Nicolet Bankshares, Inc. (NIC) Earnings Call Transcript & Summary

Welcome to our 2021 Annual Meeting of Shareholders. Before I call the meeting to order, I'd like to first say how nice it is to be together on behalf of all of us to be back here at the Meyer Theatre. We missed you during the last year. I guess we all missed a lot of people. We're grateful for your attendance this evening, and we especially appreciate those who traveled to be here. I guess that also, on behalf of everyone in the room here, Mike and myself, I think we'd like to extend a thank you to our senior leadership team for an outstanding job in a very challenging year. We're very proud of the team, and we're proud of the leadership that you as senior leaders provided, especially during 2020. Your efforts were noticed greatly by the get-stuff-done kind of attitude. And I think it wasn't just the $1 billion of mortgage volume or the PPP loans or the almost $1.3 million micro grants we did to the really small businesses sort of in the massive COVID, it was that we were there. And in some way, in addition to just being there up -- to provide competent advice, we were just present in a way that I think a lot of people needed, whether it was by Zoom or in person, either in our office or in our customers' offices. And so really appreciate the presence. And I'd like to think we've always kind of intended that Nicolet would be a place where we would not only do what we do well and serve the communities, but maybe it would be kind of a help and encouragement to businesses and people as to how to do things better. So we're going to start the business portion of the meeting first. Here's how the meeting breaks down, pretty much the same as always. We're going to have the business portion first. Then we're going to hear from Ann Lawson, our CFO, her reflections on the year. Then Mike will present his thoughts as CEO. And then Mike and I are going to take questions and answers together because I guess that's the most fun part of the meeting that we've had over time. So you guys, I think, know my name is Bob Atwell. I'm the Executive Chairman of Nicolet Bankshares, and I welcome you to the 2021 meeting. The purpose of this meeting is to elect the directors; to ratify the appointment of our independent registered accounting firm, Wipfli LLP; and to approve, through an advisory vote, Nicolet's named executive officer compensation. Copies of the notice of this meeting, the proxy statement and the form of the proxy were sent to shareholders on or about March 17, 2021, and only shareholders of record as of March 1, 2021, which is the record date for this meeting, are entitled to vote on matters presented for approval. The first order of business is to see if we have a quorum. Ann Lawson, our CFO, will serve as inspector of elections, and she has informed me that the company has received proxies representing over 7.5 million shares or more than 74% of the company's outstanding common stock. Because that number is in excess of the number necessary to constitute a quorum, this meeting is properly convened. There are copies of the minutes from the 2020 annual meeting held May 11, 2020, that will be available after this meeting, if you are interested. And at this point, I'd like to ask for a motion to dispense with the reading of the minutes of the 2020 meeting. Could I have a motion? [ Weddy Ellsworth ]. Okay. And could we have a second? Terry. Would those in favor of the motion indicate by saying aye? [Voting]

Would those opposed to the motion indicate by saying no? [Voting]

The motion is carried. And I will now entertain a motion to approve the minutes from the 2020 meeting of the shareholders. Bob Weyers showed up. Usually, you're the guy for seconds, but I'm looking for a second. Is there a second to the motion? Wow. Okay. You got it. The motion to approve the minutes of the 2020 annual meeting of the shareholders has been made and seconded. Would those in favor of the motion indicate by saying aye? [Voting]

Would those opposed to the motion indicate by saying no? [Voting]

The motion is carried. The next order of business is a description of the proposals to be voted on at today's meeting. Now the first proposal is for the election of directors, and I would now ask that the following 13 nominees please stand as we call your name. Myself, Rachel Campos-Duffy, Mike Daniels, John Dykema, Terry Fulwiler. Will you please remain standing? Chris Ghidorzi, Andrew Hetzel, Jr., DJ Long, Jr., Dustin McClone. I think Dustin didn't make it tonight. Sue Merkatoris. I saw you over there somewhere, Sue. Pierce Smith and Robert J. Weyers. Thank you, guys. You may sit down. I'm advised that no other nominations may properly come before this meeting, and the results of the voting will be announced shortly. Proposal 2 is the ratification of the appointment of our independent registered public accounting firm. The ratification vote is described in detail on the proxy statement for the meeting, and I will now entertain a motion that the following resolution be adopted. Resolved, that the shareholders approve the appointment of Wipfli LLP as the independent registered accounting firm for the company for the fiscal year ending December 31, 2021, as described in Proposal 2 of the company's 2021 proxy statement. Could I have a motion on that resolution?

