M&A Announcement

Jun 22, 2021

I would now like to turn the call over to Bob Atwell, Executive Chairman of Nicolet. Mr. Atwell, please go ahead. Thank you. Good afternoon to everyone joining us today to discuss the Nicola Bancshares acquisition of Cowen Bank Corp. As she mentioned, my name is Bob Atwell. I'm Co Founder and Chairman of Nicolet. Also joining me on the call from Nicolet are Mike Daniels, our CEO and my fellow co founder Phil Moore, our newly appointed Chief Financial Officer and Brad Hutchins, Executive Vice President, Chief Credit Officer and Compliance and Risk Manager. In addition, we have Tim Schneider, Co Founder, President of County Bancorp and CEO of Investors Community Bank in the room with us. Welcome. Earlier this morning, we issued a joint press release announcing Nikolay's agreement to acquire County Bancorp, the holding company for Investors Community Bank. We've also provided an investor presentation that can be accessed either on the Investor Relations section of our website or as part of our 8 ks filing on the announcement. Before we continue, I'd like to direct everyone to the company's Safe Harbor statement on the forward looking statements, which is included in both the press release and on pages 23 of the investor presentation. I realize that many of you on the call are very familiar with County, especially their position as a leading lender to the dairy industry throughout the state of Wisconsin. County's operating subsidiary Investors Community Bank has a strong market position in Manitowoc and Stevens Point, 2 markets that are new to Nicolet, but adjacent to markets we currently serve well. Also, investors have branches in Green Bay and Appleton, which will enhance Nickelode's current lead local position in those markets. On a combined basis and including our previously announced acquisition of Mackinac Financial back in April, Nikolay will have total assets of $7, 500, 000, 000 making it the 2nd largest bank headquartered in Wisconsin and 1 of the largest, if not the largest community banks serving the upper Midwest. This is, of course, an important geographic infill and like our previous acquisitions, it is substantially accretive to earnings per share, which is the metric that we manage most closely to. While it does diversify our revenue streams, it's important to understand that this is not a new revenue vertical that we dreamt up in a whiteboard session. Food production and processing is 1 of the 2 main foundational industries within our region. And Nicoli has a strong footprint in the C and I companies that process food that make equipment for processing, packaging and shipping food, but we've always been underweighted in ag production precisely because investors Community Bank is so good at. This deal isn't so much about diversifying our revenue streams as it is a highly accretive move that brings us into closer alignment with the underlying economic activities and communities we serve. I'm very excited about what Connie will bring to the Nicolet franchise and now I want to turn it over to Mike Daniels to talk more about that. Thanks, Bob, and welcome to everyone on the call. I could not be more excited about this announcement, especially on the heels of the Mackinac deal. We have known Kim and his team from investors since they founded the bank back in 1997 and have a tremendous amount of respect and admiration for what they've been able to build in over 25 years. Like us, they've operated with an entrepreneurial mentality as the 4 founders of investors continue to remain active today on either the management team or the Board. Tim has assembled an impressive team of ag and commercial bankers, and we couldn't be more excited about them joining the Nicolet team. I'd like to address investors' Investors Ag Concentration and our plans for the Ag portfolio first. As many of you know, Investors has a significant Ag Concentration over 60% of its loan portfolio, mainly in dairy since they've been founded. It is what they know best. And quite frankly, we don't think the market has ever given them for just how well they have been able to manage that risk reward trade off in this portfolio. Once the merger of Mackinac and Investors closes, our Ag concentration will go from approximately 4% of our loan portfolio to slightly under 15%. As a result, what you'll see going forward is a well diversified loan portfolio that remains largely focused on commercial C and I lending with a specialty in ag. As mentioned in the press release, we are very pleased that Tim Schneider will be joining the senior management team at Nicolet as Senior Vice President, Head of Ag Lending. This division will be 1 of the main revenue lines going forward and 1 where we expect to commit additional resources to allow Kim and his team to grow and manage that portfolio. In addition, we will be establishing a specific Ag Credit Committee. I also want to touch on the due diligence process as I know investors' asset quality may be top of mind to many people on this call. First off, you may have seen County's 8 ks filing from yesterday regarding their significant