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 June 30, 2013

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 333-90052

NICOLET BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

WISCONSIN (State or other jurisdiction of incorporation or organization)	47-0871001 (I.R.S. Employer Identification No.)
111 North Washington Street Green Bay, Wisconsin 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 o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o      Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

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

As of August 5, 2013 there were 4,227,622 shares of $0.01 par value common stock outstanding.

Nicolet Bankshares, Inc.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION		PAGE
	Item 1.	Financial Statements:
		Consolidated Balance Sheets
		June 30, 2013 (unaudited) and December 31, 2012	3
		Consolidated Statements of Income
		Three Months and Six Months Ended June  30, 2013 and 2012 (unaudited)	4
		Consolidated Statements of Comprehensive Income
		Three Months and Six Months Ended June 30, 2013 and 2012 (unaudited)	5
		Consolidated Statement of Changes in Stockholders’ Equity
		Six Months Ended June 30, 2013 (unaudited)	6
		Consolidated Statements of Cash Flows
		Six Months Ended June 30, 2013 and 2012 (unaudited)	7
		Notes to Consolidated Financial Statements	8-26
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27-50
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
	Item 4.	Controls and Procedures	51
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	51
	Item 1A.	Risk Factors	51
	Item 2.	Unregistered Sales of Equity Securities and Use of  Proceeds	51
	Item 3.	Defaults Upon Senior Securities	51
	Item 4.	Mine Safety Disclosures	51
	Item 5.	Other Information	51
	Item 6.	Exhibits	52
		Signatures	52

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements:

NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)

	June 30, 2013 (Unaudited)			December 31, 2012 (Audited)
Assets
Cash and due from banks	$	7,511		$	26,988
Interest-earning deposits		27,998			54,516
Federal funds sold		637			499
Cash and cash equivalents		36,146			82,003
Certificates of deposit in other banks		1,960			-
Securities available for sale (“AFS”)		129,988			55,901
Other investments		7,531			5,221
Loans held for sale		3,142			7,323
Loans		840,546			552,601
Allowance for loan losses		(7,658	)		(7,120	)
Loans, net		832,888			545,481
Premises and equipment, net		29,224			19,602
Bank owned life insurance		23,352			18,697
Accrued interest receivable and other assets		24,209			11,027
Total assets	$	1,088,440		$	745,255
Liabilities and Stockholders’ Equity
Liabilities:
Demand	$	150,460		$	108,234
Money market and NOW accounts		387,378			322,507
Savings		90,201			46,907
Time		280,044			138,445
Total deposits		908,083			616,093
Short-term borrowings		33,231			4,035
Notes payable		25,040			35,155
Junior subordinated debentures		12,029			6,186
Accrued interest payable and other liabilities		8,730			6,408
Total liabilities		987,113			667,877
Stockholders’ Equity:
Preferred equity		24,400			24,400
Common stock		42			34
Additional paid-in capital		49,147			36,243
Retained earnings		26,575			14,973
Accumulated other comprehensive income (“AOCI”)		1,140			1,683
Total Nicolet Bankshares Inc. stockholders’ equity		101,304			77,333
Noncontrolling interest		23			45
Total stockholders’ equity and noncontrolling interest		101,327			77,378
Total liabilities, noncontrolling interest and stockholders’ equity	$	1,088,440		$	745,255
Preferred shares authorized (no par value)		10,000,000			10,000,000
Preferred shares issued		24,400			24,400
Common shares authorized (par value $0.01 per share)		30,000,000			30,000,000
Common shares outstanding		4,227,622			3,425,413
Common shares issued		4,279,745			3,479,888

See accompanying notes to consolidated financial statements.

3

ITEM 1.  Financial Statements Continued:

NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Interest income:
Loans, including loan fees	$	9,828	$	6,530	$	16,609	$	12,986
Investment securities:
Taxable		278		157		405		319
Non-taxable		187		205		360		419
Other interest income		65		51		145		123
Total interest income		10,358		6,943		17,519		13,847
Interest expense:
Money market and NOW accounts		463		398		977		804
Savings and time deposits		562		747		1,049		1,713
Short term borrowings		6		1		7		2
Junior subordinated debentures		165		125		289		250
Notes payable		344		338		627		675
Total interest expense		1,540		1,609		2,949		3,444
Net interest income		8,818		5,334		14,570		10,403
Provision for loan losses		975		1,125		1,950		2,375
Net interest income after provision for loan losses		7,843		4,209		12,620		8,028
Noninterest income:
Service charges on deposit accounts		470		280		754		567
Trust services fee income		1,074		724		1,876		1,454
Mortgage income		714		671		1,586		1,408
Brokerage fee income		115		81		217		165
Gain on sale of assets, net		45		237		49		383
Bank owned life insurance		212		183		381		336
Rent income		274		240		524		480
Investment advisory fees		76		85		162		171
Bargain purchase gain		10,435		-		10,435		-
Other		351		176		538		337
Total noninterest income		13,766		2,677		16,522		5,301
Noninterest expense:
Salaries and employee benefits		5,555		3,393		9,114		6,666
Occupancy, equipment and office		1,466		1,102		2,570		2,241
Business development and marketing		473		352		898		697
Data processing		572		410		995		812
FDIC assessments		130		138		240		274
Core deposit intangible amortization		286		168		434		336
Other		1,104		446		1,675		768
Total noninterest expense		9,586		6,009		15,926		11,794
Income before income tax expense		12,023		877		13,216		1,535
Income tax expense		547		232		966		375
Net income		11,476		645		12,250		1,160
Less: Net income attributable to noncontrolling interest		19		13		38		26
Net income attributable to Nicolet Bankshares, Inc.		11,457		632		12,212		1,134
Less:  Preferred stock dividends and discount accretion		305		305		610		610
Net income available to common shareholders	$	11,152	$	327	$	11,602	$	524
Basic earnings per common share	$	2.79	$	0.09	$	3.12	$	0.16
Diluted earnings per common share	$	2.78	$	0.09	$	3.11	$	0.16
Weighted average common shares outstanding:
Basic		3,999,732		3,452,209		3,717,627		3,466,282
Diluted		4,008,426		3,463,137		3,728,599		3,481,791

See accompanying notes to consolidated financial statements.

4

ITEM 1.  Financial Statements Continued:

NICOLET BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income	$	11,476		$	645		$	12,250		$	1,160
Other comprehensive income, net of tax:
Securities available for sale:
Net unrealized holding gains/(losses) arising during the period		(1,645	)		119			(1,130	)		633
Less: reclassification adjustment for net (gains)/losses realized in net income		239			(232	)		239			(440	)
Net unrealized gains/losses on securities before tax expense		(1,406	)		(113	)		(891	)		193
Income tax expense/(benefit)		549			39			348			(65	)
Total other comprehensive income		(857	)		(74	)		(543	)		128
Comprehensive income	$	10,619		$	571		$	11,707		$	1,288

See accompanying notes to consolidated financial statements.

5

ITEM 1.  Financial Statements Continued:

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

(In thousands) (Unaudited)

	Nicolet Bankshares, Inc. Stockholders’ Equity
	Preferred Equity		Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interest			Total
Balance, December 31, 2012	$	24,400	$	34	$	36,243		$	14,973		$	1,683		$	45		$	77,378
Comprehensive income		-		-		-			12,212			(543	)		38			11,707
Stock compensation expense		-		-		342			-			-			-			342
Exercise of stock options		-		-		206			-			-			-			206
Purchase and retirement of common stock		-		-		(63	)		-			-			-			(63	)
Common stock issued, net of capitalized issuance costs of $401		-		8		12,419			-			-			-			12,427
Preferred stock dividends		-		-		-			(610	)		-			-			(610	)
Distribution from noncontrolling interest		-		-		-			-			-			(60	)		(60	)
Balance, June 30, 2013	$	24,400	$	42	$	49,147		$	26,575		$	1,140		$	23		$	101,327

See accompanying notes to consolidated financial statements.

6

ITEM 1.  Financial Statements Continued:

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

Consolidated Statement of Cash Flows

(In thousands) (Unaudited)

	Six Months Ended June 30,
	2013			2012
Cash Flows From Operating Activities:
Net income	$	12,250		$	1,160
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		1,985			1,233
Provision for loan losses		1,950			2,375
Increase in cash surrender value of life insurance		(381	)		(336	)
Stock compensation expense		342			241
Gain on sale of assets, net		(49	)		(383	)
Gain on sale of loans held for sale, net		(1,586	)		(1,408	)
Proceeds from sale of loans held for sale		95,965			90,266
Origination of loans held for sale		(90,198	)		(81,727	)
Bargain purchase gain		(10,435	)		-
Net change in:
Accrued interest receivable and other assets		366			256
Accrued interest payable and other liabilities		1,354			2,489
Net cash provided by operating activities		11,563			14,166
Cash Flows From Investing Activities:
Net decrease in certificates of deposit in other banks		-			248
Net increase in loans		(19,689	)		(47,901	)
Purchases of securities available for sale		(8,711	)		(11,830	)
Proceeds from sales of securities available for sale		43,945			5,415
Proceeds from calls and maturities of securities available for sale		8,089			3,692
Purchase of other investments		(8	)		(2	)
Purchase of bank owned life insurance		-			(3,750	)
Purchase of premises and equipment		(1,246	)		(1,632	)
Proceeds from sale of other real estate and other assets		993			877
Net cash received in business combination		13,898			-
Net cash provided (used) by investing activities		37,271			(54,883	)
Cash Flows From Financing Activities:
Net decrease in deposits		(54,152	)		(11,641	)
Net change in short term borrowings		3,091			(2,451	)
Proceeds from notes payable		-			3,800
Repayments of notes payable		(45,809	)		(108	)
Purchase of common stock		(63	)		(814	)
Stock issuance costs		(401	)		-
Issuance of common stock		3,107			-
Proceeds from exercise of common stock options		206			-
Noncontrolling interest in joint venture		(60	)		(100	)
Cash dividends paid on preferred stock		(610	)		(610	)
Net cash used by financing activities		(94,691	)		(11,924	)
Net decrease in cash and cash equivalents		(45,857	)		(52,641	)
Cash and cash equivalents:
Beginning	$	82,003		$	92,129
Ending	$	36,146		$	39,488
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	2,241		$	3,477
Cash paid for taxes		1,018			726
Transfer of loans to other real estate owned		2,116			1,169
Acquisition:
Fair value of assets acquired		435,692			-
Fair value of liabilities assumed		415,067			-
Net assets acquired		20,625			-
See accompanying notes to consolidated financial statements.

7

NICOLET BANKSHARES, INC. AND SUBSIDIARIES

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 Nicolet Bankshares, Inc. (the “Company”) and its subsidiaries, consolidated balance sheets, and statements of income, comprehensive income, changes in stockholders’ equity and cash flows 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 financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes for the year ended December 31, 2012 which is contained in the Joint Proxy Statement-Prospectus dated March 26, 2013, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended (the “Securities Act”) on March 27, 2013.

Preparation of 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, useful lives for depreciation and amortization, fair value of financial instruments, 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 and the assessment of deferred tax assets and liabilities, and therefore are critical accounting policies.  Management does not anticipate any material changes to estimates in the near term. 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, and changes in applicable banking regulations. 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.

The following information related to critical accounting policies has been expanded within this document to include the discussion on policies which were impacted by the acquisition.

Business Combinations and Method of Accounting for Loans Acquired

The Company accounts for its acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets and liabilities acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

Acquired loans are recorded at their estimated fair value at the acquisition date, and are initially classified as either purchase credit impaired (“PCI”) loans (i.e. loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans. PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.  The Company estimates the amount and timing of expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual

principal and contractual interest payments over all cash flows expected to be collected at acquisition as an amount that should not be accreted.   These credit discounts (“nonaccretable marks”) are included in the determination of initial fair value for acquired loans; therefore, an allowance for loan losses is not recorded at the acquisition date. Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that are not credit-based (“accretable marks”) are subsequently accreted to interest income over the estimated life of the loans using a method that approximates a level yield method if the timing and amount of the future cash flows is reasonably estimable.

8

Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows after the acquisition date are recognized through the provision for loan losses.

Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for under this guidance. All fair value discounts on acquired loans were deemed to be credit related at acquisition in the Mid-Wisconsin merger.  The nonaccretable difference represents cash flows not expected to be collected. Subsequently, based on re-evaluation of cash flows and facts available, some nonaccretable differences may be reclassified to accretable.

Allowance for loan losses

The allowance for loan and lease losses related to PCI loans is based on an analysis that is performed each period to estimate the expected cash flows for each loan deemed PCI. To the extent that the expected cash flows of a PCI loan have decreased since the acquisition date, the Company establishes or increases the allowance for loan losses.

For acquired loans that are not deemed credit impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans.  The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the economic life of the loans.

Income Taxes

Deferred income taxes are recognized for the tax consequences of temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities that will result in taxable or deductible amounts in future years. These temporary differences are multiplied by the enacted income tax rate expected to be in effect when the taxes become payable or receivable. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence.  At acquisition, deferred taxes were evaluated in respect to the acquired assets and assumed liabilities (including the acquired net operating losses), and a net deferred tax asset was recorded.  Certain limitations within the provisions of the tax code are placed on the amount of net operating losses which can be utilized as part of acquisition accounting rules and were incorporated into the calculation of the deferred tax asset.  In addition, a portion of the fair market value discounts on PCI loans which resolve in the first twelve months after the acquisition may be disallowed under provisions of the tax code.

9

Note 2 – Acquisition

On April 26, 2013, the Company consummated its acquisition of Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), pursuant to the Agreement and Plan of Merger by and among the Company and Mid-Wisconsin dated November 28, 2012, as amended January 17, 2013 (the “Merger Agreement”), whereby Mid-Wisconsin was merged with and into the Company, and Mid-Wisconsin Bank, Mid-Wisconsin’s wholly owned commercial bank subsidiary serving central Wisconsin, was merged with and into Nicolet National Bank.  The system integration was completed, and the eleven branches of Mid-Wisconsin opened on April 29, 2013 as Nicolet National Bank branches, doubling the Bank’s footprint to 22 branch locations.

The purpose of the merger was for strategic reasons beneficial to the Company. The acquisition is consistent with its growth plans to build a community bank of sufficient size to flourish in various economic environments, serve its expanded customer base with a wide variety of products and services, and effectively and efficiently meet growing regulatory compliance and capital requirements.  The Company believes it is well-positioned to achieve stronger financial performance and enhance shareholder value through synergies of the combined operations.