[indiscernible]

Terry [indiscernible]. Is that -- do we get a second?

[indiscernible].

Bob -- is that Bob Agnew? Okay. Made and seconded. And again -- once again, the vote -- the tabulation of the votes will be reported shortly. And then the third is the advisory vote to approve Nicolet's named executive officer compensation, which is proposal #3. Proposal 3 is a nonbinding advisory vote required by the Exchange Act to approve Nicolet's named executive officers' compensation. Full details of Nicolet's named executive officers' compensation can be found in the Executive Compensation Discussion and Analysis section, the compensation tables and the narrative discussion in our proxy statement. The Compensation Committee will take into account the outcome of this advisory vote when considering future executive compensation agreements. And I will now entertain a motion that the following resolution be adopted. Resolved, that the shareholders approve the compensation of Nicolet's named executive officers, as disclosed, pursuant to the compensation rules of the SEC, in the Compensation Discussion and Analysis, the compensation tables and the narrative discussion. Could I have a motion on that resolution?

So moved.

Pierce. Is there a second? Bob Weyers, is that you? We can now complete the voting on the election of directors, the ratification vote on the appointment of our independent registered accounting firm and the advisory vote to approve Nicolet's named executive officers' compensation. If you have already returned the proxy, your votes had been tabulated. If there is anyone who has not yet voted and would like to do so, please raise your hand. Ballots are available for shareholders who'd prefer vote by ballot. Since I don't see any hands up, the results of the voting are now available. And I can report that the 13 nominees all received votes in excess of 94% of the outstanding shares voted and that there were no competing nominees for any given seat on the Board. The ratification vote on the appointment of our independent registered accounting firm received in excess of 98% of the shares that voted. Advisory approval of the named executive officers received in excess of 88% of the shares that voted. Therefore, all director nominees are elected, the appointments of Wipfli LLP as our independent registered accounting firm is approved and ratified and the advisory vote on Nicolet's named executive officers' compensation is approved. Unless there's other business to discuss, this concludes the business portion to be transacted at this meeting, and I will now entertain a motion to adjourn the formal part of the meeting, not the meeting itself. So Andy? Is there a second?

Second.

Second. A motion to adjourn has been made and seconded. Would those in favor of the motion indicate by saying aye? [Voting]

Would those opposed to the motion indicate by saying no? [Voting]

The motion has carried, and this concludes the meeting of the shareholders. So next, what happens is Ann will give her report. We'll have a few things to say about Ann perhaps later. Ann has resigned as CFO, and she has just been elected to serve on the Board of Directors of Nicolet Bankshares, and so this presentation will be her swansong as CFO. Just a little side note. When Ann started, she was mortified of public speaking. And now I think she's not quite at my level, but don't get between her and a microphone. And then as you -- as I think you know, Mike is newly appointed CEO of Nicolet Bankshares. He was previously CEO of Nicolet Bank, and we've been partners for a long, long time. And I'll make this short. You hold. When you worked with someone through thick and thin for 34 years, you get to know each other pretty well, especially the thin part. And you hopefully appreciate many aspects of who they are and what they do. And perhaps, however, there are certain things that you find kind of annoying. So most of us understands Mike's many strengths. And I won't go through them all, but he's exceptionally gifted at organizing, motivating and directing people. He's extraordinary at attracting and developing excellent talent, people that is. Possibly the best salesperson I've ever met. I think there's a couple of other candidates who would vie for that honor. And near and dear to my heart is when there's a significant problem, you want Mike in the room, whether it's a bar fight, a lawsuit or a squirrelly borrower. His insight, creativity, mental quickness and infectious confidence consistently make mountains into molehills, which is a great skill. So I can go on and on, but Mike's self-confidence hardly needs augmentation. And there honestly aren't too many annoying or irritating characteristics. But I'd like to focus on just one that really gets to me. Over the years, I think I've done quite a few things pretty well. And the thing that irritates me is the things that I know I have done quite well, he figures out how to do better. And I know this will be the case in the coming years. And I know that you'll join me in expressing our hope and our expectation that he annoys me even more as CEO in that regard. And I look forward to pitching in when needed and staying out of the way when not. So we're going to hear from Ann in a little bit, but Mike has a great team around him, and he will challenge and build and carry on the way we keep the challenge, build and carry on the work of Nicolet. So how about a round of applause for Mike? Okay Ann, get up here. Do I stand between you and the microphone? No.

Sure, You want to just read it?

No.