improvement in asset quality since the Q1. As County has been articulating the last couple of quarters, they are seeing significant improvement in credits, specifically within the Ag portfolio. This is being driven by higher commodity prices, primarily milk over the past couple of years, which has translated into credit upgrades, improved classified ratios, as well as which involved our own ag banking team as well as our credit team, confirm this improving picture. Over the course of our due diligence, we reviewed 93% of the Ag portfolio and 85% of the commercial portfolio. Finally, I'd like to take a quick minute to update you on our integration efforts. Our internal integration team has been off and running with the team from Mackinac for a couple of months now and everything is going as planned. We anticipate shareholder approval next month and our plan is for that deal to close in early September. As with all of our past acquisitions, we close and convert the same weekend. The same strategy is planned with Mackinac and the fact it is a Fiserv to Fiserv conversion will make that process much smoother. Likewise, we will have a similar plan in place with County, only it will be scheduled for later this year. County is also a Fiserv platform, so I anticipate another seamless conversion once that takes place. The fact that County and its subsidiary investors only and its subsidiary investors only operates 4 branches, 1 of which we plan to consolidate with an existing Nicolet branch also makes this integration process a bit easier. No doubt, clearly, these 2 deals will force us to take a pause with M and A for the remainder of the year. We need to ensure both integrations go as smooth as possible for the customers and that all employees joining Nicolet clearly understand their new roles and responsibilities within our bank and culture. In the end, I see the combination of Nicolay, Mackinac County as having several benefits to our combined customer and employee base and believe it will offer tremendous opportunity for increased shareholder value going forward. I could not be more excited about what the future holds for Nikolay in 2020 for the remainder of this year actually and in 2022 and beyond. Currently, I'd like to now turn it over to Phil Moore, our CFO, to share some thoughts related to the deal metrics. Thank you, Mike. First off, let me say what a pleasure it is to be joining this call as well as this organization. Through my 20 plus year relationship with Bob, Mike and the Nicolet team, I've enjoyed the privilege as a trusted advisor to get to see a lot of cool stuff. Words can't describe my excitement now that I'm part of such highly respected organization where I can get to be a part of executing these transformational opportunities. Let me highlight a few of the financial metrics of the transaction, which can be found on Page 11 of the investor presentation. County shareholders will have the right to elect to receive 0.48 shares of Nicolet Bancshares common stock for $37.18 in cash for each share of county that they own. After the election process, it is intended that the consideration will consist of 80% stock and 20% cash. Based on Monday's closing price of $71.75 the implied per share purchase price is $34.44 for the stock portion and a total transaction value of approximately $219, 000, 000 when you include County's outstanding shares and restricted stock as well as cashing out their stock options. The purchase price is approximately 1.38 times tangible book value and 16.6 times County's consensus estimated earnings per share for 2021. And while the 1 day stock price premium appears high by comparable standards, I would point out that the pay to trade ratio of 70% is 1 of the lowest among M and A transactions thus far in 2021. We believe that pro form a financial metrics are compelling to our existing shareholders. As noted on Page 12 of the investor deck, on a pro form a basis, including the Mackinac transaction, we estimate mid single digit EPS accretion in the 1st full year and a tangible book earn back of only 1.4 years, which includes all merger related charges and the CECL Day 2 impact. I'm encouraged that we can meaningfully outperform these estimates as the forward earnings assumptions for County County utilize mean analyst estimates. Based on County's own estimates, including their improved credit outlook, which some of you may have seen reported in their 8 ks filing yesterday, as well as their performance thus far in 2021, we believe the earnings accretion could be meaningfully higher. On a pro form a basis as it stands today, Nikolay shareholders will own 68% of the combined company with Mackinac and County shareholders each owning about 16%. Some of the significant financial modeling assumptions can be found on Page 11. We anticipate approximately $11, 700, 000 of cost savings, which is roughly 33 percent of County's core non interest expenses, with 75% of that being realized in 20 22. We're expecting deal related costs of approximately $19, 000, 000 on a pre tax basis, which include many larger ticket items like change in control contracts, contract