Pursuant to the terms of the Merger Agreement, the outstanding shares of Mid-Wisconsin common stock, other than dissenting shares as defined in the merger agreement, were converted into the right to receive 0.3727 shares of Company common stock (and in lieu of any fractional share of Company common stock, $16.50 in cash) per share of Mid-Wisconsin common stock or, for record holders of 200 or fewer shares of Mid-Wisconsin common stock, $6.15 in cash per share of Mid-Wisconsin common stock.  As a result, the total value of the consideration to Mid-Wisconsin shareholders was $10.2 million, consisting of $0.5 million in cash and 589,159 shares of the Company’s common stock. The Company’s common stock was valued at $16.50 per share, which was the value assigned in the merger agreement and considered to be the fair value of the stock on the date of the acquisition.  Concurrently with the merger, the Company also closed a private placement of 174,016 shares of its common stock at an offering price of $16.50 per share, for an aggregate of $2.9 million in proceeds.    Approximately $401,000 in direct stock issuance costs for the merger and private placement were incurred and charged against additional paid in capital.

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Mid-Wisconsin 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 fair values at the date of acquisition. The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, OREO, deposits, debt and deferred taxes with the assistance of third party valuations, appraisals, and third party advisors.  The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation.

The fair value of the assets acquired and liabilities assumed on April 26, 2013 was as follows:

	(in millions)	As recorded by Mid-Wisconsin		Fair Value Adjustments				As recorded by Nicolet
Cash, cash equivalents and securities available for sale		$	134	$	(1	)		$	133
Loans,net			284		(12	)			272
Other real estate owned			5		(3	)			2
Core deposit intangible			-		4				4
Premises, equipment, and other assets			17		7		(1)		24
Total assets acquired		$	440	$	(5	)		$	435
Deposits		$	345	$	1			$	346
Junior subordinated debentures, borrowings and other liabilities			72		(3	)	(2)		69
Total liabilities acquired		$	417	$	(2	)		$	415
Excess of assets acquired over liabilities acquired		$	23	$	(3	)		$	20
Less: purchase price								$	10
Bargain purchase gain								$	10

(1) Includes premises and equipment adjustment of $2 million and deferred tax asset of $5 million.

(2) Includes borrowings adjustment increase of $2 million and subordinated debentures adjustment decrease of $5 million.

10

The following unaudited pro forma information presents the results of operations for three months ended and six months ended June 30, 2013 and 2012, as if the acquisition had occurred January 1 of each year. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts.  These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

	Three Months Ended					Six Months Ended
	June 30, 2013		June 30, 2012			June 30, 2013		June 30, 2012
(in thousands)
Total revenues, net of interest expense	$	23,709	$	12,581		$	36,681	$	24,911
Net income		10,599		(539	)		11,247		(240	)

11

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 is 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 June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
(In thousands except per share data)
Net income, net of noncontrolling interest	$	11,457	$	632	$	12,212	$	1,134
Less: preferred stock dividends		305		305		610		610
Net income available to common shareholders	$	11,152	$	327	$	11,602	$	524
Weighted average common shares outstanding		4,000		3,452		3,718		3,466
Effect of dilutive stock instruments		8		11		11		16
Diluted weighted average common shares outstanding		4,008		3,463		3,729		3,482
Basic earnings per common share*	$	2.79	$	0.09	$	3.12	$	0.16
Diluted earnings per common share*	$	2.78	$	0.09	$	3.11	$	0.16

*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.

Note 4 – Stock-based compensation

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

Stock Options	Weighted- Average Fair Value of Options Granted		Option Shares Outstanding			Weighted- Average Exercise Price		Exercisable Shares
Balance – December 31, 2011				702,907		$	17.78		533,074
Granted	$	4.87		184,625			16.50
Exercise of stock options				(25,750	)		12.50
Forfeited				(36,250	)		16.84
Balance – December 31, 2012				825,532			17.70		548,623
Granted		-		-			-
Exercise of stock options				(15,625	)		13.20
Forfeited				(3,000	)		12.50
Balance – June 30, 2013				806,907		$	17.80		567,985

Options outstanding at June 30, 2013 are exercisable at option prices ranging from $12.50 to $26.00.  There are 363,583 options outstanding in the range from $12.50 - $17.00, 396,824 options outstanding in the range from $17.01 - $22.00, and 46,500 options outstanding in the range from $22.01 - $26.00.  The exercisable options have a weighted average remaining contractual life of approximately 5 years as of June 30, 2013.

Intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the stock options.  The total intrinsic value of options exercised in the first six months of 2013, and full year of  2012 was approximately $48,000, and $103,000, respectively. The weighted average exercise price of stock options exercisable at June 30, 2013 was $18.22.

12

Note 4 – Stock-based compensation, continued

Restricted Stock	Weighted- Average Grant Date Fair Value		Restricted Shares Outstanding
Balance – December 31, 2011	$	-		-
Granted		16.50		54,725
Vested		-		-
Forfeited		16.50		(250	)
Balance – December 31, 2012		16.50		54,475
Granted		16.50		10,606
Vested *		16.50		(12,958	)
Forfeited		-		-
Balance – June 30, 2013	$	16.50		52,123

*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 statuatory withholding rate, and 3,812 shares were surrendered accordingly during the six months ended June 30, 2013.

The Company recognized approximately $342,000 and $241,000 of stock-based employee compensation expense during the six months ended June 30, 2013 and 2012, respectively, associated with its stock equity awards.  As of June 30, 2013, there was approximately $1.7 million of unrecognized compensation cost related to equity award grants.  The cost is expected to be recognized over the weighted average remaining vesting period of approximately five years.

Note 5- Securities Available for Sale

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

	June 30, 2013
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government sponsored enterprises	$	1,000	$	1	$	-	$	1,001
State, county and municipals		51,741		1,159		560		52,340
Mortgage-backed securities		73,581		594		912		73,263
Corporate debt securities		220		-		-		220
Equity securities		1,576		1,588		-		3,164
	$	128,118	$	3,342	$	1,472	$	129,988
	December 31, 2012
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Values
State, county and municipals	$	31,642	$	1,079	$	34	$	32,687
Mortgage-backed securities		19,876		803		11		20,668
Equity securities		1,624		922		-		2,546
	$	53,142	$	2,804	$	45	$	55,901

13

Note 5- Securities Available for Sale, continued

The following table represents gross unrealized losses and the related 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, at June 30, 2013 and December 31, 2012.

	June 30, 2013
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State, county and municipals	$	20,356	$	560	$	-	$	-	$	20,356	$	560
Mortgage-backed securities		47,157		912		-		-		47,157		912
	$	67,513	$	1,472	$	-	$	-	$	67,513	$	1,472
	December 31, 2012
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State, county and municipals	$	4,250	$	34	$	-	$	-	$	4,250	$	34
Mortgage-backed securities		3,507		11		-		-		3,507		11
	$	7,757	$	45	$	-	$	-	$	7,757	$	45

As of June 30, 2013 the Company does not consider securities with unrealized losses to be other-than-temporarily impaired.  The unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. 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 and six month periods ending June 30, 2013 or 2012.

The amortized cost and fair values of securities available for sale at June 30, 2013 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Fair values of securities are estimated based on financial models or prices paid for the same or similar securities.  It is possible interest rates could change considerably, resulting in a material change in estimated fair value.

	June 30, 2013
(in thousands)	Amortized Cost		Fair Value
Due in less than one year	$	5,263	$	5,320
Due in one year through five years		38,268		39,124
Due after five years through ten years		8,835		8,522
Due after ten years		595		595
		52,961		53,561
Mortgage-backed securities		73,581		73,263
Equity securities		1,576		3,164
Securities available for sale	$	128,118	$	129,988

Proceeds from sales of securities available for sale during the first six months of 2013 and 2012 were approximately $43.9 million and $5.4 million respectively.  Net gains of approximately $239,000 and $440,000 were realized on sales of securities during the first six months of 2013 and 2012.

14

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

The loan composition as of June 30, 2013 and December 31, 2012 is summarized as follows.

	2013						2012
(in thousands)	Amount			% of Total			Amount			% of Total
Commercial & industrial	$	245,856			29.3	%	$	197,301			35.7	%
Agricultural production		13,114			1.6			215			0.1
Owner-occupied commercial real estate (“CRE”)		181,101			21.5			106,888			19.3
Agricultural real estate		38,983			4.6			11,354			2.1
CRE investment		117,264			14.0			76,618			13.9
Construction & land development		37,754			4.5			21,791			3.9
Residential construction		10,288			1.2			7,957			1.4
Residential first mortgage		141,255			16.8			85,588			15.5
Residential junior mortgage		48,929			5.8			39,352			7.1
Retail & other		6,002			0.7			5,537			1.0
Loans		840,546			100.0	%		552,601			100.0	%
Less allowance for loan losses		7,658						7,120
Loans, net	$	832,888					$	545,481
Allowance for loan losses to loans		0.91	%					1.29	%

Practically, all of the Company’s loans, commitments, and standby 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 allowance for loan and lease losses (“ALLL”) represents management’s estimate of probable and inherent credit losses in the Company’s loan portfolio at the balance sheet date. In general, estimating the amount of the ALLL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and impaired loans, and the level of potential problem loans, all of which may be susceptible to significant change.  To the extent actual outcomes differ from management estimates, additional provisions for loan losses could be required that could adversely affect our earnings or financial position in future periods. Allocations to the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

The allocation methodology used by the Company includes specific allocations for impaired loans evaluated individually for impairment based on collateral values and for the remaining loan portfolio collectively evaluated for impairment primarily based on historical loss rates and other qualitative factors.  Loan charge-offs and recoveries are based on actual amounts charged-off or recovered by loan category.  Management allocates the ALLL by pools of risk within each loan portfolio.  Due to the short period of time since the acquisition and consistent with acquisition accounting rules, no ALLL has been recorded on acquired loans at June 30, 2013.

15

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

The following table presents the balance and activity in the ALLL by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method for the periods indicated:

	Six Months ended June 30, 2013
(in thousands) ALLL:	Commercial & industrial			Agricultural production			Owner- occupied CRE			Agricultural real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
Beginning balance	$	1,969		$	-		$	1,069		$	-		$	337		$	2,580		$	137		$	685		$	312		$	31		$	7,120
Provision		170			5			259			12			485			802			36			128			57			(4	)		1,950
Charge-offs		(475	)		-			(113	)		-			(639	)		(36	)		-			(86	)		(83	)		(11	)		(1,443	)
Recoveries		21			-			2			-			-			-			-			6			1			1			31
Ending balance	$	1,685		$	5		$	1,217		$	12		$	183		$	3,346		$	173		$	733		$	287		$	17		$	7,658
As percent of ALLL		22.0	%		0.1	%		15.9	%		0.2	%		2.4	%		43.7	%		2.3	%		9.5	%		3.7	%		0.2	%		100.0	%
ALLL: Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-
ALLL: PCI loans		-			-			-			-			-			-			-			-			-			-			-
Collectively evaluated		1,685			5			1,217			12			183			3,346			173			733			287			17			7,658
Ending balance	$	1,685		$	5		$	1,217		$	12		$	183		$	3,346		$	173		$	733		$	287		$	17		$	7,658
Loans:
Individually evaluated	$	3		$	-		$	1,800		$	-		$	688		$	-		$	-		$	1,099		$	-		$	137		$	3,727
PCI loans		1			22			1,746			611			4,858			790			-			2,295			257			-			10,580
Collectively evaluated		245,852			13,092			177,555			38,372			111,718			36,964			10,288			137,861			48,672			5,865			826,239
Total loans	$	245,856		$	13,114		$	181,101		$	38,983		$	117,264		$	37,754		$	10,288		$	141,255		$	48,929		$	6,002		$	840,546
Less ALLL	$	1,685		$	5		$	1,217		$	12		$	183		$	3,346		$	173		$	733		$	287		$	17		$	7,658
Net loans	$	244,171		$	13,109		$	179,884		$	38,971		$	117,081		$	34,408		$	10,115		$	140,522		$	48,642		$	5,985		$	832,888

	Six Months ended June 30, 2012
(in thousands) ALLL:	Commercial & industrial			Agricultural production			Owner- occupied CRE			Agricultural real estate			CRE investment			Construction & land development			Residential construction			Residential first mortgage			Residential junior mortgage			Retail & other			Total
Beginning balance	$	1,965		$	-		$	347		$	-		$	393		$	2,035		$	311		$	405		$	419		$	24		$	5,899
Provision		729			-			1,096			127			24			(67	)		163			171			96			36			2,375
Charge-offs		(77	)		-			(899	)		(127	)		(155	)		(307	)		(395	)		(168	)		(118	)		(38	)		(2,284	)
Recoveries		30			-			8			-			-			5			-			7			4			1			55
Ending balance	$	2,647		$	-		$	552		$	-		$	262		$	1,666		$	79		$	415		$	401		$	23		$	6,045
As percent of ALLL		43.8	%		0.0	%		9.1	%		0.0	%		4.3	%		27.6	%		1.3	%		6.9	%		6.6	%		0.4	%		100.0	%
ALLL: Individually evaluated	$	-		$	-		$	165		$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	165
Collectively evaluated		2,647			-			387			-			262			1,666			79			415			401			23			5,880
Ending balance	$	2,647		$	-		$	552		$	-		$	262		$	1,666		$	79		$	415		$	401		$	23		$	6,045
Loans:
Individually evaluated	$	4,383		$	-		$	60		$	34		$	544		$	8,527		$	799		$	797		$	36		$	151		$	15,331
Collectively evaluated		194,645			183			115,110			1,247			62,313			16,085			5,162			62,359			38,046			6,511			501,661
Total loans	$	199,028		$	183		$	115,170		$	1,281		$	62,857		$	24,612		$	5,961		$	63,156		$	38,082		$	6,662		$	516,992
Less ALLL	$	2,647		$	0		$	552		$	0		$	262		$	1,666		$	79		$	415		$	401		$	23		$	6,045
Net loans	$	196,381		$	183		$	114,618		$	1,281		$	62,595		$	2,946		$	5,882		$	62,741		$	37,681		$	6,639		$	510,947

16

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

Loans are generally placed on nonaccrual status when management has determined collection of the interest on a loan is doubtful or when a loan is contractually past due 90 days or more as to interest or principal payments.  When loans are placed on nonaccrual status or charged-off, all current year unpaid accrued interest is reversed against interest income. The interest on these loans is subsequently accounted for on the cash basis until qualifying for return to accrual status.  If collectability of the principal is in doubt, payments received are applied to loan principal.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.   Management considers a loan to be impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.

