KBRA Affirms Ratings for Nicolet Bankshares, Inc.

NEW YORK--(BUSINESS WIRE)--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 longterm 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, betterthan-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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Methodologies
Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
ESG Global Rating Methodology

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.