cancellation costs and professional fees. We expect to take a 2.02% all in credit mark of County's loan portfolio inclusive of the day 2 CECL reserve, which is fully included in our estimates. Finally, the other significant mark I'd highlight is the $11, 800, 000 write up against County's trust preferred securities and subordinated debt. This mark is made is based on the coupon rate versus our incremental borrowing rate, which will be From a tangible common equity perspective, we expect to be above 8% at the end of the year after both Mackinac and County close. However, I should note that the pro form a balance sheet includes nearly $1, 000, 000, 000 of cash and equivalents, which weighs down the tangible common equity number. We expect some of that excess liquidity to continue to run down as our customers continue to deploy cash on their balance sheets. Now let me turn it over to Tim Schneider for some remarks. Tim? Thanks, Phil. As Bob and Mike have shared, we are very excited about the opportunities our merger creates for our ag team specifically, also others on our ICB team. As the dairy industry has continued to consolidate, a larger organization will give us more runway with our dairy dairy customers. Nicolet's strong and low cost core deposit base will offer more opportunity for retaining ag loans the county has historically Nicolet has had a very strong reputation in the markets we compete in, and I've had tremendous respect for Bob and Mike and their teams and what they have created. I'm pleased to be asked to leave the Ag division and get back to my roots of growing up on a dairy farm and being an Ag banker for a number of years. Thank you, Tim. That concludes our prepared remarks and we now welcome your questions at this time. Operator? Our first question comes from Brendan with Piper Sandler. Please go ahead. Hey, good afternoon everybody. How are you doing? Good, Brennan. How are you? Thanks. I guess just to start off here at a top level, obviously, we need to deal. You'll have quite a larger presence in the aggregate. So I think you'll be the 3rd largest exposed public bank in the country just ranked by ag to total loans. So I guess, 1, why is this business so attractive to you now? And then 2, why is this the right time to get into ag lending in a more meaningful way? Sure. This is Mike. Well, first of all, you don't always get to control the timing, right? I mean, when the phone rings, you answer the phone. And the opportunity when the phone rang, we were somewhat surprised at the timing of it. But when you look at Wisconsin and the economy and the underlying economics of the ag industry at 14.5%, a little under 12% being dairy, that's an accurate reflection of our market. And the only way to Bob mentioned that in his earlier comments, Brendan, was with County in place, it didn't make sense into trying to hire other ag lenders to try to go compete face to face with them because they're the lead local lead provider of ag in what is America's dairy land. So we didn't dictate the timing, but when the opportunity came through over the phone, we answered the call. And it fits, it makes sense. We've known Tim and the team for a long time. They're 25 miles south of us, 30 miles south of us. And it's why we've been at 4%. That 4% we've acquired in our deals. We really haven't originated it in our core franchise either through Mid Wisconsin or Bay Lake. Most of our legacy 4% portfolio came. But it fits for where we are, where we live and what we do being the lead local community bank and the lead local ag bank for the market we serve. And that's how we're here today. Brendan, if you don't mind this is Bob. If you don't mind me adding, I think 1 of the attractive things about this situation is this is a team in a loan portfolio that has been through a textbook stress test. If you were sitting in 2014 and asking how would I best stress test this customer base, say why don't I try note prices of $14 And while it did affect the non performing assets, their loan loss ratio is really, I think, clearly show that this is the premium franchise that it is. This is a high performance organization that's made a lot of money for their shareholders over 24, 25 years and they've done it by banking the best farmers and doing a great job of helping them build their businesses. All right. Fantastic. That's super helpful color. Maybe 1 more and then I'll step back. As you guys continue to grow, there are certainly a host of new issues that we need to think about as the bank gets larger. So I guess $7, 500, 000, 000 in assets pro form a, the Durbin amendment and the impact from crossing $10, 000, 000, 000 starts to become part of the conversation because it's no longer that far away, right? So I guess, can you offer some early thoughts of what getting your prep during for that and if you're ready to quantify that potential impact? Well, I don't know that we have a quantified. We're very aware of it. We're paying attention to it. There's you could say there's a reason Phil Moore is our CFO right now. But we're well aware of that. And 1 of the things we've done since we founded