All right then. All right. Well, first off, all of that small print that Eric put up there is basically saying that if we say anything forward looking, it's really only good for tonight because stuff changes. With that, I guess I get to say hello, and it is nice to be here in person. It has been a very different year than our last meeting. So we entered 2020 with great momentum, and we were advancing progress on our active strategic plan, which we started about 5 years ago. That was to profitably double in size through targeted growth and to continue to work on our leadership succession plans. But the year became strange on trying on many levels, and our 5 core values drove our actions and decisions in what was a turbulent and non-normal environment. As Mike -- as Bob mentioned, being present, flexible and adaptable added in the end to the most profitable year in Nicolet's 20-year history, allowing us to, again, serve all 3 circles. So the key things of the year were pandemic responses and efficiencies, the Paycheck Protection Plan (sic) [ Paycheck Protection Program ] and a lot of liquidity, asset quality, mortgage revenues on extremely high mortgage activity. And we completed a smaller, complementary acquisition of Advantage Community Bank, which added about $170 million in assets in our central region and about 20 people to our team. I'm going to discuss those from the numbers standpoint, and Mike, our CEO, will describe them through the lens of the company's character and actions. So I'm going to start with profitability because the trends were fantastic. We made $60.1 million, 10% over last year, which was already a banner year. Our 2020 earnings absorbed a dramatically high loan loss provision and almost $4 million of costs that were tied to our actions around the pandemic, all incurred in the second quarter. But it also benefited from those exceptional mortgage revenues, the PPP loan income and operational efficiencies. We earned $5.70 per share, which is 3% stronger than last year. It was aided by that 10% increase in earnings, but it did have to cover an increase in our share denominator, which was from our Oshkosh transaction in late of 2019. Our return on average assets was great at 1.41% but less than last year predominantly because our assets are inflated by cash. And our return to you, the shareholder, was an 11.4% return on equity and 16.8% return on tangible common equity. Our stock price trend eventually reflected these good results. We started the year above $70. As you can see, we, like the rest of the market, did fall as the pandemic hit. However, as we continue to execute and perform, our stock price recovered off of those lows later in the year, and we have now been trading in the $75 to $85 band for quite a while. This leads me to capital. Capital is the reserve buffer that helps us weather through riskier times, and the pandemic was a real stress test. Our capital is strong at $539 million, which is about 12% of our asset base. And our regulatory ratios exceed the well-capitalized hurdles. During these riskier times, our actions to do the right things still produced that $60 million of earnings, which is the best source of new capital. And because of our capital strength going into and through the year, we used $40 million to buy back over 5% of our outstanding shares, especially while our stock was low. Fewer shares, remember, improves your earnings per share, and EPS is one of the main drivers of stock price on the long term. So continuing with our balance sheet. We ended the year at $4.6 billion in assets, up 27%; $3.9 billion in deposits, up 33%; and $2.8 billion in loans, up 8% over year-end '19. Very notably on the asset chart, cash was over $800 million or 18% of our year-end assets, when most years we carry about 1/3 of that level. The complexion of our balance sheet was mirroring the changes in customer needs and the desire for safety. Everyone hunkered down and held on to cash. That includes the PPP funds that were taken by commercial customers, government stimulus for our consumers and even our own liquidity build at the start of the pandemic, which actually was not needed, as we found out later. But that is the increase in the deposits and that corresponding cash. Digging into our 8% loan growth and loan mix, you can see the impact of the PPP, which is circled in the bottom of the charts. Below -- because of the low coupon and the forgiveness features, most businesses who qualified took the PPP funds. For us, we processed over 2,700 loans, and we channeled $351 million into the deposit accounts of our commercial customers. This