The following table presents nonaccrual loans by portfolio segment as of June 30, 2013 and December 31, 2012.  The June 30, 2013 nonaccrual loans of $14.3 million include $10.6 million of loans acquired at fair value in the Mid-Wisconsin merger:

(in thousands)	2013		% to Total			2012		% to Total
Commercial & industrial	$	4		-	%	$	784		11.2	%
Agricultural production		22		0.2			-		-
Owner-occupied CRE		3,546		24.8			1,960		27.9
Agricultural real estate		611		4.3			-		-
CRE investment		5,546		38.8			-		-
Construction & land development		790		5.5			2,560		36.4
Residential construction		-		-			-		-
Residential first mortgage		3,394		23.7			1,580		22.5
Residential junior mortgage		257		1.8			-		-
Retail & other		137		0.9			142		2.0
Nonaccrual loans	$	14,307		100.0	%	$	7,026		100.0	%

The following tables present past due loans by portfolio segment:

	June 30, 2013
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or non-accrual			Current			Total
Commercial & industrial	$	23		$	4		$	245,829		$	245,856
Agricultural production		7			22			13,085			13,114
Owner-occupied CRE		89			3,546			177,466			181,101
Agricultural real estate		87			611			38,285			38,983
CRE investment		634			5,546			111,084			117,264
Construction & land development		387			790			36,577			37,754
Residential construction		-			-			10,288			10,288
Residential first mortgage		661			3,394			137,200			141,255
Residential junior mortgage		69			257			48,603			48,929
Retail & other		8			137			5,857			6,002
Total loans	$	1,965		$	14,307		$	824,274		$	840,546
As a percent of total loans		0.2	%		1.7	%		98.1	%		100.0	%

	December 31, 2012
(in thousands)	30-89 Days Past Due (accruing)			90 Days & Over or nonaccrual			Current			Total
Commercial & industrial	$	-		$	784		$	196,517		$	197,301
Agricultural production		-			-			215			215
Owner-occupied CRE		-			1,960			104,928			106,888
Agricultural real estate		-			-			11,354			11,354
CRE investment		-			-			76,618			76,618
Construction & land development		-			2,560			19,231			21,791
Residential construction		-			-			7,957			7,957
Residential first mortgage		-			1,580			84,008			85,588
Residential junior mortgage		-			-			39,352			39,352
Retail & other		6			142			5,389			5,537
Total loans	$	6		$	7,026		$	545,569		$	552,601
As a percent of total loans		0.0	%		1.3	%		98.7	%		100.0	%

17

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

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

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.

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.

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 worth, serious management conditions and decreasing cash flow.

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 non-accrual loans are considered to be categorized in this rating, regardless of collateral sufficiency.

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.

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

The following tables present loans by loan grade:

	June 30, 2013
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	231,391		$	12,319		$	700		$	1,446		$	-	$	-	$	245,856
Agricultural production		12,436			291			279			108			-		-		13,114
Owner-occupied CRE		163,633			6,545			4,607			6,316			-		-		181,101
Agricultural real estate		25,514			10,289			1,827			1,353			-		-		38,983
CRE investment		97,074			11,283			317			8,590			-		-		117,264
Construction & land development		28,061			2,416			859			6,418			-		-		37,754
Residential construction		8,906			-			-			1,382			-		-		10,288
Residential first mortgage		134,511			2,299			-			4,445			-		-		141,255
Residential junior mortgage		48,366			287			-			276			-		-		48,929
Retail & other		5,854			-			-			148			-		-		6,002
Total loans	$	755,746		$	45,729		$	8,589		$	30,482		$	-	$	-	$	840,546
Percent of total		89.9	%		5.5	%		1.0	%		3.6	%		-		-		100	%

	December 31, 2012
(in thousands)	Grades 1- 4			Grade 5			Grade 6			Grade 7			Grade 8		Grade 9		Total
Commercial & industrial	$	192,426		$	1,969		$	604		$	2,517		$	-	$	-	$	197,516
Owner-occupied CRE		96,313			16,502			1,832			3,595			-		-		118,242
CRE investment		66,358			8,545			-			1,715			-		-		76,618
Construction & land development		12,351			855			877			7,708			-		-		21,791
Residential construction		6,775			-			-			1,182			-		-		7,957
Residential first mortgage		82,914			1,094			-			1,580			-		-		85,588
Residential junior mortgage		38,582			199			249			322			-		-		39,352
Retail & other		5,537			-			-			-			-		-		5,537
Total loans	$	501,256		$	29,164		$	3,562		$	18,619		$	-	$	-	$	552,601
Percent of total		90.7	%		5.3	%		0.6	%		3.4	%		-		-		100	%

18

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

In determining the appropriateness of the allowance for loan losses, management includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors.  Impaired loans are individually assessed and are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Loans that are determined not to be impaired are collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments are also provided for certain current environmental and qualitative factors.  An internal loan review function rates loans using a grading system based on nine different categories. Loans with grades of seven or higher (“classified loans”) represent loans with a greater risk of loss and may be assigned allocations for loss based on specific review of the weaknesses observed in the individual credits if classified as impaired.  Classified loans are constantly monitored by the loan review function to ensure early identification of any deterioration.

19

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

The following tables present impaired loans as of the dates indicated:

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2013
With no related allowance:
Commercial & industrial	$	4	$	5	$	-	$	9	$	-
Agricultural production		22		62		-		36		4
Owner-occupied CRE		3,546		4,993		-		3,673		72
Agricultural real estate		611		619		-		524		15
CRE investment		5,546		7,967		-		5,558		255
Construction & land development		790		1,100		-		619		49
Residential construction		-		-		-		-		-
Residential first mortgage		3,394		4,313		-		3,206		157
Residential junior mortgage		257		275		-		263		15
Retail & Other		137		147		-		149		4
With a related allowance:						-
Commercial & industrial	$	-	$	-	$	-	$	-	$	-
Agricultural production		-		-		-		-		-
Owner-occupied CRE		-		-		-		-		-
Agricultural real estate		-		-		-		-		-
CRE investment		-		-		-		-		-
Construction & land   development		-		-		-		-		-
Residential construction		-		-		-		-		-
Residential first mortgage		-		-		-		-		-
Residential junior mortgage		-		-		-		-		-
Retail & Other		-		-		-		-		-
Total:
Commercial & industrial	$	4	$	5	$	-	$	9	$	-
Agricultural production		22		62		-		36		4
Owner-occupied CRE		3,546		4,993		-		3,673		72
Agricultural real estate		611		619		-		524		15
CRE investment		5,546		7,967		-		5,558		255
Construction & land development		790		1,100		-		619		49
Residential construction		-		-		-		-		-
Residential first mortgage		3,394		4,313		-		3,206		157
Residential junior mortgage		257		275		-		263		15
Retail & Other		137		147		-		149		4
Total	$	14,307	$	19,481	$	-	$	14,037	$	571

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

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2012
With no related allowance:
Commercial & industrial	$	784	$	1,287	$	-	$	3,015	$	265
Owner-occupied CRE		1,960		1,960		-		636		95
CRE investment		-		-		-		439		-
Construction & land development		2,560		2,560		-		6,333		-
Residential construction		-		-		-		620		-
Residential first mortgage		1,580		1,696		-		1,298		88
Residential junior mortgage		-		-		-		58		-
Retail & Other		142		150		-		120		7
With a related allowance:						-
Commercial & industrial	$	-	$	-	$	-	$	177	$	-
Owner-occupied CRE		-		-		-		162		-
CRE investment		-		-		-		-		-
Construction & land development.		-		-		-		-		-
Residential construction		-		-		-		-		-
Residential first mortgage		-		-		-		-		-
Residential junior mortgage		-		-		-		-		-
Retail & other		-		-		-		-		-
Total:
Commercial & industrial	$	784	$	1,287	$	-	$	3,192	$	265
Owner-occupied CRE		1,960		1,960		-		798		95
CRE investment		-		-		-		439		-
Construction & land development		2,560		2,560		-		6,333		-
Residential construction		-		-		-		620		-
Residential first mortgage		1,580		1,696		-		1,298		88
Residential junior mortgage		-		-		-		58		-
Retail & other		142		150		-		120		7
Total	$	7,026	$	7,653	$	-	$	12,858	$	455

Troubled Debt Restructurings

At June 30, 2013, and December 31, 2012, there were no loans classified or reported as troubled debt restructurings.  There were no loans which were modified and classified as trouble debt restructurings at June 30, 2013.  There were no loans which were classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the six months ended June 30, 2013.  Loans which were considered troubled debt restructurings by Mid-Wisconsin prior to the acquisition are not required to be classified as troubled debt restructurings in the Company’s financial statements unless or until such loans would subsequently meet criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

Note 7- Other Real Estate Owned (“OREO”)

A summary of OREO, net of valuation allowances, for the periods indicated is as follows:

	Three Months ended						Six Months ended
(in thousands)	June 30, 2013			June 30, 2012			June  30, 2013			June 30, 2012
Balance at beginning of period	$	2,038		$	260		$	193		$	641
Transfer of loans at net realizable value to OREO		166			744			2,116			1,123
Sale proceeds		(884	)		(120	)		(993	)		(820	)
Net gain (loss) from sale of OREO		284			6			288			(54	)
Acquired balance, net		1,756			-			1,756			-
Balance at end of period	$	3,360		$	890		$	3,360		$	890

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Note 8- Borrowings

At June 30, 2013 the Company had short-term borrowings maturing within twelve months consisting of Federal Home Loan Bank (“FHLB”) advances of $20.0 million and short term repurchase agreements of approximately $13.2 million.

The Company had the following long term notes payable:

(in thousands)	June 30, 2013		December 31, 2012
Joint Venture note	$	10,040	$	10,155
FHLB advances		15,000		25,000
Notes Payable	$	25,040	$	35,155

At the completion of the construction of the Company’s headquarters building in 2005 and as part of a joint venture investment related to the building, the Company and the other joint venture partners guaranteed a joint venture note to finance certain costs of the building. This note is secured by the building, bears a fixed rate of 5.81% and requires monthly principal and interest payments until its maturity on June 1, 2016.

At June 30, 2013 and December 31, 2012, the Company’s fixed-rate FHLB advances totaled $15 million and $25 million, respectively, require interest-only monthly payments, and have maturities through August 2016.  The weighted average rate of FHLB advances was 2.45% and 2.87% at June 30, 2013 and December 31, 2012, respectively. The FHLB advances are collateralized by a blanket lien on qualifying first mortgages, home equity loans, multi-family loans and certain farmland loans which totaled approximately $80.3 million and $54.2 million at June 30, 2013 and December 31, 2012, respectively.

The following table shows the maturity schedule of the notes payable as of June 30, 2013:

Years Ending December 31,	(in thousands)
2013	$	118
2014		10,248
2015		262
2016		14,412
	$	25,040

Note 9 - Junior Subordinated Debentures

At June 30, 2013 the Company’s carrying value of junior subordinated debentures was $12.0 million. In July 2004 Nicolet Bankshares Statutory Trust I (the “Statutory Trust”), issued $6.0 million of guaranteed preferred beneficial interests (“trust preferred securities”) that qualify as Tier I capital under Federal Reserve Board guidelines. All of the common securities of the Statutory Trust are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by the Statutory Trust to purchase $6.2 million of junior subordinated debentures of the Company, which pay an 8% fixed rate. Interest on these debentures is current. The debentures may be redeemed in part or in full, on or after July 15, 2009 at par plus any accrued but unpaid interest. The maturity date of the debenture, if not redeemed, is July 15, 2034.

As part of the Mid-Wisconsin acquisition, the Company assumed $10.3 million of junior subordinated debentures related to $10.0 million of issued trust preferred securities.  The trust preferred securities and the debentures mature on December 15, 2035 and have a floating rate of the three-month LIBOR plus 1.43% adjusted quarterly.  The debentures may be called at par in part or in full, on or after December 15, 2010 or within 120 days of certain events.  At acquisition the debentures were recorded at a fair value of $5.8 million, with the discount being accreted to interest expense over the remaining life of the debentures.  The carrying value of the trust preferred securities qualifies as Tier 1 capital.  Interest on these debentures is current.

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Note 10 - Fair Value Measurements

The relevant accounting standard (codified in ASC Topic 820, “Fair Value Measurements and Disclosures”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value measurements; accordingly, the standard amends numerous accounting pronouncements but does not require any new fair value measurements of reported balances. The standard emphasizes that fair value (i.e. the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement versus an entity-specific measurement.

The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.  Level 1 inputs are 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 are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.   Level 3 inputs are 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.

The following table presents items measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

Assets Measured at Fair Value on a Recurring Basis
	June 30, 2013
			Fair Value Measurements Using
(in thousands)	Total		Level 1		Level 2		Level 3
U.S. government sponsored enterprises	$	1,001	$	-	$	1,001	$	-
State, county and municipals		52,340				51,965		375
Mortgage-backed securities		73,263		-		73,263		-
Corporate debt securities		220		-		-		220
Equity securities		3,164		3,164		-		-
Securities available for sale, June 30, 2013	$	129,988	$	3,164	$	126,229	$	595

	December 31, 2012
			Fair Value Measurements Using
(in thousands)	Total		Level 1		Level 2		Level 3
State, county and municipals	$	32,687	$	-	$	32,312	$	375
Mortgage-backed securities		20,668		-		20,668		-
Equity securities		2,546		2,546		-		-
Securities available for sale, December 31, 2012	$	55,901	$	2,546	$	52,980	$	375

The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy. Where quoted market prices on securities exchanges are available, the investment is classified in Level 1 of the fair value hierarchy. Level 1 investments primarily include exchange-traded equity securities available for sale. If quoted market prices are not available, fair value is generally determined using pricing models (such as matrix pricing which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities), quoted market prices of securities with similar characteristic (adjusted for differences between the quoted instruments and the instrument being valued), or discounted cash flows, and are classified in Level 2 of the fair value hierarchy. 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 auction rate securities available for sale (for which there has been no liquid market since 2008) and corporate debt securities.  At June 30, 2013 and December 31, 2012, it was determined that carrying value was the best approximation of fair value for these Level 3 securities, based primarily on receipt of par from refinances for the auction rate securities.

23

Note 10 - Fair Value Measurements, continued

The following table presents the Company’s collateral-dependent impaired loans and other real estate owned measured at fair value on a nonrecurring basis as of June 30, 2013 and December 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

Assets Measured at Fair Value on a Nonrecurring Basis
	June 30, 2013
			Fair Value Measurements Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral-dependent impaired loans	$	14,307	$	-	$	-	$	14,307
Other real estate owned		3,360		-		-		3,360

	December 31, 2012
			Fair Value Measurements Using
(in thousands)	Total		Level 1		Level 2		Level 3
Collateral-dependent impaired loans	$	7,026	$	-	$	-	$	7,026
Other real estate owned		193		-		-		193

The following is a description of the valuation methodologies used by the Company for the items noted in the table above, including the general classification of such instruments in the fair value hierarchy.  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 other real estate owned, the fair value is based upon the estimated fair value of the underlying collateral adjusted for the expected costs to sell.