the bank 21 years ago was make sure that we always had our infrastructure in place before the growth came. We continue to remain committed to that, whether it be on the finance treasury side, whether it be on the credit side, whether it be on the compliance BSA side. We've worked hard to build and earn a tremendous amount of regulatory credibility over the years in how we do it. And we're very aware of what we need to do as we approach that and additional investments in certain areas, some of which we've already begun. But there is no doubt. I mean, we look at M and A as a 5th revenue line, but at the end of the day, we fully expect to run a high performing community bank with a solid regulatory standing and not damage that regulatory credibility that we've worked so hard for over the years. So we're well aware of what's out in front of the windshield and have begun the process to deal with it. All right. Great. Thanks for taking my questions. The next question comes from Terry McEvoy with Stephens. Please go ahead. Thanks. Good afternoon, everyone. Hi, Terry. Maybe if you could just talk about the balance sheet strategy over the next 2 to 4 quarters, specifically just looking at the brokered CDs and the ability to run those down and also counties wholesale funding, when will there be an opportunity to pay that off and just overall reduce your cost of funds or cost of deposits too? Yes. I mean, that's a tremendous opportunity that exists in there. I don't know, Phil, if you have any of the granularity of that. But we've already begun that process. As you know from that, we put on it at the beginning of the pandemic. We've begun to unwind that as that ladder matures and runs off. And we've county is well aware and we'll be looking at doing the same thing. So I would expect to see brokers continue to wind down and us be able to utilize that almost $1, 000, 000, 000 worth of cash we're carrying around on our balance sheet, which will look on an aggregate basis of all 3 deals combined include the or dramatically improve the cost of funds. We have some things that I mean, as soon as we can get rid of it, we plan on it. We understand it's there. Some of it, how many did as a hedge and will unwind. But our core deposit franchise is extremely solid. And I expect that we will continue to unwind our broker position as they mature and we'll see a continued improvement in our cost of funding. Phil, you want to add anything to that? Yes. I think and you mentioned that Mike, the $135, 000, 000 in the callable CDs is sort of an early point that we will go to. Then there's another callable tranche of some debt in 2023 that we'll also have the ability look into depending on where pricing sits at that point in time. So I think it's that's on our plate. We have the ability to take it out because of our current liquidity position we have. And so it will just be part of our normal management process as we integrate the franchises. Thank you for that. And then as a follow-up, we've already discussed 15% pro form a ag loan exposure, but also I guess it's Page 5 here, you talk about the ability to move a portfolio a certain part of the $842, 000, 000 of County's servicing portfolio. So I guess my question is, are there limits in terms of how large you'd like that portfolio to be on a relative basis given the ability to bring over some of the servicing book? Well, I think bringing over the servicing book, I mean, it's not so much the sole servicing stuff as it is the and stuff as it is the participations that counties had chosen to sell or on credit they've originated because of their 60% concentration level and to maintain that level. That's fairly laddered out. I mean, it's not like we can pull that back all at once. It will happen as those notes mature and come up for renewal. As with anything, Terry, I mean, it's the 14% slightly under 15%, it's all driven by the quality, the quality of the underlying loans, where we are in the cycle and things like that. We will be looking at those opportunities as they present. They are out on the horizon. I think there's probably only over the next 6 months about $80, 000, 000 Is that what we figured, Tim? That's right. About $80, 000, 000 that we'll have the opportunity to look at. So much the same as the funding question relative to how we'll be able to dispose of that, bringing assets back will be a long of that is an opportunity, but it's a little longer term in nature. Great. Thank you for taking my questions. Hey, Terry. Just wanted to thank Tim Schrier here. Another piece that probably was maybe missing a lot of the noise here is, as you know, these additional BMO bankers that we brought on recently have been really bringing in some nice books of business. And because of our ag concentration and liquidity challenges, we've been pushing a lot of that off balance sheet as well. So there's going to be opportunity here in the near term to book a few more of those deals on our balance sheet there. It's good quality stuff and I think that will help use up some of the excess liquidity that Nikolay is sitting on today as well. The next question comes from