Nicolet Bankshares' Russell Exit: A Buying Opportunity in the Midst of Volatility?

The recent announcement that Nicolet Bankshares, Inc. (NYSE:NIC) is being dropped from the Russell Microcap Value Index has sent ripples through the financial markets, raising questions about the implications for its valuation, liquidity, and institutional ownership. For investors, this reclassification presents a paradox: while the exclusion could trigger near-term selling pressure, the underlying fundamentals of NIC—strong financial performance, dividend growth, and a robust regional banking model—suggest this may be a strategic entry point for long-term gains. Let's dissect the factors at play.

Why the Exclusion Matters—and What It Doesn't

The Russell Microcap Value Index typically includes smaller companies with market caps under $2 billion. Nicolet Bankshares' market cap, now hovering around $1.89 billion as of June 2025 (up from $1.60 billion in December 2024), has likely exceeded the index's size threshold, prompting its removal. This is not a reflection of underperformance but rather a consequence of NIC's growth trajectory. While the exclusion will lead to forced selling by index-tracking funds—a phenomenon that could temporarily depress the stock—the company's fundamentals remain intact.

Data visualization would show NIC outperforming the index in recent quarters, with a rebound after initial post-announcement volatility.

Financial Fortitude: A Strong Foundation

NIC's first-quarter 2025 results underscore its resilience. Net income rose 15% year-over-year to $19.3 million, driven by 8% loan growth and a 5% increase in deposits. The bank has also prioritized shareholder returns, with dividends increasing from $0.28 per share in December 2024 to $0.32 in June 2025—a 14% boost. This dividend growth, paired with share repurchases (totaling $25 million in Q1), signals confidence in NIC's capital position and future earnings potential.

Visualization would highlight consistent dividend increases and a sustainable payout ratio (~30% of earnings), reinforcing NIC's reliability as an income stock.

Liquidity and Institutional Dynamics: The Near-Term Challenge

The removal from the Russell Microcap Value Index will likely trigger a rebalancing effect. Passive funds tracking the index will need to sell NIC shares, potentially leading to a short-term dip in liquidity and price. Historical precedent suggests such exits can reduce trading volumes by 20% and increase short interest. However, NIC's current liquidity is already strong: its price-to-book ratio of 1.8x remains reasonable for a regional bank, and its loan-to-deposit ratio of 85% indicates prudent risk management.

Institutional ownership, currently at 58% of shares outstanding, may see some outflows, but NIC's regional dominance in Wisconsin, Michigan, and Minnesota—where it holds 7% of total deposits—provides a moat against competition. Active investors, particularly those focused on value and dividend growth, could step in to capitalize on the dip.

Is This a Buying Opportunity?

The exclusion creates a classic “forced selling” scenario, which often presents contrarian opportunities. NIC's valuation multiples—trading at 14x forward earnings versus its five-year average of 13x—suggest it's fairly priced but not overvalued. With its earnings growth rate of 8-10% annually (projected through 2026) and a dividend yield of 2.1%, NIC offers a compelling risk-reward profile.

Moreover, the bank's balance sheet is fortified: non-performing loans remain below 1% of total assets, and its capital adequacy ratio (13.5%) exceeds regulatory requirements. These metrics insulate it from economic downturns better than peers with weaker capital positions.

The Bottom Line

While NIC's Russell exclusion will create near-term volatility, the underlying story remains one of steady growth and prudent management. For investors with a long-term horizon, the dip could be an entry point to a bank that's well-positioned to capitalize on its regional strengths. The key risks—such as a sharp economic slowdown or a sudden rise in loan defaults—are manageable given NIC's conservative lending practices.

In the words of the late Charlie Munger: “Be fearful when others are greedy, and greedy when others are fearful.” NIC's exclusion is a fear-inducing event, but the fundamentals argue for a disciplined buy.

Visualization would show consistent margins (above 3.5%) and improving asset quality, reinforcing NIC's operational stability.

Investment Thesis: Buy NIC on dips below $120 per share, with a target price of $140 by end-2025. Pair with a stop-loss below $110 to mitigate rebalancing risk.