Summarized below are the estimated fair values of the Company’s financial instruments at June 30, 2013 and December 31, 2012, along with the methods and assumptions used by the Company in estimating the fair value disclosures.

	June 30, 2013
	Carrying		Estimated		Fair Value Measurements Using
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	36,146	$	36,146	$	36,146	$	-	$	-
Certificates of deposit in other banks		1,960		2,005		-		-		2,005
Securities available for sale		129,988		129,988		3,164		126,229		595
Other investments		7,531		7,531		-		4,864		2,667
Loans held for sale		3,142		3,142		3,142		-		-
Loans, net		832,888		819,981		-		-		819,981
Bank owned life insurance		23,352		23,352		23,352		-		-
Financial liabilities:
Deposits	$	908,083	$	910,248	$	-	$	-	$	910,248
Short-term borrowings		33,231		33,231		33,231		-		-
Notes payable		25,040		25,268		-		25,268		-
Junior subordinated debentures		12,029		11,617		-		-		11,617

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Note 10 - Fair Value Measurements, continued

	December 31, 2012
	Carrying		Estimated		Fair Value Measurements Using
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	82,003	$	82,003	$	82,003	$	-	$	-
Securities available for sale		55,901		55,901		2,546		52,980		375
Other investments		5,221		5,221		-		3,243		1,978
Loans held for sale		7,323		7,323		7,323		-		-
Loans, net		545,481		540,887		-		-		540,887
Bank owned life insurance		18,697		18,697		18,697		-		-
Financial liabilities:
Deposits	$	616,093	$	617,677	$	-	$	-	$	617,677
Short-term borrowings		4,035		4,035		4,035		-		-
Notes payable		35,155		36,017		-		36,017		-
Junior subordinated debentures		6,186		6,186		-		-		6,186

The following is a description of the valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.

Cash and cash equivalents and certificates of deposit in other banks:  For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities available for sale and other investments:  Fair values for securities are based on quoted market prices on securities exchanges, when available, which is considered a Level 1 measurement.  If quoted market prices are not available, fair value is generally determined using pricing models widely used in the industry, quoted market prices of securities with similar characteristics, or discounted cash flows, which is considered a Level 2 measurement, and Level 3 was deemed appropriate for auction rate securities (for which there has been no liquid market since 2008) and corporate debt securities which include trust preferred security investments.  The corporate debt securities were acquired in the acquisition and valued based on discounted cash flows and the credit quality of the underlying issuer.    The fair value approximates the acquired cost at June 30, 2013.  For other investments, the carrying amount of Federal Reserve Bank 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 carrying amount of loans held for sale approximates the fair value, given the short-term nature of the loans between origination and sale, which is considered a Level 1 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.

Bank owned life insurance:  The carrying value of these assets approximates fair value, which is considered a Level 1 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 on certificates within the market place.  Use of internal discounted cash flows provides a Level 3 fair value measurement.

Short-term borrowings:  Due to the short-term nature of these instruments, the carrying amount is a reasonable estimate of fair value.

25

Note 10 - Fair Value Measurements, continued

Notes payable:  The fair values of notes payable are estimated using discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and credit quality which represents a Level 2 measurement.

Junior subordinated debentures:  The fair values of junior subordinated debentures are estimated based on an evaluation 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.

Off-balance-sheet instruments:  The estimated fair value of letters of credit at June 30, 2013 and December 31, 2012 was insignificant.  Loan commitments on which the committed interest rate is less than the current market rate are also insignificant at June 30, 2013 and December 31, 2012.

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 11 - Subsequent Event

On August 9, 2013, Nicolet National Bank (the “Bank”) announced that it entered into an agreement with the Federal Deposit Insurance Corporation (“FDIC”) to purchase certain assets and assume certain liabilities of a one-branch bank in Wausau, Wisconsin, effective immediately. Subject to final settlements, the Bank acquired approximately $29.9 million of the failed bank assets.

26

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

Nicolet Bankshares, Inc.  is a bank holding company headquartered in Green Bay, Wisconsin, providing a diversified range of traditional banking and wealth management services to individuals and businesses in its market area through the 22 branch offices of its banking subsidiary, Nicolet National Bank, in northeastern and central Wisconsin and Menominee Michigan.

The primary revenue sources of Nicolet Bankshares, Inc. and its subsidiaries (“Nicolet”) are net interest income, representing interest income from loans and other interest earning assets such as investments, less interest expense on deposits and other borrowings, and noninterest income, including, among others, trust fees, secondary mortgage income and other fees or revenue from financial services provided to customers or ancillary to loans and deposits. Business volumes and pricing drive revenue potential and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth and competitive conditions within the marketplace.

At June 30, 2013, total assets were $1.1 billion and net income for the six months ended June 30, 2013 was $12.2 million.  Financial results as of June 30, 2013 and for the three and six months ended June 30, 2013, are largely impacted by the Company’s acquisition of Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), consummated on April 26, 2013.  The eleven banking branches of Mid-Wisconsin opened as Nicolet National Bank on April 29, 2013. The transaction was accounted for under the acquisition method of accounting, and thus, the results of operations of Mid-Wisconsin prior to the consummation date were not included in the accompanying consolidated financial statements.  At acquisition, the transaction increased total assets by $435 million, total liabilities by $415 million, common equity by approximately $9.3 million, and resulted in a bargain purchase gain of $10.4 million during the second quarter of 2013.  The income statement also includes approximately $1.7 million of pre-tax, non-recurring merger related expenses tied to preparation for, consummation of and integration of Mid-Wisconsin into the Company.  Additionally, acquisition accounting requires assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition, which impacted various ratios, but most notably asset quality measures (as loans are recorded directly at their estimated fair value and no addition to the allowance for loan losses is recorded at consummation) and taxes.  For additional details, see “Note 2 – Acquisition”, Note 6 – Loans, Allowance for Loan Losses, and Credit Quality”, and Income Taxes within this document.

On November 28, 2012, Nicolet entered into a merger agreement with Mid-Wisconsin Financial Services, Inc. (“Mid-Wisconsin”), and initially filed a Registration Statement on Form S-4 (Regis. No. 333-186401) (the “Registration Statement”) with the Securities and Exchange Commission under the provisions of the Securities Act.  On March 26, 2013, the Registration Statement became effective and Nicolet became a public reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-Looking Statements

Statements made in this document and in 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. Stockholders 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 the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations promulgated thereunder, as well as the rules by the Federal bank regulatory agencies to implement the Basel III capital accord;

● 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 and Mid-Wisconsin;

● 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; and

● other factors discussed under “Risk Factors” included in the Joint Proxy Statement-Prospectus contained in the  Registration Statement.

27

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.

Critical Accounting Policies

The consolidated financial statements of Nicolet Bankshares, Inc. and its subsidiaries are prepared in conformity with U.S. GAAP and follow general practices within the industry in which it operates. This preparation requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include the valuation of loans acquired in the Mid-Wisconsin transaction, as well as the determination of the allowance for loan losses and income taxes and, therefore, are critical accounting policies.

Business Combinations and Valuation of Loans Acquired in Business Combination

We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting.  Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation. Once management has finalized the fair values of acquired assets and assumed liabilities within this 12-month period, management considers such values to be the Day 1 Fair Values.

In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date.  Substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics; and since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

In determining the Day 1 Fair Values of acquired loans, management calculates a non-accretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The non-accretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the Day 1 Fair Values. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, and nonaccretable difference which would have a positive impact on interest income.

The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the Day 1 Fair Values.

Allowance for Loan Losses

The allowance for loan losses (the “ALLL”) is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the ALLL. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the ALLL. A provision for loan losses, which is a charge against earnings, is recorded to bring the ALLL to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the ALLL is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the ALLL could change significantly.

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The allocation methodology applied by Nicolet is designed to assess the appropriateness of the ALLL and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and nonaccrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the ALLL is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the ALLL is appropriate. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the ALLL. These agencies may require Nicolet to make additions to the ALLL based on their judgments of collectability based on information available to them at the time of their examination.

Income taxes

The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. Nicolet files a consolidated federal income tax return and a combined state income tax return (both of which include Nicolet and its wholly owned subsidiaries). Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the companies that incur federal tax liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies.  Nicolet may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

The following discussion is Nicolet management’s analysis of the consolidated financial condition as of June 30, 2013 and December 31, 2012 and results of operations for the three-month and six-month periods ended June 30, 2013 and 2012.  It should be read in conjunction with Nicolet’s audited consolidated financial statements as of December 31, 2012 and 2011, and for the three years ended December 31, 2012, included in the Registration Statement.

Performance Summary

Nicolet reported net income of $12.2 million for the six months ended June 30, 2013, compared to $1.2 million for the comparable period of 2012. Net income available to common shareholders for the six months of 2013 was $11.6 million, or $3.11 per diluted common share, compared to net income available to common shareholders of $0.5 million, or $0.16 per diluted common share, for the first six months of 2012.  Income statement results and average balances for 2013 include approximately two months of Mid-Wisconsin activity (as results of operations of Mid-Wisconsin prior to consummation are appropriately not included in the accompanying consolidated financial statements). Results from the first half 2013 included a bargain purchase gain of $10.4 million and pre-tax, non-recurring expenses of approximately $1.7 million specifically related to the consummation and integration of the Mid-Wisconsin transaction.

● Net interest income was $14.6 million for the first six months of 2013, an increase of $4.2 million or 40% over the first six months of 2012.  The improvement was predominantly volume related, given the timing of the acquisition, but also favorably impacted by an increase in interest rate spread on higher average earning assets.  On a tax-equivalent basis, the net interest margin for first half 2013 was 3.74%, up 20 basis points (“bps”) from 3.54% for first half 2012.  The cost of interest-bearing liabilities was 0.91%, 48 bps lower than first half 2012, while the average yield on earning assets was 4.49%, 20 bps lower than first half 2012, resulting in a 28 bps improvement in the interest rate spread.

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● Loans were $841 million at June 30, 2013, up $288 million or 52% over $553 million at December 31, 2012, with $272 million of loans added from Mid-Wisconsin at acquisition.  Between the comparative six month periods, average loans were $651 million in 2013 yielding 5.09%, compared to $495 million in 2012 yielding 5.24%.

● Total deposits were $908 million at June 30, 2013, up $292 million or 47% over $616 million at December 31, 2012, with $346 million of deposits added from Mid-Wisconsin at acquisition, offset in part by a customary pattern of deposit decline historically following year ends through the first six-month periods.  For perspective, total deposits grew $368 million since June 30, 2012, $22 million more than the acquired balances. Average total deposits for first half 2013 were $699 million compared to $523 million for first half 2012, up 34%.

● While impacted by the merger, asset quality measures remained strong, with nonperforming assets at 1.62% of total assets at June 30, 2013, compared to 0.97% at year end 2012. The allowance for loan losses was $7.7 million or 0.91% of loans at June 30, 2013 (impacted by the merger adding no allowance for loan losses while adding $272 million to loans at acquisition), compared to $7.1 million or 1.29%, respectively, at December 31, 2012.  The provision for loan losses was $2.0 million with net charge offs of $1.4 million for the first half of 2013, versus provision of $2.4 million with $2.2 million of net charge offs for the first half of 2012.

● Noninterest income was $16.5 million for the first six months of 2013, up $11.2 million over the first six months of 2012, with $10.4 million of this variance attributable to the bargain purchase gain recorded in conjunction with the merger.  With the exception of investment advisory fees and net gains on sales of assets, all other categories were up from the prior year, including service charges (up $0.2 million or 33%), trust fee income (up $0.4 million or 29%), and mortgage income (up $0.2 million or 13%) compared to the first six months of 2012.

● Noninterest expense was $15.9 million for the first six months of 2013, up $4.1 million over the first half of 2012, as the first half of 2013 included approximately two months of increased operations from the Mid-Wisconsin transaction and approximately $1.7 million of non-recurring merger-related expenses.  Most notably, salaries and benefits accounted for $2.4 million of the increase (of which approximately $1 million was attributable to non-recurring merger expenses), and Other expenses increased $0.9 million (of which nearly $0.7 million was attributable to non-recurring merger expenses).

Net Interest Income

Nicolet’s earnings are substantially dependent on net interest income, which is the difference between interest earned on investments and loans and the interest paid ondeposits and other interest-bearing liabilities. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.

Comparison of the six months ending June 30, 2013 versus 2012

Net interest income in the consolidated statements of income (which excludes any taxable equivalent adjustment) was $14.6 million in the first six months of 2013, compared to $10.4 million in the first half of 2012. Taxable 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 34% tax rate) were $275,000 and $316,000 for the first six months of 2013 and 2012, respectively, resulting in taxable equivalent net interest income of $14.8 million for first half of 2013 and $10.7 million for first half of 2012.

Taxable 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.

Net interest income is the primary source of Nicolet’s revenue, and is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings. Net interest income is directly impacted by the sensitivity of the balance sheet to changes in interest rates and by the amount, mix and composition of interest earning assets and interest-bearing liabilities, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies.

Tables 1through 5 present information to facilitate the review and discussion of selected average balance sheet items, taxable equivalent net interest income, interest rate spread and net interest margin.

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Table 1:  Year-To-Date Net Interest Income Analysis

	For the Six Months Ended June 30,
	2013							2012
(in thousands)	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
ASSETS
Earning assets
Loans (1) (2) (3)(4)	$	651,256	$	16,658		5.09	%	$	494,647	$	13,065		5.24	%
Investment securities
Taxable		57,508		402		1.40	%		20,802		321		3.09	%
Tax-exempt (2)		28,889		585		4.05	%		26,423		656		4.96	%
Other interest-earning assets		51,205		149		0.58	%		56,847		121		0.43	%
Total interest-earning assets		788,858	$	17,794		4.49	%		598,719	$	14,163		4.69	%
Cash and due from banks		4,449							11,558
Other assets		59,991							39,603
Total assets	$	853,298						$	649,880
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	63,812	$	98		0.31	%	$	26,940	$	59		0.44	%
Interest-bearing demand		135,395		591		0.88	%		84,149		389		0.93	%
MMA		197,793		370		0.38	%		164,487		402		0.49	%
Core CDs and IRAs		156,038		851		1.10	%		139,310		1,292		1.86	%
Brokered deposits		35,589		116		0.66	%		33,197		375		2.27	%
Total interest-bearing deposits		588,627		2,026		0.69	%		448,083		2,517		1.13	%
Other interest-bearing liabilities		61,679		923		2.98	%		46,373		927		3.96	%
Total interest-bearing liabilities		650,306		2,949		0.91	%		494,456		3,444		1.39	%
Noninterest-bearing demand		110,189							74,719
Other liabilities		6,656							4,388
Total equity		86,147							76,317
Total liabilities and stockholders’ equity	$	853,298						$	649,880
Net interest income and rate spread			$	14,845		3.58	%			$	10,719		3.30	%
Net interest margin						3.74	%						3.54	%

(1)Nonaccrual loans 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 34% and adjusted for the disallowance of interest expense.