Damon DelMonte with KBW. Please go ahead. Hey, good afternoon. Good afternoon, guys. Hope everybody is doing well today. Hi, David. My first question, just you guys made mention in there that you're probably going to issue some sub debt to help with the cash portion of the transaction. Just wondering if you had any color on that process at this point? Yes. I mean, the entrance into the sub debt market, I mean, would we I mean, we have a lot of cash right now at the holding company where our earnings are strong. We probably could get by with doing it given the timing and the pricing of it and what we believe potentially could be opportunistic over the next few years, the time to enter the sub debt market. The deal the county deal or the Mackinac deals are predicated on the sub debt rate. We would have the cash to close both of those. But given the overall landscape and the 2 deals and the earnings machine of the underlying operation, it just seemed like an appropriate time to also look at sub debt. The sub debt raises around the M and A schedule not driving the M and A schedule, if that makes sense. Okay. Yes, it does. That's helpful. Thank you. And then as you kind of look out over 2022, there's, as you had mentioned, a lot of liquidity on the balance sheet. If you when the deal closes, you're around $7, 500, 000, 000 in total assets. Where do you kind of see the balance sheet by the end of 2022, so like a year after the both of these transactions close? That's a really good question, because if you'd ask me that on a nickel and standalone basis a year ago, I went to total 7, 500, 000, 000 dollars I think that's largely predicated on the environment in the market. I mean, 1 thing I can tell you, we will get both these deals integrated successfully and operate a high performing community bank. And I mean, might additional opportunity presents itself in 2022? Potentially, it appears so, but I mean, it's got to make sense. It's got to fit. It's kind of like after we announced the Mackinac transaction. I think you and a couple of the other analysts that asked us, does that take us out of the game? And we said, well, it kind of depends on the inbound opportunities as we can't control those and whether or not they fit in our footprint and make sense, which county obviously did and does. So I think that would be the same. I don't I mean, we're going to try to we're going to try to put our liquidity to work. We're not going to given what the Fed came out and said this week about potential rising rates, we're not looking to deploy that into things that will be not so good a year from now. So I think our balance sheet is going to be very well positioned. I think we'll have the liquidity as if the Fed does execute a change in the yield curve and we don't see our customers using that excess cash from, as you know, I mean, nickel, they have a standalone basis that over 500 dollars 1, 000, 000 of PPP loans and County did about $140, 000, 000 I want to say. And Mackinac did a little bit more than that. I mean, that's $800, 000, 000 $900, 000, 000 of capital injected into our customer base that we're seeing sitting on our balance sheet that we're going to shepherd and pay attention and make sure we get these 2 deals closed and integrated. Got it. Great. Okay. That's all that I had. I appreciate the color. Pretty much everything else has been asked and answered. So thank you. All right, The next question comes from Bryce Rowe with Hovde Group. Please go ahead. Thanks. Good afternoon and congratulations on the transactions. Thanks, Bryce. Thank you. Wanted to maybe dive a little bit into the ag concentration and definitely appreciate County's ability to generate Ag loans. So if you look at where you are on a pro form a basis around that 15% level, is there I mean is that where you expect to run over time? Or do you potentially see that concentration building even from the 15% opportunities in both ag and our C and I portfolio. I do expect growth in both areas. As long as the quality is solid, I'm not going to be overly concerned if 14.5% is 16%, 18%, I think. It kind of but with that it needs to be much the same as our C and I book high quality, high performing operations. Okay. That's fair, Mike. I want to ask about a couple more things here. Number 1, you made mention in the prepared remarks about your customers using some cash on their own balance sheet. So I was just curious if you're seeing some of that some of those excess deposits start to maybe work their way off? Are customers starting to use those deposits, use that cash for working capital purposes or whatnot? A little bit. I mean, I think we touched on in our individual quarterly calls with those of you that follow us, the resilience in our existing C and I portfolio, they've made money. And as a result, if you look at our line of credit borrowings there, they're not historically what they've averaged. So I mean, while there while we're starting to see some expansion, either new lines being added, some of our manufacturing or plant expansions that are being done, we are seeing some of that cash be used, but they're also