significantly replaced or reduced their need for traditional loans, which we mostly saw in the C&I lines, those commercial lines of credit. For the first time in recent history, those declined between year-end periods, down almost 1/3, and replaced by those PPP funds. But despite that and the new loans, if you exclude those new loans that we made through the PPP, all other loans combined still grew 6% over the end of the year. And even if we adjust for the Advantage transaction, we were up 2% over the prior year. This growth is actually very worth celebrating in such a weird year. On the asset quality front, we went from kind of a, oh, my goodness, who knows, to really-not-so-bad kind of environment. When the pandemic emerged, no one would or could fathom just how bad it might be and whether really loan losses were going to soar. We expensed $10.3 million to boost our allowance for loan losses against only $1.4 million of net charge-offs, with the majority of that provision occurring in the first 9 months of the year. What we saw in our commercial customers with time was resilience and effective adaptability. We offered early on some relief through temporary payment modifications, and those who took the PPP funds were basically now having a capital boost. So by fourth quarter, the potential deterioration that we initially anticipated was not materializing, and we reduced our fourth quarter position -- provision. So our allowance ended at a healthy 1.15% of loans, and our nonperforming asset levels at year-end were very low and remain so today. Moving to another positive, let's talk mortgage. It's another time to say what a year. As Bob mentioned, over $1 billion in mortgages originated. That was more than 4,300 loans. For many consumers, the most important thing we could do for them last year was to refinance their mortgage loan or help them trade up and build -- or build for a larger home. There was a dramatic fall in the mortgage rates to take advantage of, and families were dealing with job issues or work and school at home. So we were there, closed loans under very unusual, abnormal conditions and with greater automation, and it paid off with that $30 million of revenues into our earnings. So in summary, I'm going to brag just a little bit since it's my swansong time or whatever. You own a top-performing bank. We got to say that last year even though it was under different conditions, but we are a top-performing bank. We were very proactive for our customers, originating PPP and mortgage loans. We were a safe place for their deposits and transactions, and we counseled folks through a very volatile market. We made tough decisions on branches but also improved the automation and efficiency. And we provided for the uncertainty around loan quality. In the end, we responded as a team to the pandemic. But as importantly, we stayed focused on our long term and completed a merger. We grew organically, and we maintained our strong capital. For first quarter, I'm glad to report we're seeing more of the same. This is the third consecutive quarter where we have had net income at or above $18 million. EPS and our returns on assets and equity are still remaining exceptional. Our mortgage revenues have tapered a little, but they're still very notable. Asset quality remains stellar and allowed for yet another lower provision this past quarter. And while the balance sheet appears minimally changed positively, we continue to grow loans and cash is down a bit. And we do remain acquisitive. We announced in April our plan to acquire a $1.5 billion bank out of Michigan and has Northern Wisconsin present, and Mike's going to address that more. So I'd like to finish with this last slide. These are just a few of the recognitions in the past year that we are very proud to share. And as Bob mentioned, since this is my last meeting as your CFO, I did want to throw out a couple of thank-yous. To our investors, I hope over at least my time through here as well as since the inception of the bank you realize how seriously we take your ownership. And I do look forward to serving as a new director this year. To coworkers, my big thanks to my excellent team, some of the hardest-working folks, and to all of our team out there. Those are -- great drive and everybody here, and they've really executed on our mission with a lot of uniformity in our culture. And of course, to these guys over here, to Bob and Mike. I really do appreciate your confidence in me and your inclusion always and for the absolute fun, wild ride of growth that I've had over 12.5 years. So thank you. Now you get up here.