(3)Interest income for the period ending June 30, includes loan fees of $250,000 in 2013, and $115,000 in 2012.

(4)Includes accretable yield from acquired loans

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Table 2:  Volume/Rate Variance

Comparison of six months ended June 30, 2013 versus 2012:

	Increase (decrease) Due to Changes in
(in thousands)	Volume		Rate			Net(3)
Earning assets
Loans (1)(2)(4)	$	3,959	$	(366	)	$	3,593
Investment securities
Taxable		260		(179	)		81
Tax-exempt (2)		57		(128	)		(71	)
Other interest-earning assets		11		17			28
Total interest-earning assets	$	4,287	$	(656	)	$	3,631
Interest-bearing liabilities
Interest-bearing demand	$	224	$	(22	)	$	202
Savings deposits		61		(22	)		39
MMA		72		(104	)		(32	)
Core CDs and IRAs		140		(581	)		(441	)
Brokered deposits		25		(284	)		(259	)
Total interest-bearing deposits		522		(1,013	)		(491	)
Other interest-bearing liabilities		203		(207	)		(4	)
Total interest-bearing liabilities		725		(1,220	)		(495	)
Net interest income	$	3,562	$	564		$	4,126

(1)Nonaccrual loans 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 34% adjusted for the disallowance of interest expense.

(3)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.

(4)Includes accretable yield from acquired loans

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Table 3:  Quarterly Net Interest Income Analysis

	For the Three Months Ended June 30,
	2013							2012
(in thousands)	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
ASSETS
Earning assets
Loans (1) (2) (3)(4)	$	754,352	$	9,860		5.18	%	$	504,876	$	6,570		5.16	%
Investment securities
Taxable		88,622		275		1.24	%		22,249		158		2.84	%
Tax-exempt (2)		31,792		309		3.89	%		26,118		321		4.91	%
Other interest-earning assets		32,580		69		0.85	%		35,831		50		0.56	%
Total interest-earning assets		907,346	$	10,513		4.60	%		589,074	$	7,099		4.78	%
Cash and due from banks		2,271							11,091
Other assets		78,244							43,001
Total assets	$	987,861						$	643,166
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Savings	$	78,476	$	50		0.25	%	$	29,645	$	34		0.46	%
Interest-bearing demand		154,196		286		0.74	%		87,807		211		0.96	%
MMA		203,043		172		0.34	%		156,466		181		0.46	%
Core CDs and IRAs		195,713		443		0.91	%		135,002		606		1.81	%
Brokered deposits		41,876		74		0.71	%		30,934		112		1.45	%
Total interest-bearing deposits		673,304		1,025		0.61	%		439,854		1,144		1.05	%
Other interest-bearing liabilities		82,810		515		2.46	%		47,051		464		3.90	%
Total interest-bearing liabilities		756,114		1,540		0.81	%		486,905		1,608		1.32	%
Noninterest-bearing demand		129,978							75,101
Other liabilities		7,196							4,797
Total equity		94,573							76,363
Total liabilities and stockholders’ equity	$	987,861						$	643,166
Net interest income and rate spread			$	8,973		3.79	%			$	5,491		3.46	%
Net interest margin						3.92	%						3.69	%

(1)Nonaccrual loans 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 34% and adjusted for the disallowance of interest expense.

(3)Interest income for the period ending June 30, includes loan fees of $170,000 in 2013, and $103,000 in 2012.

(4)Includes accretable yield from acquired loans

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Table 4:  Volume/Rate Variance

Comparison of three months ended June 30, 2013 versus 2012:

	Increase (decrease) Due to Changes in
(in thousands)	Volume		Rate			Net(3)
Earning assets
Loans (1)(2)(4)	$	3,263	$	27		$	3,290
Investment securities
Taxable		214		(97	)		117
Tax-exempt (2)		62		(74	)		(12	)
Other interest-earning assets		14		5			19
Total interest-earning assets	$	3,553	$	(139	)	$	3,414
Interest-bearing liabilities
Interest-bearing demand	$	133	$	(58	)	$	75
Savings deposits		36		(20	)		16
MMA		46		(55	)		(9	)
Core CDs and IRAs		209		(372	)		(163	)
Brokered deposits		31		(69	)		(38	)
Total interest-bearing deposits		455		(574	)		(119	)
Other interest-bearing liabilities		211		(160	)		51
Total interest-bearing liabilities		666		(734	)		(68	)
Net interest income	$	2,887	$	595		$	3,482

(1)Nonaccrual loans 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 34% adjusted for the disallowance of interest expense.

(3)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.

(4)Includes accretable yield from acquired loans

Table 5: Interest Rate Spread, Margin and Average Balance Mix — Taxable-Equivalent Basis

		Six Months Ended June 30,
	2013								2012
(in thousands)	Average Balance		% of Earning Assets			Yield/Rate			Average Balance		% of Earning Assets			Yield/Rate
Total loans	$	651,256		82.6	%		5.09	%	$	494,647		82.6	%		5.24	%
Securities and other earning assets		137,602		17.4	%		1.65	%		104,072		17.4	%		2.11	%
Total interest-earning assets	$	788,858		100	%		4.49	%	$	598,719		100	%		4.69	%
Interest-bearing liabilities	$	650,306		82.4	%		0.91	%	$	494,456		82.6	%		1.39	%
Noninterest-bearing funds, net		138,552		17.6	%					104,263		17.4	%
Total funds sources	$	788,858		100	%		0.75	%	$	598,719		100	%		1.15	%
Interest rate spread							3.58	%							3.30	%
Contribution from net free funds							0.16	%							0.24	%
Net interest margin							3.74	%							3.54	%

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Taxable-equivalent net interest income was $14.8 million for the first six months of 2013, an increase of $4.1 million or 38% over the same period in 2012.  The $4.1 million increase in net interest income was predominantly volume related, given the timing of the acquisition, but was also favorably impacted by an increase in interest rate spread on higher average earning assets.  Taxable equivalent interest income increased $3.6 million between the six-month periods (including $4.0 million from higher loan volumes, less $0.4 million from lower loan yields).  Interest expense fell $0.5 million between the six-month periods due to beneficial growth in the mix of lower-costing funds (with $1.2 million less interest expense from favorable rate changes, but $0.7 million more interest expense from higher interest-bearing liabilities volume).

The taxable-equivalent net interest margin was 3.74% for the first six months of 2013, up 20 bps over the first half of 2012, with improvement in the cost of funds at 0.91% (down 48 bps), offset partly by a lower earning asset yield at 4.49% (down 20 bps) and an 8 bps decrease in net free funds.  In general, there has been, and will continue to be, considerable downward margin pressure as assets mature in this prolonged low-rate environment, with current reinvestment rates substantially lower than previous rates and less opportunity to offset such with similar changes in the already low cost of funds.

The earning asset yield was comprised mainly of loans, representing 82.6% of average earning assets and yielding 5.09% for first half 2013, compared to 82.6% and 5.24%, respectively, for first half 2012, but aided in 2013 by the timing of the acquisition and the positive rate profile of acquired loans. If acquired loans marked to estimated fair value at acquisition resolve or perform more favorably than originally anticipated, there is and will continue to be potential for favorable loan yield adjustments.  All other interest earning assets combined yielded 1.65%, down 46 bps compared to first half 2012, but aided in 2013 by a higher mix of investments (representing 11.0% of average earning assets, compared to 7.9% for first half 2012) that earn more than the other cash-equivalent earning assets.

Nicolet’s cost of funds continued its favorable decline during the low-rate environment, at 0.91% for the first half of 2013, 48 bps lower than the first half 2012. The average cost of interest-bearing deposits (which represent over 90% of average interest-bearing liabilities for both years), was 0.69% for the first half of 2013, down 44 bps versus the first half 2012, with favorable rate variances in all deposit categories and higher mix of balances in lower-costing transactional deposits (savings, checking and MMA). Average brokered deposit balances remained stable for the comparable six-month periods, however, their cost decreased from 2.27% in 2012 to 0.66% in 2013, as a significant portion of the higher rate brokered deposit balances matured since June 30, 2012, and were replaced with shorter-term, less-costly brokereds in anticipation of the merger and seasonal deposit declines.   The cost of other interest-bearing liabilities (comprised of short- and long-term borrowings) decreased to 2.98%, down 98 bps between the six-month periods, mainly from increased usage of short-term advances at favorable rates in addition to the prepayment of $10 million in higher-costing advances during the first quarter 2013 and the acquisition at fair value of a lower-rate junior subordinated debenture in second quarter 2013.

Average interest-earning assets were $789 million for the first half of 2013, $190 million or 32% higher than the first half of 2012, led by a $157 million increase in average loans (to $651 million or 83% of interest earning assets) and a $39 million increase in average investments (to $86 million or 11% of earning assets), both heavily influenced by the size and timing of the acquisition in 2013.

Average interest-bearing liabilities were $650 million, up $156 million or 32% over the first half of 2012, led by a $138 million increase in non-brokered interest-bearing deposits (to $553 million or 85% of average interest-bearing liabilities) and a $15 million increase in average other interest-bearing liabilities (to $62 million), both heavily influenced by the size and timing of the acquisition in 2013.

Provision for Loan Losses

The provision for loan losses for the six months ended June 30, 2013 and 2012 was $2.0 million and $2.4 million respectively.  The provision for loan losses has been trending down, with asset quality trends improving in the non-acquired portfolio (primarily from work-outs of problem loans and declining net charge-offs), as well as credit discounts being included directly in the estimated fair value of recently acquired loans (and accordingly no allowance for loan losses recorded at acquisition).   At December 31, 2012, the ALLL was $7.1 million which grew to $7.7 million at June 30, 2013, given the $2.0 million provision for loan losses and net charge offs of $1.4 million during the first six months of 2013.  The ratio of the ALLL to total loans was 0.91% at June 30, 2013, impacted most notably by the 2013 acquisition, which added no allowance for loan losses to the numerator (as noted above) and $272 million of loans into the denominator as of the date of acquisition.   As events occur in the acquired loan portfolio, an ALLL will be established for this pool of assets as appropriate.  Comparatively, the ALLL to total loans was 1.29% at December 31, 2012.  Nonperforming loans were improving prior to the acquisition, starting at $7.0 million (or 1.3% of total loans) at December 31, 2012, to $2.7 million (or 0.5% of loans) at March 31, 2013, and then increased to $14.3 million (or 1.7% of loans) at June 30, 2013.  The $11.6 million increase from March 31 to June 30, 2013, included approximately $10.9 million of acquired loans brought on in a nonaccruing and impaired status at acquisition.

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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 adequacy of the ALLL. The adequacy 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,” and “Balance Sheet Analysis — Impaired Loans and Nonperforming Assets.”

Noninterest Income

Table 6:  Noninterest Income

	For the three months ended June 30,										For the six months ended June 30,
	2013		2012		$ Change			% Change			2013		2012		$ Change			% Change
(in thousands)
Service charges on deposit accounts	$	470	$	280	$	190			67.9	%	$	754	$	567	$	187			33.0	%
Trust services fee income		1,074		724		350			48.3			1,876		1,454		422			29.0
Mortgage income		714		671		43			6.4			1,586		1,408		178			12.6
Brokerage fee income		115		81		34			42.0			217		165		52			31.5
Gain on sale of assets, net		45		237		(192	)		(81.0	)		49		383		(334	)		(87.2	)
Bank owned life insurance (“BOLI”)		212		183		29			15.8			381		336		45			13.4
Rent income		274		240		34			14.2			524		480		44			9.2
Investment advisory fees		76		85		(9	)		(10.6	)		162		171		(9	)		(5.3	)
Bargain purchase gain		10,435		-		10,435			100.0			10,435		-		10,435			100.0
Other		351		176		175			99.4			538		337		201			59.6
Total noninterest income	$	13,766	$	2,677	$	11,089			414.2	%	$	16,522	$	5,301	$	11,221			211.7	%

Comparison of the six months ending June 30, 2013 versus 2012

Noninterest income was $16.5 million for the six months of 2013, an increase of $11.2 million from 2012 or 211.7%, with a $10.4 million bargain purchase gain included in the second quarter 2013.  The bargain purchase gain was calculated as the net difference in the fair value of the net assets acquired of $20.6 million less the consideration paid of $10.2 million resulting in the net bargain purchase gain of $10.4 million.  The details of the acquisition accounting are located in Note 2 of the notes to the unaudited consolidated financial statements.  Without the bargain purchase gain, noninterest income was up $0.8 million or 14.8% between the six-month periods ended June 30, 2013 and 2012, impacted mostly by the size and timing of the Mid-Wisconsin transaction but offset partly by a negative swing in net gain on assets sold of $0.3 million.

Service fees on deposit accounts were $0.8 million for the six months ended June 30, 2013, up $0.2 million (or 33.0%) over the first six months of 2012.  The increase is primarily from increased service charges on deposits given the increase in deposit balances and accounts mainly from the merger, and higher non-sufficient funds (“NSF”) fees.

Trust service fees increased to $1.9 million for the first six months of 2013, up $0.4 million or 29.0% over first half 2012. In addition to the larger base of customers acquired through the merger, there was continued market improvement on assets under management, on which fees are based.  Similarly, brokerage fees were $0.2 million, up $52,000 or 31.5% over first half 2012, mainly from increased legacy business, market improvements and to a lesser degree from the merger.  The expanded footprint of the bank will provide growth potential for wealth management in future periods.  

Mortgage income represents net gains received from the sale of residential real estate loans service-released into the secondary market and to a small degree, some related income. Residential refinancing activity and new purchase activity continues to remain steady, despite mortgage rates being higher than a year ago and trending upward.  Mortgage income was $1.6 million for the first six months of 2013, up $0.2 million or 12.6% over the first half of 2012, though slowing slightly for second versus first quarter of 2013.  The increase between six-month periods was not significantly impacted by the acquisition.

During the first half of 2013, Nicolet recognized a $49,000 net gain on sale of assets in the first six months of 2013 compared to $383,000 net gain in the comparable period of 2012.  The activity in 2013 consisted of $239,000 of net losses on sales of investments (mainly the result of selling a large portion of the acquired investment portfolio in second quarter to prepay higher costing debt assumed in the merger), more than offset by $288,000 of net gains on sales of OREO (as properties were resolved at better than expected terms).   Investments were recorded at fair value at the time of acquisition but an increase in rates during second quarter resulted in additional market declines realized on investments sold during the second quarter related to planned balance sheet reductions.  For the first six months of 2012, securities sales produced net gains of $440,000, while net losses on OREO were $57,000.

