KBRA Affirms Ratings for Nicolet Bankshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Green Bay, Wisconsin based Nicolet Bankshares, Inc. (NYSE: NIC) (“Nicolet” or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for lead subsidiary, Nicolet National Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by our favorable view of NIC's management, which is long tenured with deep ties to the company’s operating markets and maintains a generally conservative credit philosophy. Additionally, notwithstanding earnings in 1Q23, NIC has generally posted better-than-peer core performance over recent years, owing to the company’s healthy contribution from fee income sources and lead positioning in its markets. Relatedly, Nicolet’s strong deposit base has been a core credit strength of the organization through time as demonstrated by solid positioning in the company’s command of market share, which is second in Wisconsin among in-state headquartered banks. NPAs, while modestly above peer levels, are largely loans acquired through 2021 and 2022 transactions and have been trending favorably, while losses have been negligible, consistent with the industry to date. We acknowledge that the complexion of NIC’s loan profile materially shifted in 2021 through M&A, which saw an influx of primarily dairy agriculture lending exposure. Though agriculture lending can demonstrate higher volatility, Nicolet retained talent through the transaction and, married with its conservative credit philosophy, the portfolio has remained largely stable. Other aspects of the company's loan portfolio are generally considered favorably, including the granularity of portfolio and diversity of industries served, though these are somewhat offset by a relatively concentrated geographic operating footprint. The primary credit constraint for NIC is the company’s degraded capital position, which is currently ~200 bps below peer levels. Lower capital levels have been driven by balance sheet growth owing to moderate organic loan growth and successive M&A transactions over preceding years, coupled with cash consideration in certain transactions. We note a partial mitigant in the company’s recent balance sheet restructure, which effectively neutralized the deferment of capital impact from HTM holdings such that the company’s current and go-forward capital profile is wholly reflective of MTM impact. Nonetheless, acuity increases in our assessment of emergent asset quality issues, should they arise, on a comparatively thinner capital base, all things being equal.

Rating Sensitivities

Given the Stable Outlook, positive rating momentum is not expected in the medium term. Over a longer term, better-than-peer core capital, coupled with growth in uncorrelated fee income contribution to previous levels could drive positive rating momentum. Conversely, negative rating sentiment could develop if the company’s capital profile fails to migrate to peer levels—above 10% CET1—over the course of several quarters. Additionally, the emergence of asset quality issues beyond our expectations, both in absolute levels and relative to peers, could drive downward pressure on ratings, particularly against the prospect of potentially lower earnings power given industry trends in margin compression.

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