a number of basic banking activity sources, including but not limited to, the core deposit base; repayment and maturity of loans; investment securities calls, maturities, and sales; and procurement of brokered deposits. All securities AFS and equity securities (included in other investments) are reported at fair value on the consolidated balance sheet. At March 31, 2018, approximately 38% of the $401 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 March 31, 2018, consist of a $10 million available and unused line of credit at the holding company, $158 million of available and unused Federal funds lines, available borrowing capacity at the FHLB of $140 million, and borrowing capacity in the brokered deposit market.

Cash and cash equivalents at March 31, 2018 and December 31, 2017 were $433.0 million and $154.9 million, respectively. The increase in cash and cash equivalents since year-end 2017 was largely attributable to a $0.3 billion short-term transactional deposit of a long-standing commercial customer, partially offset by net loan growth, net investment purchases, and common stock purchases. Nicolet’s liquidity resources were sufficient as of March 31, 2018 to fund loans, accommodate deposit cycles and trends, and to meet other cash needs as necessary.

Interest Rate Sensitivity Management and Impact of Inflation

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

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

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

Nicolet assessed the impact on net interest income in the event of a gradual +/-100 bps and +/-200 bps change in market rates (parallel to the change in prime rate) over a one-year time horizon to a static (flat) balance sheet. The interest rate scenarios are used for analytical purposes only and do not necessarily represent management’s view of future market interest rate movements. Based on financial data at March 31, 2018 and December 31, 2017, the projected changes in net interest income over a one-year time horizon, versus the baseline, are presented in Table 12 below. The results are within Nicolet’s guidelines of not greater than -10% for +/- 100 bps and not greater than -15% for +/- 200 bps.

Table 12: Interest Rate Sensitivity

	March 31, 2018			December 31, 2017
200 bps decrease in interest rates		(0.7	)%		(1.0	)%
100 bps decrease in interest rates		(0.0	)%		(0.2	)%
100 bps increase in interest rates		(0.1	)%		(0.1	)%
200 bps increase in interest rates		(0.2	)%		(0.2	)%

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

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

Capital

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

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As shown in Table 13, Nicolet’s regulatory capital ratios remain well above minimum regulatory ratios. At March 31, 2018, the Bank’s regulatory capital ratios qualify the Bank as well-capitalized under the prompt-corrective action framework. This strong base of capital has allowed Nicolet to be opportunistic in the current environment and in strategic growth. A summary of Nicolet’s and the Bank’s regulatory capital amounts and ratios as of March 31, 2018 and December 31, 2017 are presented in the following table.

Table 13: Capital

(in millions)	March 31, 2018			December 31, 2017
Company:
Total risk-based capital	$	301.1		$	299.0
Tier 1 risk-based capital		276.4			274.5
Common equity Tier 1 capital		247.1			245.2
Total capital ratio		12.8	%		12.8	%
Tier 1 capital ratio		11.8	%		11.8	%
Common equity tier 1 capital ratio		10.5	%		10.5	%
Tier 1 leverage ratio		10.0	%		10.0	%
Bank:
Total risk-based capital	$	276.0		$	267.2
Tier 1 risk-based capital		263.2			254.5
Common equity Tier 1 capital		263.2			254.5
Total capital ratio		11.8	%		11.5	%
Tier 1 capital ratio		11.2	%		10.9	%
Common equity tier 1 capital ratio		11.2	%		10.9	%
Tier 1 leverage ratio		9.5	%		9.3	%

In managing capital for optimal return, we evaluate capital sources and uses, pricing and availability of our stock in the market, and alternative uses of capital (such as the level of organic growth or acquisition opportunities) in light of strategic plans. During the first quarter of 2018, we utilized $8.0 million to repurchase and cancel approximately 144,600 shares of common stock pursuant to our 2014 common stock repurchase program, bringing the life-to-date cumulative totals to 851,800 shares repurchased for $32.1 million. On February 20, 2018, our board authorized an increase to the program of $12 million or up to 200,000 shares. As a result, there remains $9.9 million authorized under the repurchase program to be utilized from time-to-time to repurchase shares in the open market, through block transactions or in private transactions as an alternative source of capital.

Critical Accounting Policies

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

Future Accounting Pronouncements

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

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments intended to improve the financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Entities should apply the amendment by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company expects to adopt the new accounting standard in 2020, as required, and is currently assessing the impact of the new guidance on its consolidated financial statements. A cross-functional team has been established to assess and implement the new standard.

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of the guidance is a lessee should recognize the assets and liabilities that arise from leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new standard will require both types of leases to be recognized on the balances sheet. The updated guidance is effective for annual reporting periods beginning after December 15, 2018. Early application is permitted. The Company will adopt the new accounting standard in 2019, as required, and is currently assessing the impact of the new guidance on its consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See section “Interest Rate Sensitivity Management and Impact of Inflation” within Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part 1, Item 2.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

Following are Nicolet’s monthly common stock purchases during the first quarter of 2018.

	Total Number of Shares Purchased(a)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(b)
	(#)		($)		(#)		(#)
Period
January 1 – January 31, 2018		31,869	$	55.23		31,432		312,000
February 1 – February 28, 2018		59,321	$	54.54		58,266		453,000
March 1 – March 31, 2018		54,919	$	55.75		54,919		398,000
Total		146,109	$	55.15		144,617		398,000

(a) During the first quarter of 2018, the Company repurchased 1,492 shares for minimum tax withholding settlements on restricted stock. These purchases do not count against the maximum number of shares that may yet be purchased under the board of directors’ authorization.

(b) During the first quarter of 2018, Nicolet utilized $8.0 million to repurchase and cancel approximately 144,600 shares of common stock pursuant to our 2014 common stock repurchase program, bringing the life-to-date cumulative totals to $32.1 million to repurchase and cancel approximately 851,800 shares, or a weighted average price of $37.69 per share excluding commissions. On February 20, 2018, our board authorized an increase to the program of $12 million or up to 200,000 shares. At March 31, 2018, approximately $9.9 million remained available to repurchase up to 398,000 common shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

Exhibit
Number	Description
31.1	Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2	Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32.1	Certification of CEO Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certification of CFO Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101*	The following material from Nicolet’s Form 10-Q Report for the three months ended March 31, 2018, formatted in eXtensible Buisness Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

*Indicates information that is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

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

	NICOLET BANKSHARES, INC.
April 27, 2018	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, President and Chief Executive Officer
April 27, 2018	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer

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