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BOLI income was $0.4 million for the first six months of 2013, up $45,000 from the comparable period in 2012, or 13.4%, mainly from the timing of additional BOLI procured.  New BOLI investment of $3.8 million was procured in the first quarter 2012 and $4.3 million was acquired in the Mid-Wisconsin transaction (bringing the 2013 six-month average of BOLI investment to $20.4 million, up 21% over the comparable period last year).   Rent income, investment advisory fees and other noninterest income combined were $1.2 million for the first half of 2013 compared to $1.0 million for the first half 2012, with the majority of the increase due to ancillary fees tied to deposit-related products, most particularly debit card, check cashing and wire fee income.

Noninterest Expense

Table 7:  Noninterest Expense

	For the three months ended June 30,										For the six months ended June 30,
	2013		2012		$ Change			% Change			2013		2012		$ Change			% Change
(in thousands)
Salaries and employee benefits	$	5,555	$	3,393	$	2,162			63.7	%	$	9,114	$	6,666	$	2,448			36.7	%
Occupancy, equipment and office		1,466		1,102		364			33.0			2,570		2,241		329			14.7
Business development and marketing		473		352		121			34.4			898		697		201			28.8
Data processing		572		410		162			39.5			995		812		183			22.5
FDIC assessments		130		138		(8	)		(5.8	)		240		274		(34	)		(12.4	)
Core deposit intangible amortization		286		168		118			70.2			434		336		98			29.2
Other		1,104		446		658			147.5			1,675		768		907			118.1
Total noninterest expense	$	9,586	$	6,009	$	3,577			59.5	%	$	15,926	$	11,794	$	4,132			35.0	%

Comparison of the six months ending June 30, 2013 versus 2012

Total noninterest expense for the six months ending June 30, 2013 and 2012 was $15.9 million and $11.8 million, respectively, up $4.1 million or 35.0%, as the first half of 2013 included approximately two months of increased operations from the Mid-Wisconsin transaction and approximately $1.7 million of non-recurring merger-related expenses.  Most notably, salaries and benefits accounted for $2.4 million of the increase (of which approximately $1 million was attributable to non-recurring merger expenses, such as stay bonuses, severances and related payroll taxes), and other expense increased $0.9 million (of which nearly $0.7 million was attributable to non-recurring merger expenses, predominantly legal or consultant in nature for consummation and integration).

Salaries and employee benefits expense increased by $2.4 million or 36.7%, over the first half of 2012, with approximately $1 million attributable to nonrecurring merger-related costs as noted above.  The increase was otherwise commensurate with the growing workforce and impacted by merit increases between the years and higher overtime in preparation for the merger.  Average full time equivalent employees for the first half of 2013 were 226, versus 158 for first half 2012 (up 43%).

Occupancy, equipment and office expense increased $0.3 million to $2.6 million for the first six months of 2013 compared to first half 2012.   This 14.7% increase is in line with the addition of 11 branches which nearly doubled our physical facilities and depreciation expense for two of the first six months in 2013.  Utilities, rent, and other occupancy expenses increased proportionately in conjunction with the merger.

Business development and marketing expense for the first six months of 2013 increased $0.2 million compared to the same period in 2012.  This 28.8% increase was a result of the greater focus on growth in loans, sales seminars and events, higher charitable donations in 2013, and merger-related travel and business development costs.

Data processing, FDIC assessments and core deposit intangible amortization combined increased from $1.4 million for the first six months in 2012 to $1.7 million for the same period in 2013.  Core deposit intangible amortization increased given the new $4.0 million core deposit intangible recorded at acquisition being amortized over a 10-year period.  Data processing expenses (which are primarily volume based) rose individually 22.5%, in line with two months of increased size.  FDIC assessments declined slightly (down $34,000) despite the rise in assets as Nicolet experienced a reduction in the assessment rate beginning in first quarter 2013.

Other expense increased $0.9 million for the first half of 2013, compared to the same time period in 2012.  Legal, consulting, and accounting fees combined accounted for $0.7 million of the increase and were predominantly related to the merger activity. The remaining increase is primarily from higher foreclosure expenses and higher insurance costs related to Nicolet’s increased size and public nature.

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Income Taxes

For the first six months of 2013 income tax expense was $1.0 million compared to $0.4 for the same period of 2012.  The effective tax rates were 7.3% and 24.4% for first six months of 2013 and 2012, respectively, influenced largely by the bargain purchase gain which was a tax free transaction.  The tax rate for the first six months of 2013 without the bargain purchase gain would have been 34.7%.  GAAP requires that deferred income taxes be analyzed to determine if a valuation allowance is required. A valuation allowance is required if it is more likely than not that some portion of the deferred tax asset will not be realized.  No valuation allowance was determined to be necessary.

Comparison of the three months ending June 30, 2013 versus 2012

Nicolet reported net income of $11.5 million for the three months ended June 30, 2013, compared to $0.6 million for the comparable period of 2012, with second quarter 2013 including the $10.4 million bargain purchase gain and approximately $1.5 million of non-recurring pre-tax merger-related expenses.  Net income available to common shareholders for the second quarter of 2013 was $11.2 million, or $2.78 per diluted common share, compared to net income available to common shareholders of $0.3 million, or $0.09 per diluted common share, for the second quarter of 2012. Income statement results and average balances for second quarter 2013 include approximately two months of activity from Mid-Wisconsin.

Taxable equivalent net interest income was $9.0 million for second quarter 2013, up $3.5 million or 65.3% over second quarter 2012, with $2.9 million of the increase from volume variances (given the larger balance sheet following the acquisition), and $0.6 million improvement from rate variances (predominantly from lower cost of funds between the comparable quarters).

For the second quarter of 2013, the earning asset yield was 4.60%, 18 bps lower than the second quarter of last year, mainly due to a decline in the yield on non-loan earning assets (which combined cost 1.71%, down 80 bps from second quarter 2012), and pressured additionally by non-loan earning assets (which earn less than loans) representing a higher percentage of average earning assets (to 16.9% for first half 2013 versus 14.3% for first half 2012).  Loans yielded 5.18%, up 2 bps over the second quarter 2012, aided mostly by the timing of the acquisition and the positive rate profile of acquired loans.

Between the second quarter periods, the cost of funds declined 51 bps to 0.81% in 2013 versus 1.32% in 2012.  All funding categories showed significantly lower rates between the second quarter periods, as the majority of maturities of higher costing CDs or wholesale debt were renewed in full or in part into shorter-term, lower-costing funding, and rates offered on many transaction deposit products (within savings, checking and MMA) were lowered by Nicolet over the year since June 30, 2012. Average other interest-bearing liabilities (consisting primarily of FHLB advances, junior subordinated debentures and notes payable) increased $35.8 million between the second quarter periods, as approximately 80% of Mid-Wisconsin debt acquired was paid off during the quarter and thus inflated the average balance of second quarter 2013. FHLB advances acquired in the Mid-Wisconsin transaction were marked at fair value assuming immediate payoff; however, they were repaid later in the second quarter, with the most notable result being a $0.2 million ‘recovery’ of prepayment penalty recorded in other expense as required by accounting standards.

Noninterest income was $13.8 million for second quarter 2013, and without the bargain purchase gain was $3.3 million, compared to $2.7 million for second quarter 2012.  Aside from investment advisory fees and the lower net gains on sale of assets, all other categories increased mainly in light of being a larger institution with increased volumes.  Other income for second quarter 2013 nearly doubled to $0.4 million versus the second quarter of 2012, mainly due to higher fee income ancillary to deposit activity (such as debit cards, wires and checking cashing, and safe deposit boxes) given our increased size.

Noninterest expense was $9.6 million for the second quarter of 2013, up $3.6 million over second quarter 2012, including approximately $1.5 million of non-recurring merger-based expenses and reflecting proportionate increases as a result of the timing and size of the merger.  For the quarter, FDIC assessments were down 5.8% minimally from the prior year but increased from the first quarter of 2013 by $20,000 as a result of the larger asset size.  Other expenses include legal, consulting and audit expense and increased $0.7 million for the second quarter of 2013 when compared to the second quarter of 2012.  These expenses included approximately $0.4 million in the second quarter alone with the primary expense related to the payment of the investment banker on consummation of the merger.  Additional consulting and legal expenses were up $0.1 million when compared to the first quarter of 2013 and represented approximately $0.6 million in total for the year.  We did realize a net gain on repayment of FHLB advances of $0.2 million as a result of incurring less prepayment penalty than determined at the time of merger due to a slight lag in paying off the debt, however much of this was captured in increased interest expenses while we maintained the advances.

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The provision for loan losses for the three months ended June 30, 2013 and 2012 was $1.0 million and $1.1 million respectively.  At June 30, 2013, the ALLL was $7.7 million (or 0.91% of total loans) compared to $6.0 million (or 1.19% of total loans) at June 30, 2012.  Net charge offs for the quarter ending June 30, 2013 were $0.9 million compared to $1.1 million for the same period in 2012.

Income tax expense was $0.5 million and $0.2 million for the second quarters of 2013 and 2012, respectively.   The effective tax rates were 4.5% (or 34.4% when removing the impact of the tax free bargain purchase gain) for second quarter 2013 and 26.5% for second quarter 2012.        

BALANCE SHEET ANALYSIS

Loans

Nicolet services a diverse customer base throughout Northeast and Central Wisconsin and in Menominee, Michigan including the following industries: manufacturing, agriculture, wholesaling, retail, service, and businesses supporting the general building industry. It continues to concentrate its efforts in originating loans in its local markets and assisting its current loan customers. It actively utilizes government loan programs such as those provided by the U.S. Small Business Administration to help customers weather current economic conditions and position their businesses for the future.

Nicolet’s primary lending function is to make commercial loans, consisting of commercial and industrial business loans, agricultural production, and owner-occupied commercial real estate loans; commercial real estate (“CRE”) loans, consisting of commercial investment real estate loans, agricultural real estate, and construction and land development loans; residential real estate loans, including residential first mortgages, residential junior mortgages (such as home equity loans and lines), and to a lesser degree residential construction loans; and retail and other loans.

Total loans were $841 million at June 30, 2013 compared to $553 million at December 31, 2012.  This balance included acquired loans of $272 million at acquisition, representing a net increase of $16 million of originated loans.  The increase was largely due to strong loan growth in the second quarter of $27 million offsetting the $11 million decrease which occurred in the first quarter versus year end 2012.

Table 8: Period End Loan Composition

	For the three months ended,
	June 30, 2013					March 31, 2013					December 31, 2012					September 30, 2012					June 30, 2012
(in thousands)	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial & industrial	$	245,856		29.3	%	$	193,288		35.7	%	$	197,301		35.8	%	$	201,049		36.8	%	$	199,028		38.5	%
Agricultural production		13,114		1.6			219		-			215		-			315		0.1			183		-
Owner-occupied CRE		181,101		21.5			107,523		19.8			106,888		19.3			105,585		19.3			115,170		22.3
Total commercial loans		440,071		52.4			301,030		55.5			304,404		55.1			306,949		56.2			314,381		60.8
Agricultural real estate		38,983		4.6			9,866		1.8			11,354		2.1			1,201		0.2			1,281		0.2
CRE investment		117,264		14.0			73,410		13.5			76,618		13.9			76,773		14.1			62,857		12.2
Construction & land development		37,754		4.5			22,286		4.1			21,791		3.9			26,964		4.9			24,612		4.8
Total CRE loans		194,001		23.1			105,562		19.4			109,763		19.9			104,938		19.2			88,750		17.2
Residential construction		10,288		1.2			7,445		1.4			7,957		1.4			7,670		1.4			5,961		1.2
Residential first mortgage		141,255		16.8			86,202		15.9			85,588		15.5			79,543		14.6			63,156		12.2
Residential junior mortgage		48,929		5.8			39,026		7.2			39,352		7.1			40,928		7.5			38,082		7.4
Total residential real estate loans		200,472		23.8			132,673		24.5			132,897		24.0			128,141		23.5			107,199		20.8
Retail & other		6,002		0.7			2,859		0.6			5,537		1.0			5,680		1.1			6,662		1.2
Total loans	$	840,546		100.0	%	$	542,124		100.0	%	$	552,601		100.0	%	$	545,708		100.0	%	$	516,992		100.0	%

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Total commercial and total CRE loans combined were 75.5% at June 30, 2013 compared to 74.9% of the total loan portfolio at December 31, 2012.  Mid-Wisconsin had a higher proportion of CRE loans, thus post-merger total CRE rose to 23.1% at June 30, 2013 compared to 19.9% at December 31, 2012 while total commercial loans declined to 52.4% versus 55.1% for the respective periods.  All commercial loans (commercial and CRE combined) are considered to have more inherent risk of default than residential mortgage or retail loans, in part because the commercial balance per borrower is typically larger than that for residential and mortgage loans, implying higher potential losses on an individual customer basis, and the underlying dependence of the commercial borrower’s success on many influences such as health of the economy, real estate values, and efficient business practices.

Total commercial loans were 52.4% of total loans at June 30, 2013.  The increase in commercial loan balances from June 2012 to June 2013 has resulted primarily from the acquisition, but also renewed loan demand from business borrowers based on cautious optimism for improving economic conditions versus a year ago.   The increase in agricultural production loans was almost entirely the result of the acquisition with the central region of the state having a strong farming base.  All commercial loan segments include a diverse range of industries. The credit risk related to commercial and industrial loans, agricultural production loans, and owner-occupied CRE loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations, or on the value of underlying collateral, if any.

Total CRE loans were 23.1% of total loans at June 30, 2013.  CRE investment loans comprised 14.0% of the portfolio at June 30, 2013 compared to 13.9% at December 31, 2012.  The CRE investment loan classification primarily includes commercial-based mortgage loans that are secured by non-owner occupied, nonfarm/nonresidential real estate properties, and multi-family residential properties. The increase in agricultural real estate loans (at 4.6% of total loans versus 2.1% at June 30, 2013 and year end 2012, respectively) was almost entirely the result of the acquisition with the central region of Wisconsin having a strong farming base.  Construction and land development loans were 4.5% at June 30, 2013 compared to 3.9% December 31, 2012.  Loans in this classification provide financing for the development of commercial income properties, multi-family residential development, and land designated for future development. Credit risk on these types of loans is controlled by making loans in familiar markets, reviewing the merits of individual projects, controlling loan structure, and monitoring the progress of projects through the analysis of construction advances.  This category has been decreasing as Nicolet has limited new lending to reduce its credit exposure and the acquisition did not significantly impact this category.  Lending in this segment has been focused on loans that are secured by commercial income-producing properties as opposed to speculative real estate development. Credit risk on both CRE investment loans and construction and land development loans is managed by employing sound underwriting guidelines, lending primarily to borrowers in local markets, periodically evaluating the underlying collateral, and formally reviewing the borrower’s financial soundness and relationships on an ongoing basis.