Well, hello, everybody. Can you hear me? So one thing over 20 years that I've realized is, whether it's Bob or whether it's now me, we're standing between you and the bar. So we'll try not to make this last. But one of the things I wanted to do was draw you into the conversation of why we are all here. And this is the one meeting a year we talk about what we did, and that's the results. But if we go back 20 years to a person, anybody who invested in us 20 years ago when we had this idea, Nicolet Bank, didn't invest in financials, they didn't invest in anything. They invested in an idea and in a mission. Along the way, whether it was Mid-Wisconsin, whether it was Baylake, whether it was FMB, whether it was Choice or Advantage, one of the things that stood out was, of course, always what are the economics of the deal. But what really stood out was, what are we joining? What are we becoming? And what's the mission? And that's the result. But it's not what we do and it's not who we are and it's not what we stand for. What we are right now are 550 people who show up every day. And Bob alluded to it, but I'll say it because it's become a catchphrase at Nicolet. And we get shipped on. I mean we get it done day in and day out. It takes 550 people showing up and caring enough about their community, their customers and one another that produce results like that. People ask Bob and I all the time as we're talking to them about whether we're looking to buy their bank or acquire their bank. How do we ensure the larger we get, that we don't lose that community bank feel? How do we make sure we don't forget what makes us different? And the answer is simple. It is whether that's 550 people, 750 people, 1,100 people or whatever the number potentially becomes, depending on how much runway we all have as a group, it's that those people believe the same thing, that their commitment to their customers, their commitment to the community in which we operate, wherever that may be, and the commitment to one another is the reason to show up every day. And as long as we do that and as long as we execute on that and as long as we hold each other accountable -- I can't see around every corner, none of us can, but the results ought to keep showing up like that because it's the work of people. There's no -- nobody shows up every day and says, I wonder what our -- I wonder how much money we can make today. How can we make a difference to our customers across all of our revenue lines? Do we matter in our community? Because this bank can only be as healthy as the communities in which we operate and as healthy as our customer base. And it's -- when things go wrong, are we willing to have the conversation? Will we have the conversation with them? Will we do it humanely? Will we do it with empathy and compassion and say, hey, I understand things are going -- but what are we going to do to make it better? We did it in '08/'09 when we came through the recession. This year, when things got weird -- I mean, one of the reasons I think largely is because all of those people started showing up May 26. We're the only bank around that said, we're not staying at home anymore. We're going to show up. We're going to open our doors. We're going to open our lobby. We're going to invest in the PPE and make sure that we are here because our customers are showing up. They had -- I mean, most of them were essential businesses. They had to keep working. And it just seemed disingenuous to what we stood for to say, yes, we'll talk to you on the phone or we'll talk to you from home. I mean I don't know about you, but I -- the fewer Zoom meetings we can never have again is -- I mean, that's on the top of my list even though -- I mean, if you can turn your camera off, I got a face for radio, so that helps a lot. But nothing can beat the in-person interaction and actually being there and your customers knowing you're there and your communities knowing you're there and the investments we made in our nonprofits and things like that. And that's -- no matter what size we look to grow to, and we'll talk a little bit about the Mackinac thing in a little while, that's the conversation we can't lose. We can't lose it as a management team. And we definitely don't want any of you to forget why you still hold the stock. Maybe some of you are in it for -- it's turned into just a financial play. But for many of us and for many of you, you hold it for a reason. And hopefully, it's the reason that we always try to do the right thing. I mean we screw some things up, I mean -- but it's like we tell, make a mistake, apologize if you need to but move forward. And as long as we can continue to communicate that message throughout the organization, throughout whatever geography we end up operating in and the people believe it and it resonates with them and the communities believe it and the communities find value and validity in that message and that it's not a hollow message, it doesn't matter whether there's 21 people across the street on Washington Street with an idea, 550 now or 750, 1,000 people. That doesn't matter. So we have a tendency not to talk about that a -- the numbers a lot. This is the one time a year we get to do it publicly. We do our press releases quarterly being a public company. But we never want to have that become the focus as to why we show up. Because as soon as that happens, what's our value proposition to one another? And I think it diminishes the value proposition of the investment you've entrusted in us as we look to move forward. So yes, the exciting thing is the Mackinac deal. It's $1.5 billion. Eric has put a little slide up here. People say, what are you -- the -- in the UP, Michigan? Well, one of our philosophies has always been we are going to be lead local wherever we are, meaning we want to be the predominant community bank in all the markets we serve. We're trying to get to that space. We're not there in every market, but we continue to try to. This opportunity makes us the largest community bank in the UP. mBank is a franchise that's done a number of smaller acquisitions, but they look very similar to us primarily in the terms of its commercial composition, their C&I customers in those towns that they serve, primarily UP, Northern, Lower and then up in the [ Northwoods ] where we do have a little overlap. The crazy part is, Bob and I were talking about the other day, somebody said, "Well, your market cap is going to be $1 billion, did you guys ever think 21 years ago when you had this idea?" We didn't know what we thought. I just knew that Walmart probably wouldn't hire me as greeter, so failure wasn't an option. So we better make this thing work. And our team -- and probably the biggest nuance of this is Michigan is running a little further behind in opening than Wisconsin is. But we've started the interaction. Our team is up there talking to people and figuring out how to integrate this thing in September and close and integrate, and I am very confident that we will get that done. We also believe actually that given the year we just came off and as people sit around and try to figure out what their strategic alternatives are, particularly if all you do is make loans and take deposits, that the low rate environment will have a lot of people probably sit around and say, what's our strategic advantage? Is it time to look? So we're hoping -- maybe hoping is a bad word, but maybe -- no, hoping is a good word -- and expecting there to be increased M&A activity over the next couple of years. So what does that mean for us? We have absolutely no idea. We know that if invited to a conversation, we certainly want to show up, put our best foot forward if it makes sense for all of us as shareholders and if it makes sense as we fill out -- as we look to complete and fill out our footprint. So thank you, whatever your reason was for becoming a shareholder of Nicolet Bank. Whether you were a former Board member, a current Board member or an employee or you owned us through one of our other acquisitions, we hope we've made you proud. We try to make every decision we make through the lens of ownership and true to our core values and the 3 circles, which are shareholders, customers and employees.