Executive Summary / Key Takeaways

• Nicolet Bankshares (NYSE:NIC) is a growing Midwest community bank leveraging strategic acquisitions and technological investments to drive profitability and expand its market footprint.
• The company delivered strong first quarter 2025 results with net income of $32.6 million and diluted EPS of $2.08, demonstrating improved profitability metrics compared to the prior year.
• Net interest margin expanded significantly to 3.58% in Q1 2025, benefiting from favorable asset repricing and managed deposit costs despite a challenging interest rate environment.
• Loan and deposit growth remain solid, with total loans increasing 2% and total deposits increasing 2.3% since year-end 2024, reflecting effective customer acquisition and retention strategies.
• NIC's technological focus, particularly in digital platforms and integrated services, provides a competitive advantage in efficiency and customer engagement against larger, more traditional rivals, supporting future growth and margin potential.

Setting the Scene: A Midwest Banking Story

Nicolet Bankshares, Inc., headquartered in Green Bay, Wisconsin, operates as a community bank holding company primarily serving individuals, businesses, and government municipalities across Wisconsin, Michigan, and Minnesota through its subsidiary, Nicolet National Bank. The company's history is marked by a strategic emphasis on growth through acquisition, a path evident since at least 2013 with the assumption of junior subordinated debentures from acquired entities. This inorganic growth strategy accelerated notably in December 2021 with multiple transactions, expanding both its geographic reach and service capabilities, including agricultural lending and wealth management. This history of strategic expansion has shaped Nicolet into its current form: a diversified financial services provider operating under a unified banking segment model.

The banking industry in the Midwest, like elsewhere, is influenced by broad economic conditions, particularly interest rate fluctuations dictated by the Federal Reserve. While the Fed decreased short-term rates by 100 basis points in the latter half of 2024, rates remained stable in the first quarter of 2025. This environment impacts banks' net interest margins and the behavior of both borrowers and depositors. Competition is robust, coming from regional peers like Associated Banc-Corp (ASB), Wintrust Financial Corporation (WTFC), Old National Bancorp (ONB), and Huntington Bancshares (HBAN), as well as increasingly from fintech firms offering specialized digital services.

Within this competitive landscape, Nicolet positions itself as a community-focused bank that leverages technology to enhance efficiency and customer experience. While smaller in scale than some larger regional competitors like HBAN, NIC aims to differentiate through service and operational effectiveness. Its technological focus, particularly on digital platforms for mobile banking and potentially automated underwriting tools, offers tangible benefits. For instance, its digital platforms are estimated to offer 20-30% faster processing times compared to more traditional systems used by some competitors. This efficiency can translate into 10-15% higher customer loyalty and improved margins, particularly in fee-generating services like wealth management, where integrated technology platforms contribute to 10-15% greater efficiency compared to some peers. This technological edge serves as a competitive moat, supporting NIC's strategy to capture market share in both traditional and digital banking services.

First Quarter 2025 Performance: Profitability and Growth

Nicolet delivered a strong start to 2025, reporting net income of $32.6 million for the first quarter, translating to earnings per diluted common share of $2.08. This represents a significant improvement compared to net income of $27.8 million and diluted EPS of $1.82 in the first quarter of 2024, although slightly down from $34.5 million and $2.19 in the fourth quarter of 2024. Management noted that these first quarter profitability metrics likely place the company well within the top quartile of community banks.

The improvement in profitability was significantly driven by the expansion of the net interest margin. The tax-equivalent net interest margin stood at 3.58% for Q1 2025, a notable 25 basis point increase from 3.33% in Q1 2024. This expansion resulted from a combination of factors: the yield on earning assets increased by 17 basis points to 5.67%, primarily due to the repricing of new and renewed loans at higher rates. While the yield on investment securities also increased, the yield on other interest-earning assets, mainly cash, decreased, consistent with the Federal Reserve's rate cuts in 2024. Simultaneously, the cost of interest-bearing liabilities decreased by 18 basis points to 2.83%, largely due to lower deposit costs, despite growth in higher-cost deposit products like brokered deposits. The resulting tax-equivalent net interest income increased by $8.4 million, or 13%, year-over-year.

Noninterest income for the first quarter of 2025 was $18.2 million, a decrease of $1.2 million compared to Q1 2024. However, this decline was primarily attributable to changes in asset gains and losses. Excluding these volatile items, noninterest income increased by $1.1 million, or 6%, demonstrating solid underlying growth in fee-based businesses. Wealth management fee income rose by $0.5 million (8%) to $7.0 million, benefiting from favorable market conditions and growth in assets under management. Mortgage income saw a significant increase of $0.6 million (41%) to $1.9 million, driven by higher secondary market volumes and related gains on sales. Service charges on deposit accounts also contributed positively, increasing by $0.4 million (28%) to $2.0 million due to growth in accounts and analysis fees. The net asset losses of $0.4 million in Q1 2025 were mainly due to unfavorable fair value marks on equity securities, contrasting with net asset gains of $1.9 million in Q1 2024, which included gains on the sale of an investment security and the early extinguishment of subordinated notes.

