By:
Andrew Diedrich, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Nicolet Bankshares, Inc. (NAS: NCBS) is a holding company that engages
in the provision of commercial and consumer banking services through its subsidiary,
Nicolet Bank. Its principal business is banking consisting of commercial and
personal checking accounts, savings accounts, money market accounts, CDs, and individual
retirement accounts; as well as other ancillary banking related products and
services. The bank operates Northeastern Wisconsin and the Upper Peninsula of
Michigan. NCBS is headquartered in Green Bay, Wisconsin.
• NCBS acquisition of
Choice Bancorp Inc. expands the company’s Northeastern Wisconsin niche.
• NCBS recently hit 52-week
high on the heels of strong Q3 results. The strong Q3 results primarily driven
by better than expected fee income.
• Net interest margins
detracted last quarter indicating that the company is feeling the pressure of the
low interest rate environment.
Key
points:
With
the consolidation in the banking industry it is becoming more difficult to survive
without proper scale. NCBS responded to this trend through the expansion of its
Northeastern Wisconsin niche. The recent acquisition of Choice Bancorp Inc. allows
NCBS to expand its presence in the promising Oshkosh marketplace. Oshkosh is consistently
ranked highly in employment and education: 3rd best job market in
the US in 2018, #5 best college town in 2018, and #3 in under the radar cities
with great tech career opportunities. Choice Bancorp had the largest market share
in the area with $314 million in deposits. This acquisition further reinforces
Nicolet as the lead local community bank throughout the Fox Valley region of
Wisconsin.
In
Q3 NCBS’s core fees were quite strong and increased higher than the street expected,
growing at 5% during the quarter. This growth in fees was primarily due success
in the home mortgages business. Mortgage originations in 2019 lean heavily to refinancing
versus purchases given the recent decline in interest rates. NCBS is the #1
mortgage lender in Green Bay YTD. Fee income is important for banks because it
diversifies their revenue streams away from lending.
In
this low rate environment, banks face compressed margins due to reduced income
from interest bearing assets. Despite this difficult backdrop, NCBS posted impressive
numbers in Q3. Average loan growth and net interest income expanded further than
the street expected at 5.3% and 0.8% respectively. However, net interest margin
(NIM) detracted 9 bps in Q3 to 4.19%. The declining NIM is concerning since this
is the primary driver of alpha in bank stocks.
The
high competitiveness in the commercial banking space makes it difficult to grow
organically. Digital capabilities are one of the final places that banks can invest
in to grow their businesses from the inside. NCBS does not have any major
active digitization improvement strategies, which concerns me about future
organic growth. The continuous evolution of mobile banking will have a dramatic
effect on client growth and retention. Generation Y, which includes people ages
10-30, currently relies heavily on mobile phones for paying bills, a trend that
is expected to increase over he next five years. Companies with well-developed mobile
platforms will be able to attract more young adults, ensuring their future
deposit growth and lending capabilities.
What
has the stock done lately?
Since Q3 earnings were
released, NCBS has been on a tear. NCBS broke into a new 52-week high on
November 7th hitting a peak of $70.51. NCBS had its highest quarterly
net income (13.5 million) and EPS (1.40) in the Company’s history. For the
stock to continue its climb, the company will need to find a way to manage its
costs effectively to improve the operating leverage of the company.
Past
Year Performance:
NCBS
has increased 43.50% in value over the past year. With the current shares
trading at over 14 times the street’s 2020E EPS estimates, NCBS is currently at
a deserved but substantial premium in comparison to its peers.
Source:
FactSet
My
Takeaway
NCBS’s profitability is strong
and the company is seeing steady loan growth. NCBS has proven it is an
experienced and effective leader in M&A through its successful integration
of its past three acquisitions of First Menasha, Baylake, and Financial Advisor
purchases. Based on this past record of success, I believe the company will successfully
integrate the resources of Choice Bank. However, I am concerned about the company’s
ability to organically grow in the coming years. Currently, NCBS does not have
any digital initiatives in place to improve its mobile banking operations. Because
of this, I recommend holding the stock. It will be important to monitor the
company’s initiatives to organically grow to determine whether the stock has a
path for expansion.
Source:
FactSet
