Tuesday, December 3, 2019

A Current AIM Small Cap Equity Holding: Nicolet Bankshares (NCBS, $70.19): “Is this the Peak for Nicolet?”

Nicolet Bankshares (NCBS, $70.19): “Is this the Peak for Nicolet?”
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.


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