Noninterest expense saw a modest increase of $0.6 million (1%) to $47.8 million in the first quarter of 2025 compared to the prior year period. While personnel costs remained relatively stable, non-personnel expenses rose, driven by higher occupancy, equipment, office, and data processing costs. Data processing expense, for instance, increased by $0.3 million (6%), largely due to volume-based increases in core and brokerage processing charges, reflecting business activity growth. Other expenses also increased, primarily due to higher professional fees. Intangibles amortization provided a partial offset, decreasing by $0.3 million due to the aging of existing intangible assets. The provision for credit losses increased to $1.5 million from $0.8 million in Q1 2024, reflecting growth and changes within the loan portfolio.

Balance Sheet Strength and Risk Management

Nicolet's balance sheet demonstrated continued growth and stability. Total assets reached $9.0 billion at March 31, 2025, an increase of $178 million (2%) since December 31, 2024, primarily fueled by loan growth. Total loans grew by $119 million (2%) to $6.7 billion, with commercial and industrial loans being a significant driver of this increase. The loan portfolio remains diversified across various industries, with commercial-based loans constituting 77% and retail-based loans 23% of the total.

Deposits, the primary funding source, also grew, reaching $7.6 billion at March 31, 2025, an increase of $169 million (2.3%) from year-end 2024. This growth included a $62 million increase in customer core deposits and a $107 million increase in brokered deposits, indicating a strategic shift in funding mix. Total estimated uninsured deposits stood at 30% of total deposits at quarter-end.

Asset quality is actively managed. The Allowance for Credit Losses (ACL) for loans stood at $67.5 million, representing 1.00% of total loans at March 31, 2025, consistent with the ratio at year-end 2024. This allowance is determined based on a methodology incorporating historical losses, economic conditions, collateral values, and other qualitative factors, highlighting the significant judgment involved in this critical accounting estimate. Nonperforming assets totaled $29.3 million, representing 0.33% of total assets, relatively stable compared to prior periods. Potential problem loans, defined as performing loans rated Substandard, were $70 million, or 1% of loans, requiring heightened management review given economic uncertainties.

Interest rate sensitivity is actively monitored through simulation analysis. Based on March 31, 2025 data, a hypothetical 100 basis point decrease in rates over one year is projected to decrease net interest income by 1.40%, while a 100 basis point increase is projected to increase it by 1.30%. These results are within policy guidelines, though actual outcomes can vary based on market dynamics and behavioral responses.

Capital levels remain robust, with both the Company and the Bank exceeding minimum regulatory requirements. The Bank is classified as well-capitalized, providing a strong foundation for continued growth and strategic initiatives. Management aims to maintain an optimal capital mix, balancing growth, shareholder return, and regulatory compliance. The ongoing common stock repurchase program, with an additional $60 million authorized in April 2025, reflects the company's focus on returning capital to shareholders when opportunistic.

Liquidity remains a key focus. Management reported adequate liquidity at March 31, 2025, to meet projected obligations. Available liquidity sources totaled $1.88 billion, including $175 million in Fed Funds lines, $1.04 billion in brokered capacity, $657 million in FHLB borrowing availability, and $12 million via the Fed Discount Window. The Parent Company also maintains a strong cash position ($155 million at March 31, 2025) and access to capital markets, further bolstering overall liquidity.

Outlook and Competitive Positioning

Nicolet's outlook appears positive, supported by its recent financial performance and strategic positioning. The company's ability to expand its net interest margin in the current rate environment, coupled with solid fee income growth, points to continued profitability. The Zacks Consensus Estimate projects earnings of $8.18 per share for fiscal year 2025, representing a 4.5% increase from the prior year, with analysts having steadily raised estimates over the past three months (a 5.1% increase).

Competitively, Nicolet leverages its community banking model and technological investments to differentiate itself. While facing larger rivals with broader scale and potentially lower funding costs (like ASB), NIC's superior profitability metrics, such as its higher Return on Equity (17.77% in Q3 2024 vs. ASB's ~9%), demonstrate effective operational execution. Its investment in digital platforms provides an edge in efficiency and customer service, potentially capturing market share in digitally-inclined segments. However, its smaller scale could result in higher operating costs per unit compared to larger peers, a vulnerability that needs careful management to avoid eroding profitability gains. The company's focus on niche markets like agricultural lending also provides a degree of insulation and higher potential margins compared to competitors with less specialized portfolios.

Conclusion

Nicolet Bankshares has demonstrated solid financial performance, marked by expanding net interest margin, growth in fee income, and disciplined expense management in the first quarter of 2025. The company's historical strategy of accretive acquisitions has built a diversified regional presence, while its ongoing investments in technology enhance operational efficiency and competitive positioning. Despite facing competition from larger regional banks and agile fintech firms, Nicolet's focus on profitability, asset quality, and strategic capital management, including share repurchases, underpins its investment thesis. The positive earnings outlook and management's commentary suggest continued momentum, making Nicolet Bankshares a compelling consideration for investors seeking exposure to a well-managed, growing community bank in the Midwest.