KBRA Affirms Ratings for Nicolet Bankshares, Inc.; Revises Outlook to Positive

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 its main subsidiary, Nicolet National Bank. The Outlook for all long-term ratings is revised to Positive from Stable.

The revision of the Outlook to Positive from Stable is primarily due to the company’s consistent outperformance from an earnings standpoint over the years, most notably since the beginning of 2023, which has been a challenging operating environment for a majority of banks. Entering 2024, NIC’s profitability was well above peer levels (core ROA just below 1.3% during 1Q24), which benefits from a healthy NIM following the balance sheet restructuring in early-2023, as well as solid and durable noninterest income contributions (+20% of revenues). Moving forward, management is projecting improved operating results due to the expectation of a flat to slightly higher NIM along with steady growth in noninterest income for the rest of 2024. The ratings are also underpinned by a strong core deposit base that has reflected a below average beta through the cycle, which is reinforced by solid market share in its home state (#2 market share among WI-based banks) and granularity of the deposit base. Moreover, despite the seasonality with deposits in 1Q24, core deposit balances have been largely steady since the bank failures and Fed’s restrictive policy, which, combined with measured loan growth, has resulted in maintenance of a higher-than-peer level of core deposits to total funding. Nicolet’s NPA ratio has had a tendency to be elevated historically, which was primarily attributable to acquired loans, though recent credit quality metrics have been rather pristine. The complexion of the loan profile has materially shifted over the years from acquisitions, which resulted in a higher agriculture lending exposure (19% of loans as of 1Q24), primarily dairy. While agriculutral lending can demonstrate higher volatility, NIC retained talent and, married with its conservative credit philosophy, the portfolio has remained largely stable. With regard to risks in the CRE space, we believe that Nicolet is well insulated given its below average exposure to investor CRE (160% of total risk-based capital as of 1Q24) and minimal concentration in investor office lending (less than 3% of loans). The primary credit constraint has been the degraded capital position from M&A transactions, though core capital ratios have been moving closer to peer levels in recent quarters (CET1 ratio of 10.2% as of 1Q24) and are expected to continue to build throughout 2024.

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