making money and they're making real money and the asset quality picture, Nikolay's standalone of under 7% classified to capital speaks to the resilience of that customer base. So while we are seeing them try to invest that money, they continue to make money replacing it. So we're hopeful we'll continue to see that. But yes, to my earlier comment, dollars 500, 000, 000 of free injected into our customer base is a tough thing to work through. And I think a lot of our customers are it's important to understand the overall context they're operating in. It's a strange time that our C and I customers are generally not demand constrained. They're constrained on people and on supply and on transportation issues, which is slowing down the deployment of working capital, if those issues weren't there. So it's an interesting time, but the customer base is very healthy, but managing a lot of turmoil. And we would love to see them be able to deploy their cash assets and start borrowing again more quickly, but they can't do what they can't do. Right. We think that Mike, all these commercial customers who became large fast followers are just in time being able to order their inventory and get it. They're finding that maybe that was a or it wasn't a problem until it became a problem, and it's a problem now. So we're hoping that that will input that we'll see some of that cash get deployed into inventory, so they don't have to slow their manufacturing processes or slow the production of their goods from because they're waiting on something in the supply chain that they haven't been able to get that they used to just get on a just in time basis. Okay. Okay. Maybe shift to 1 more question here. Just you all made mention of the earnings accretion possibly being more meaningful than what you've kind of laid out in the deck. And certainly appreciate what Tim and his team have talked about really for the last 6 to 9 months in terms of seeing the credit improvement and they've certainly delivered almost to a tee in terms of what they said would happen this year. So my question is just around the potential for better earnings out of the County franchise. Is that driven by kind of credit all by itself? Or are there other aspects there that are that could help drive earnings above and beyond what is expected at this point? Well, I mean, we talked about the ability to improve the cost of funds. But, Jim, inside your operation, if you want to I mean you and Glenn are talking about your performance today relative to what the analysts had. And it's not only credit quality drift, largely credit quality driven, but not all. I mean, Bryce, you saw in our 8 ks that we filed last night, I mean, we had some substantial improvement in credit quality that's going to drive possibly some sizable loan loss reserve reversals as well as non accrual income. And we've got some more of that I think that could come through. But on top of that, what I mentioned earlier is just the ability to keep a little bit more of that on our balance sheet given Nikolay's excess liquidity, lower cost funds and make a little bit better spread than the 70 basis points or 80 basis points that we historically have made with the participations that we sell through the Farm Credit system. So I think all that could be that hasn't been modeled in this at all, That's real. What that number is, I don't know. But then and the wealth division that we don't have access to today from a referral perspective, I think is meaningful for our franchise as well. Perspective, I think is meaningful for our franchise as well. All right. That's great. I appreciate the perspective. This concludes our question and answer session. I would like to turn the conference back over to Bob Atwell for any closing remarks. We want to thank you for your attention. And just a few summary comments, I think this is best characterized as an end market diversification of a well seasoned team and portfolio in an industry that is core to the people and the places we currently serve. And also I know that 66% expansion of balance sheet, people question or want to see the actual execution. I just want to remind people that this is not the first time we acquired a 65% expansion in our balance sheet. And we did that back in 2013 with the Mid Wisconsin acquisition. Thirdly, this it's been said, but the investors feel pairs very well with Mackinac from the standpoint of geographic extension and balance sheet composition. And really, lastly and most importantly, I don't know anyone better at driving cultural and operational integration than our CEO, Mike Daniels. We always achieve our EPS accretion targets. We hit our cost takeouts and we do the things that we say we're going to do. And Tim and his team are those kind of people also. It's little noted though that we also tend to increase market share in the markets that we acquire. So yes, we realized cost savings and EPS accretion, but in the process of doing that, we actually become more integral to the communities that we serve. Thank you very much. Thank you. Thanks, everybody. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.