Residential construction loans were 1.2% at June 30, 2013 compared to 1.4% at December 31, 2012 representing a continued downward trend in these types of loans.

Residential first mortgage real estate loans increased slightly from 15.5% at December 31, 2012 to 16.8% largely as a result of acquired balances.   Residential first mortgage loans include conventional first-lien home mortgages and exclude loans held for sale in the secondary market. Since early 2012, Nicolet has retained specific high quality residential mortgages, in part as an alternative to investing in greater volumes of mortgage-backed securities.  Residential junior mortgage real estate loans increased slightly in balance but declined as a percent of loans from 7.1% at December 31, 2012 to 5.8% of loans at June 30, 2013.  Residential junior mortgage real estate loans consist of home equity lines and term loans secured by junior mortgage liens. While Nicolet has not experienced significant losses in the residential real estate category, if declines in market values that have occurred in the residential real estate markets worsen, particularly in Nicolet’s market area, the value of collateral securing its real estate loans could decline further, which could cause an increase in the provision for loan losses. In light of the uncertainty that exists in the economy and credit markets, there can be no guarantee that Nicolet will not experience additional deterioration resulting from a downturn in credit performance by its residential real estate loan customers. As part of its management of originating residential mortgage loans, the vast majority of Nicolet’s long-term, fixed-rate residential real estate mortgage loans are sold in the secondary market without retaining the servicing rights. At June 30, 2013, $3.1 million of residential mortgages were held for resale to the secondary market, compared to $7.3 million at December 31, 2012.

Retail and other loans totaled $6.0 million at June 30, 2013, an increase of $0.5 million since December 31, 2012, and represented 0.7% and 1.0% of total loans, respectively. Loans in this classification include predominantly short-term and other personal installment loans not secured by real estate. The decline in retail and other loans is largely a result of consumers preferring home equity-based loans over consumer installment loans, as well as the uncertain and difficult economic conditions reducing consumer demand for leverage in general.  Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guaranty positions.

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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 adequate ALLL, and sound nonaccrual and charge-off policies. An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are made. The credit management process is regularly reviewed and the process has been modified over the past several years to further strengthen the controls.

The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to multiple numbers of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At June 30, 2013, no significant industry concentrations existed in Nicolet’s portfolio in excess of 25% of total loans. Nicolet has also developed guidelines to manage its exposure to various types of concentration risks.

Allowance for Loan and Lease Losses

Credit risks within the loan portfolio are inherently different for each loan type. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and 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 ALLL is established through a provision for loan losses charged to expense to appropriately provide for potential credit losses in the existing loan portfolio. Loans are charged against the ALLL when management believes that the collection of principal is unlikely. 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 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. Nicolet’s methodology reflects guidance by regulatory agencies to all financial institutions.

At June 30, 2013, the ALLL was $7.7 million, an increase of $0.6 million since December 31, 2012 and $0.2 million since March 31, 2013.  The ALLL as a percentage of total loans was 0.91% at June 30, 2013.  This is a decline from 1.39% at March 31, 2013 and 1.29% at December 31, 2012.  This was largely the result of the acquisition, as loans are recorded directly at their estimated fair value (inclusive of credit-related marks) and no addition to the allowance for loan losses is recorded at consummation.  Loss history on the acquired loans will be developed as charge offs occur and an allocation will be made for these loans in future periods as or if needed.  The provision for loan losses for the first six months of 2013 was $2.0 million compared to $2.4 million for the same period in 2012.  Gross charge-offs were $1.4 million for the first six months of 2013 compared to $2.3 million for the first six months of 2012.  Recoveries were $31,000 and $55,000 for the two periods, respectively. As a result, net charge-offs for the first six months of 2013 were $1.4 million compared to $2.2 million for the comparable period in 2012.  Commercial and industrial and CRE investment loan charge offs increased compared to 2012 while all other categories saw improvement.  Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.  The level of the provision for loan losses is directly correlated to the assessment of the adequacy of the allowance, including, but not limited to, consideration of the amount of net charge-offs, loan growth, levels of nonperforming loans, and trends in the risk profile of the loan portfolio.

The ALLL was 43.53% and 98.63% of nonperforming assets at June 30, 2013 and December 31, 2012, respectively. Issues impacting asset quality over the past few years have included historically depressed economic factors, such as weakened commercial and residential real estate markets, volatile energy prices, heightened unemployment, and depressed consumer confidence, leading to long resolution periods at low returns. Declining collateral values significantly contributed to elevated levels of nonperforming loans, net charge-offs, and ALLL. Nicolet pursued rigorous workout and resolution plans on problem credits and implemented enhanced underwriting and credit monitoring, particularly in 2010 and 2011. As a result, asset quality stabilized during 2012 and continues to improve in 2013.

Nicolet’s 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 collateral shortfall is established for all loans determined to be impaired. The specific reserve in the ALLL is equal to the aggregate collateral shortfall calculated from the impairment analysis. Loans measured for impairment include nonaccrual loans, troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. Second, Nicolet’s management allocates 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. Lastly, management allocates 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.

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At June 30, 2013, the largest portion of the ALLL is allocated to construction and land development loans at $3.3 million, representing 43.5% of the ALLL (compared to 36.2% allocated to this segment at December 31, 2012), and commensurate with risks in this segment, past loss history and nonaccrual activity. Owner-occupied CRE, CRE investment, and residential first mortgage loans all show significant increase in nonperforming levels, however, the majority of the increase was due to acquired loans which have been marked to fair value and did not require additional allowance at June 30, 2013.  At June 30, 2013, $10.6 million of the $14.3 million total nonaccrual loans were acquired loans, thus the remaining $3.7 million are originated nonaccrual loans, down $3.3 million from the $7.0 million nonaccrual loans at December 31, 2012.

Management performs ongoing intensive analyses of its loan portfolio to allow for early identification of customers experiencing financial difficulties, maintains prudent underwriting standards, understands the economy in its markets, and considers the trend of deterioration in loan quality in establishing the level of the ALLL.

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

Table 9: Loan Loss Experience

	For the three months ended,
(in thousands)	June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012
Allowance for loan losses (ALLL):
Balance at beginning of period	$	7,540		$	7,120		$	6,491		$	6,045		$	5,973
Provision for loan losses		975			975			975			975			1,125
Charge offs		876			567			671			552			1,077
Recoveries		19			12			325			23			24
Net charge offs		857			555			346			529			1,053
Balance at end of period	$	7,658		$	7,540		$	7,120		$	6,491		$	6,045
Net loan charge offs:
Commercial & industrial	$	(16	)	$	470		$	164		$	48		$	66
Agricultural production		—			—			—			—			—
Owner-occupied CRE		56			55			(291	)		300			666
Agricultural real estate		—			—			1			—			—
CRE investment		639			—			(27	)		150			—
Construction & land development		36			—			406			(17	)		176
Residential construction		—			—			—			1			30
Residential first mortgage		44			36			45			48			64
Residential junior mortgage		88			(6	)		47			(1	)		13
Retail & other		10			—			1			—			38
Total net loans charged off	$	857		$	555		$	346		$	529		$	1,053
ALLL to total loans		0.91	%		1.39	%		1.29	%		1.19	%		1.17	%
ALLL to net charge offs		223.40	%		339.64	%		514.45	%		306.76	%		143.52	%
Net charge offs to average loans, annualized		0.49	%		0.41	%		0.25	%		0.40	%		0.83	%

The allocation of the ALLL for each of the past five periods is based on Nicolet’s estimate of loss exposure by category of loans is shown in Table 10.

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Table 10: Allocation of the Allowance for Loan Losses

(in thousands)	June 30, 2013			% of Loan Type to Total Loans			December 31, 2012			% of Loan Type to Total Loans
ALLL allocation
Commercial & industrial	$	1,685			29.3	%	$	1,969			35.7	%
Agricultural production		5			1.6			-			0.1
Owner-occupied CRE		1,217			21.5			1,069			19.3
Agricultural real estate		12			4.6			-			2.1
CRE investment		183			14.0			337			13.9
Construction & land development		3,346			4.5			2,580			3.9
Residential construction		173			1.2			137			1.4
Residential first mortgage		733			16.8			685			15.5
Residential junior mortgage		287			5.8			312			7.1
Retail & other		17			0.7			31			1.0
Total ALLL	$	7,658			100.0	%	$	7,120			100.0	%
ALLL category as a percent of total ALLL:
Commercial & industrial		22.0	%					27.7	%
Agricultural production		0.1						-
Owner-occupied CRE		15.9						15.0
Agricultural real estate		0.2						-
CRE investment		2.4						4.7
Construction & land development		43.5						36.2
Residential construction		2.3						1.9
Residential first mortgage		9.6						9.6
Residential junior mortgage		3.8						4.4
Retail & other		0.2						0.5
Total ALLL		100.0	%					100.0	%

Impaired Loans and Nonperforming Assets

As part of its overall credit risk management process, Nicolet’s management has been 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.

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 measured for impairment include significant nonaccrual loans, troubled debt-restructurings (“restructured loans”), or other loans determined to be impaired by management. 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. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash after a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan principal.

Nonperforming loans were $14.3 million and $7.0 million at June 30, 2013 and December 31, 2012, respectively.  This balance included $10.6 million of nonperforming loans acquired in the merger representing a net decline of $3.3 million in nonperforming originated loans.   This continues the improving trend as a result of Nicolet’s aggressive workout efforts over the past three years.

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 adequacy 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 loans covering a diverse range of businesses and real estate property types.

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Potential problem loans totaled $16.2 million (or 1.9% of total loans) at June 30, 2013 and $11.6 million (or 2.1% of total loans) at December 31, 2012.  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.

OREO increased to $3.4 million at June 30, 2013 from $0.2 million at December 31, 2012. The increase was related to one originated loan which had been on nonaccrual and was taken into possession in the first quarter of 2013 with the remaining balance of $1.7 million being acquired in the merger.  Total nonperforming assets increased from $7.2 million at December 31, 2012 to $17.7 million at June 30, 2013.   The increase in nonperforming assets included acquired loans with a balance of $10.6 million at June 30, 2013.    Nicolet’s management actively seeks to ensure properties held are monitored to minimize Nicolet’s risk of loss. Evaluations of the fair market value of the OREO properties are done quarterly and valuation adjustments, if necessary, are recorded in Nicolet’s consolidated financial statements.

Table 11: Nonperforming Assets

(in thousands)	June 30, 2013			March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012
Nonaccrual loans considered impaired:
Commercial & industrial	$	4		$	93		$	784		$	3,986		$	4,088
Agricultural production		22			—			—			—			—
Owner-occupied CRE		3,546			1,857			1,960			354			389
Agricultural real estate		611			—			—			—			—
CRE investment		5,546			—			—			380			544
Construction & land development		790			—			2,560			8,558			8,531
Residential construction		—			—			—			397			1,200
Residential first mortgage		3,394			628			1,580			1,326			396
Residential junior mortgage		257			—			—			—			36
Retail & other		135			149			142			151			151
Total nonaccrual loans considered impaired		14,307			2,727			7,026			15,152			15,335
Impaired loans still accruing interest		—			—			—			—			—
Accruing loans past due 90 days or more		—			—			—			—			—
Total nonperforming loans	$	14,307		$	2,727		$	7,026		$	15,152		$	15,335
CRE investment	$	360		$	121		$	71		$	393		$	393
Owner-occupied CRE		604			—			—			—			—
Construction & land development		1,925			1,917			17			19			44
Residential real estate owned		471			—			105			205			453
OREO		3,360			2,038			193			617			890
Total nonperforming assets	$	17,667		$	4,765		$	7,219		$	15,769		$	16,225
Total restructured loans accruing		—			—			—			—			—
Ratios
Nonperforming loans to total loans		1.7	%		0.5	%		1.3	%		2.8	%		3.0	%
Nonperforming assets to total loans plus OREO		2.09	%		0.88	%		1.31	%		2.89	%		3.13	%
Nonperforming assets to total assets		1.62	%		0.70	%		0.97	%		2.46	%		2.42	%
ALLL to nonperforming assets		43.35	%		158.24	%		98.63	%		41.16	%		37.27	%
ALLL to total loans at end of year		0.91	%		1.39	%		1.29	%		1.19	%		1.17	%

Table 12: Investment Securities Portfolio

	June 30, 2013							December 31, 2012
(in thousands)	Amortized Cost		Fair Value		% of Total			Amortized Cost		Fair Value		% of Total
U.S. government sponsored enterprises	$	1,000	$	1,001		1	%	$	-	$	-		-	%
State, county and municipals		51,742		52,340		40	%		31,642	$	32,687		58	%
Mortgage-backed securities		73,581		73,263		57	%		19,876		20,668		37	%
Corporate debt securities		220		220		-	%		-		-		-	%
Equity securities		1,576		3,164		2	%		1,624		2,546		5	%
Total	$	128,119	$	129,988		100	%	$	53,142	$	55,901		100	%

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At June 30, 2013 the total carrying value of investment securities was $130.0 million, up from $55.9 million at December 31, 2012, and represented 11.9% and 7.5% of total assets at June 30, 2013 and December 31, 2012, respectively. As part of the merger, securities with a fair value of $119 million were acquired and as of June 30, 2013 approximately $44 million had been sold in conjunction with planned reductions.

At June 30, 2013, the securities portfolio did not contain securities of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of shareholders’ equity.

In addition to securities available for sale, Nicolet had other investments of $7.5 million and $5.2 million at June 30, 2013 and December 31, 2012, respectively, consisting of capital stock in the Federal Reserve and the FHLB (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System), as well as equity investments in other private companies. The FHLB and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost. The investments in private companies have no quoted market prices, and are carried at cost less other than temporary impairment (“OTTI”) charges, if any. Nicolet’s management evaluates all these other investments periodically for impairment, considering financial condition and other available relevant information. There were no OTTI charges recorded in 2012 or year to date 2013.

Table 13: Investment Securities Portfolio Maturity Distribution

	As of June 30, 2013
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Mortgage- related and Equity Securities					Total Amortized Cost					Total Fair Value Amount
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
(in thousands)
U.S. government sponsored enterprises	$	—		—	%	$	1,000		0.3	%	$	—		—	%	$	—		—	%	$	—		—	%	$	1,000		0.3	%	$	1,001
State and county municipals (1)		5,263		3.3			37,268		2.3			8,835		1.7			375		4.1			—		—			51,741		4.0			52,340
Corporate debt securities		—		—			—		—			—		—			220		9.9			—		—			220		9.9			220
Mortgage-backed securities		—		—			—		—			—		—			—		—			73,581		1.7			73,581		1.7			73,263
Equity securities		—		—			—		—			—		—			—		—			1,576		—			1,576		—			3,164
Total amortized cost	$	5,263		3.3	%	$	38,268		2.2	%	$	8,835		1.7	%	$	595		6.2	%	$	75,157		1.7	%	$	128,118		2.6	%	$	129,988
Total fair value and carrying value	$	5,320				$	39,124				$	8,522				$	595				$	76,427									$	129,988

(1) The yield on tax-exempt investment securities is computed on a tax-equivalent basis using a federal tax rate of 34% adjusted for the disallowance of interest expense.

Deposits

Deposits represent Nicolet’s largest source of funds. Nicolet competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives. Included in total deposits in Table 14 are brokered deposits of $61.9 million at June 30, 2013 and $32.6 million at December 31, 2012.

Table 14: Deposits

	June 30, 2013					December 31, 2012
(in thousands)	Amount		% of Total			Amount		% of Total
Demand	$	150,460		16.6	%	$	108,234		17.6	%
Money market and NOW accounts		387,377		42.7	%		322,507		52.3	%
Savings		90,202		9.9	%		46,907		7.6	%
Time		280,044		30.8	%		138,445		22.5	%
Total deposits	$	908,083		100.0	%	$	616,093		100.0	%

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Total deposits were $908 million at June 30, 2013, an increase of $292 million since December 31, 2012, with $346 million of deposits from Mid-Wisconsin at acquisition.  The decline of $54 million in deposits mirrors seasonality within the customer base with deposits typically seen.  On average for the quarter, total deposits were $699 million, an increase of $176 million over 2012 averages, which includes two months of average deposit balances from merged activity.   The mix of average deposits continues to be impacted by a continued shift in customer preferences, predominantly away from time deposits.

Table 15: Average Deposits

	For the six months ended,
	June 30, 2013					June 30, 2012
(in thousands)	Amount		% of Total			Amount			% of Total
Demand	$	110,189		15.8	%		$	74,719		14.3	%
Money market and NOW accounts		340,787		48.8	%			253,982		48.6	%
Savings		64,602		9.2	%			27,694		5.3	%
Time		183,238		26.2	%			166,407		31.8	%
Total	$	698,816		100.0	%		$	522,802		100.0	%

Table 16: Maturity Distribution of Certificates of Deposit

(in thousands)	June 30, 2013
3 months or less	$	84,217
Over 3 months through 6 months		32,448
Over 6 months through 12 months		74,532
Over 12 months		88,847
Total	$	280,044

Other Funding Sources

Other funding sources, which include short-term and long-term borrowings, were $70.3 million and $45.4 million at June 30, 2013 and December 31, 2012, respectively. Short-term borrowings, consisting mainly of customer repurchase agreements and FHLB advances maturing in less than three months, totaled $33.2 million at June 30, 2013 and $4.0 million at December 31, 2012. Long-term borrowings include a joint venture note and FHLB advances, totaling $25.0 million at June 30, 2013 compared to $35.2 million at December 31, 2012, attributable to scheduled principal payments on the joint venture note payable and repayment of $10 million of longer term FHLB advances during first quarter 2013 (with a prepayment penalty of $96,000 recorded in other expense).  At acquisition, $48 million of short and long term debt (excluding subordinated debentures) was assumed and then paid off by June 30, 2013.  FHLB advances acquired in the Mid-Wisconsin transaction were marked at fair value assuming immediate payoff; however, they were repaid later in the second quarter, with the most notable result being a $0.2 million ‘recovery’ of prepayment penalty recorded in other expense.   Junior subordinated debentures are another long-term funding source.  Junior subordinated debentures of $6.2 million were issued in July 2004 in connection with the $6 million of trust preferred securities. Acquired junior subordinated debentures of $10.3 million in connection with $10 million of trust preferred securities were assumed in the merger and subsequently recorded at the fair market value of $5.8 million.  Further information regarding these junior subordinated debentures is located in Note 9 of the unaudited consolidated financial statements.

Off-Balance Sheet Obligations

As of June 30, 2013 and December 31, 2012, Nicolet had the following commitments that did not appear on its balance sheet:

Table 17: Commitments

	June 30,		December 31,
	2013		2012
(in thousands)
Commitments to extend credit — Fixed and variable rate	$	232,629	$	178,676
Standby and irrevocable letters of credit-fixed rate		7,582		4,050

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Contractual Obligations

Nicolet is party to various contractual obligations requiring the use of funds as part of its normal operations. Most of these obligations are routinely refinanced into similar replacement obligations. However, renewal of these obligations is dependent on its ability to offer competitive interest rates, liquidity needs, or availability of collateral for pledging purposes supporting the long-term advances.

At the completion of the construction of Nicolet’s headquarters building in 2005 and as part of a joint venture investment related to the building, Nicolet and the other joint venture partners guaranteed a joint venture note to finance certain costs of the building. This note is secured by the building, bears a fixed rate of 5.81% and requires monthly principal and interest payments until its maturity on June 1, 2016. The balance of this joint venture note was $10.0 million and $10.2 million as of June 30, 2013 and December 31, 2012, respectively.

Liquidity and Interest Rate Sensitivity

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 the core deposit base, the repayment and maturity of loans, investment securities sales, and sales of brokered deposits. All investment securities are classified as available for sale and are reported at fair value on the consolidated balance sheet. Approximately $60 million of the $130 million investment securities portfolio on hand at June 30, 2013 was pledged to secure public deposits, short-term borrowings, repurchase agreements and for other purposes as required by law. Other funding sources available include short-term borrowings, federal funds purchased, and long-term borrowings.

Cash and cash equivalents at June 30, 2013 and December 31, 2012 were approximately $36 million and $82 million, respectively. The increased cash and cash equivalents at year end compared to historical levels were predominantly due to strong customer deposit growth outpacing the loan demand.  These levels returned to more historical levels during the first quarter.  Nicolet’s liquidity resources were sufficient as of June 30, 2013 to fund loans and to meet other cash needs as necessary.

Interest Rate Sensitivity Gap Analysis

Table 18 represents a schedule of Nicolet’s assets and liabilities repricing over various time intervals. The primary market risk faced by Nicolet is interest rate risk. The static gap analysis starts with contractual repricing information for assets, liabilities, and off-balance sheet instruments. These items are then combined with repricing estimations for administered rate (interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition to the contractual information, residential mortgage whole loan products and mortgage-backed securities are adjusted based on industry estimates of prepayment speeds that capture the expected prepayment of principal above the contractual amount based on how far away the contractual coupon is from market coupon rates. At the indicated time intervals the cumulative maturity gap was within Nicolet’s established guidelines of not greater than +25% or -25%.

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Table 18: Interest Rate Sensitivity Gap Analysis

	June 30, 2013
(in thousands)	0-90 Days			91-180 Days			181-365 Days			1-5 years			Beyond 5 Years			Total
Earning Assets:
Loans	$	365,528		$	76,137		$	43,979		$	285,395		$	61,849		$	832,888
Securities at fair value		4,387			10,694			3,619			60,628			50,660			129,988
Other earnings assets		31,777			—			—			—			7,531			39,308
Total	$	401,692		$	86,831		$	47,598		$	346,023		$	120,040		$	1,002,184
Cumulative rate sensitive assets	$	401,692		$	488,523		$	536,121		$	882,144		$	1,002,184
Interest-bearing liabilities
Interest bearing deposits (1)	$	411,901		$	77,936		$	29,046		$	88,017		$	150,723		$	757,623
Borrowings		33,398			1,908			3,735			14,210			5,020			58,271
Subordinated debentures		1,504			1,504			3,007			6,014			—			12,029
Total	$	446,803		$	81,348		$	35,788		$	108,241		$	155,743		$	827,923
Cumulative interest sensitive liabilities	$	446,803		$	528,151		$	563,939		$	672,180		$	827,923
Interest sensitivity gap	$	(45,111	)	$	5,483		$	11,810		$	237,782		$	(35,703	)
Cumulative interest sensitivity gap	$	(45,111	)	$	(39,628	)	$	(27,818	)	$	209,964		$	174,261
Cumulative ratio of rate sensitive assets to rate sensitive liabilities		90	%		92	%		95	%		131	%		121	%

(1) The interest rate sensitivity assumptions for savings accounts, money market accounts, and interest-bearing demand deposits accounts are based on current and historical experiences regarding portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of these balances are considered to be long-term and fairly stable and are, therefore, included in the “1-5 Years” and “Beyond 5 Years” categories.

In order to limit exposure to interest rate risk, management monitors the liquidity and gap analysis on a monthly basis and adjusts pricing, term and product offerings when necessary to stay within applicable guidelines and maximize the effectiveness of asset/liability management.

Along with the static gap analysis, Nicolet’s management also estimates the effect a gradual change and a sudden change in interest rates could have on expected net interest income through income simulation. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, and 300 bps or decreasing 100, 200 and 300 bps. All rates are increased or decreased parallel to the change in prime rate. The simulation assumes a static mix of assets and liabilities. As a result of the simulation, over a 12-month time period ending June 30, 2013, net interest income was estimated to decrease 6.19% if rates increase 100 bps, and was estimated to decrease 0.33% in a 100 bps declining rate environment assumption.  These results are in line with Nicolet’s increasing interest rate sensitivity position, relatively short loan maturities and level of variable rate loans with interest floors; as rates remain low and asset maturities extend while deposit maturities contract, this position continues to become more liability-sensitive.  These results are based solely on the modeled changes in the market rates and do not reflect the earnings sensitivity that may arise from other factors such as changes in the shape of the yield curve, changes in spreads between key market rates, or changes in consumer or business behavior. Interest rates did increase significantly in June with longer term rates rising over 100 bps and there was not a corresponding rise in deposit rates.  These results also do not include any management action to mitigate potential income variances within the modeled process. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities and product mix. Nicolet’s management continually reviews its interest rate risk position through the Asset/Liability Committee process, and such Committee reports to the full board of directors on a monthly basis.

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Capital

Nicolet’s 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. Nicolet’s management 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 dividends available to shareholders. Nicolet’s management intends to maintain an optimal capital and leverage mix for growth and for shareholder return.

The Small Business Lending Fund (“SBLF”) is a U.S. Treasury program made available to community banks, designed to boost lending to small businesses by providing participating banks with capital and liquidity. In particular, the SBLF program targets commercial, industrial, owner-occupied real-estate and agricultural-based lending to qualifying small businesses, which include businesses with less than $50 million in revenue, and promotes outreach to women-owned, veteran-owned and minority-owned businesses.

On September 1, 2011, under the SBLF, Nicolet received $24.4 million from the Treasury for the issuance of 24,400 shares of Non-Cumulative Perpetual Preferred Stock, Series C, with $1,000 per share liquidation value. The annual dividend rate upon funding and for the following nine calendar quarters is 5%, unless there is growth in qualifying small business loans outstanding over a baseline which could reduce the rate to as low as 1% (as determined under the terms of the Securities Purchase Agreement (the “Agreement”)), adjusted quarterly. The dividend rate is fixed for the tenth quarter after funding through the end of the first four and one-half years at 7% (unless fixed at a lower rate given increased lending as similarly described above); and finally the dividend rate is fixed at 9% after four and one-half years if the preferred stock is not repaid. Nicolet’s weighted average dividend rate has been 5% between funding and June 30, 2013.  Under the terms of the Agreement, Nicolet is required to provide various information, certifications, and reporting to the Treasury. At December 31, 2012 and June 30, 2013, Nicolet believes it was in compliance with the requirements set by the Treasury in the Agreement. The preferred stock (under SBLF) qualifies as Tier 1 capital for regulatory purposes.

On April 26, 2013 $9.7 million of common stock was issued as part of the merger with Mid-Wisconsin. Concurrently with the merger, Nicolet also closed a private placement for an aggregate of $2.9 million in proceeds.  Approximately $401,000 in direct stock issuance costs for the merger and private placement were incurred and charged against additional paid in capital.  Despite the additional equity issued the effect of the merger transaction reduced overall capital ratios as a result of the increased asset size; however, minimum capital levels were maintained and Nicolet maintains sufficient regulatory capital for current and future needs.

On July 9, 2013 banking regulators issued final guidance on how regulatory capital will be calculated going forward.  Full provisions of these regulations will go into effect beginning in 2015.  Nicolet is determining the effect these regulations will have on future capital needs.

A summary of Nicolet’s and Nicolet National Bank’s regulatory capital amounts and ratios as of June 30, 2013 and December 31, 2012 are presented in the following table.

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Table 19: Capital

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions (2)
(in thousands)	Amount		Ratio (1)			Amount		Ratio (1)			Amount		Ratio (1)
As of June 30, 2013:
Nicolet
Total capital	$	112,672		13.2	%	$	68,202		8.0	%		N/A		N/A
Tier I capital		105,014		12.3	%		34,101		4.0	%		N/A		N/A
Leverage		105,014		10.7	%		39,120		4.0	%		N/A		N/A
Nicolet National Bank
Total capital	$	101,855		12.1	%	$	67, 275		8.0	%	$	84,094		10.0	%
Tier I capital		94,197		11.2	%		33,637		4.0	%		50,456		6.0	%
Leverage		94,197		9.8	%		38,531		4.0	%		48,164		5.0	%
As of December 31, 2012:
Nicolet
Total capital	$	85,738		15.2	%	$	45,098		8.0	%		N/A		N/A
Tier I capital		78,691		14.0	%		22,549		4.0	%		N/A		N/A
Leverage		78,691		11.0	%		28,622		4.0	%		N/A		N/A
Nicolet National Bank
Total capital	$	77,500		14.1	%	$	43,984		8.0	%	$	54,981		10.0	%
Tier I capital		70,624		12.8	%		21,992		4.0	%		32,988		6.0	%
Leverage		70,624		10.1	%		27,916		4.0	%		34,895		5.0	%

(1) The total capital ratio is defined as tier1 capital plus tier 2 capital divided by total risk-weighted assets. The tier 1 capital ratio is defined as tier1 capital divided by total risk-weighted assets. The leverage ratio is defined as tier1 capital divided by the most recent quarter’s average total assets.

(2) Prompt corrective action provisions are not applicable at the bank holding company level.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

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 Chief Executive Officer and President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term 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 Chief Executive Officer and President and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

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

Not applicable for smaller reporting company.

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

Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

Not applicable.

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ITEM 6.  EXHIBITS

The following exhibits are filed herewith:

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of Nicolet Bankshares, Inc., as amended
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*	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements tagged as blocks of text.

*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.

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.
August 12, 2013	/s/ Robert B. Atwell
	Robert B. Atwell
	Chairman, President and Chief Executive Officer

August 12, 2013	/s/ Ann K. Lawson
	Ann K. Lawson
	Chief Financial Officer

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