Equity Bancshares, Inc. (EQBK) Earnings Call Transcript & Summary

Thank you for joining Equity Bancshares conference call. This call is being recorded and is available via webcast on our Investor Relations site, along with the corresponding presentation slides. Before we begin, let me remind you that today's presentation contains forward-looking statements, and actual results may vary. Following the presentation, we will allow time for questions and further discussion. Thank you all for joining us. With that, I'd like to turn it over to Chairman and CEO, Brad Elliott.

Good morning, and thank you for joining us today. It is an exciting day as we've been working on this opportunity for several years. Today, Equity announced a merger of Rockhold Bancorp and its subsidiary, Bank of Kirksville, in Missouri. In addition to the merger, we also announced a repositioning of a large portion of our bond portfolio. Both transactions will fuel Equity Bank's earnings and stay core to our disciplined approach, emphasizing low-risk transactions that drive earnings for shareholders and grow tangible book value. I'm really excited to start 2024 with these announcements. The merger is a strategic fill-in to Equity's current footprint, bringing together 2 organizations which have been committed to communities in Missouri for a long time. Combining the 2 companies will allow us to provide exceptional banking services to additional Missouri communities. The pro forma franchise, including 8 Bank of Kirksville locations, will now have 74 locations and approximately $5.4 billion in assets. Subject to customary regulatory approval, we expect the deal to close in the first quarter of 2024. The balance sheet repositioning strategy allows Equity to take advantage of our strong regulatory capital levels to reprice assets into a much higher earning assets. This will drive improvement to earnings while not affecting our current tangible common equity levels. I'm joined today by Rick Sems and Chris Navratil. Later in the call, Chris will walk you through the financial impact of each of the announced transactions. But first, Rick will provide us thoughts on the merger. Rick?

Thanks, Brad. The talented management team leading the Bank of Kirksville including CEO, Norman Belitz, have built an attractive banking franchise in North Central Missouri, and we couldn't be more excited to welcome them to the Equity Bank family. Norman will continue leading the talented group of bankers who will be working to bring Equity Bank product offerings to current and prospective customers in the legacy Bank of Kirksville footprint. The transaction brings a strong core deposit base with sufficient granularity to positively contribute to the current Equity Bank mix, including in the expansion of noninterest-bearing deposits as a percentage of total as well as an entry point into communities in which Equity Bank has not historically participated. We believe our suite of electronic service products and our ability to do small business lending will provide growth opportunities. Kirksville is a great community with 2 distinguished universities, Truman State University and the A.T. Still University, a regional leader in health sciences that is, had anchored in the Kirksville College of Osteopathic Medicine, the first osteopathic medical school in the world. On the other side of the balance sheet, Bank of Kirksville brings strong asset quality and a very low loan-to-deposit ratio, providing downside limitation as we approach the transaction as well as meaningful growth opportunities as we look forward to filling in the Equity Bank footprint with these new markets. While seeking to partner, Bank of Kirksville's management primarily invested in bonds with limited duration resulting in short-lived AOCI marks and near-term cash flow. I'm looking forward to working with the seasoned professionals at Bank of Kirksville, as we continue to service these communities and grow Equity Bank. I'd like to turn it over now to Chris to run through the financials.

Thanks, Rick. Equity stayed true to our core transaction pricing principles, agreeing to an all-cash purchase price of $44.3 million or 1.27x tangible book value at announcement date. The transaction results in day 1 dilution of tangible book value of 3.4% and an earn-back period of approximately 1.3 years. As modeled, EPS accretion is 12% or $0.35 per share in 2024 and 14.3% or $0.45 per share in 2025 when compared to current consensus estimates. Modeled results reflect cost savings of 18%, loan discounts of 4.92%, and a core deposit intangible of 3.5%. On a consolidated basis, Rockhold as of the end of Q3 reported assets of $406 million, including $122 million in loans. Total deposits were $344 million. Pro forma total assets are $5.4 billion with a loan-to-deposit ratio of 76.9%. Bank of Kirksville's cost of funding is positively impactful to the pro forma entity, while the composition of its asset base provides upside opportunity through repositioning into higher-yielding asset classes. Repositioning consideration is not included in the EPS accretion figures previously stated. In addition to the announced merger, as Brad previously alluded to, during the fourth quarter, management facilitated a repositioning of approximately $442 million of the Equity Bank available-for-sale bond portfolio. The sale resulted in a realized loss of approximately $38 million with proceeds to be deployed in securities, cash and loan assets. Bonds included in the sale had an average book yield of 1.33%, while alternative assets are expected to yield in excess of 5%. The comparative improvement in yield would drive a $16 million expansion in interest income or approximately $0.81 per share. Importantly, the transaction was neutral to tangible common equity as all of the bonds sold were held in the available-for-sale category. Pro forma financials to reflect both transactions continue to reflect a tangible common equity ratio in excess of 7%, regulatory capital in excess of all well-capitalized thresholds and a strong liquidity position to continue to facilitate the bank's growth goals. Brad?

We're excited for the day as it's historic for Equity Bank as we welcome a new team to our growing organization as well as improving our balance sheet efficiency via our bond repositioning strategy. Our guiding principles are exceptional service for our customers, growth and development of our employees and a solid return for our shareholders. We believe these transactions put us in a position to continue to execute on each. I couldn't be more excited about these announcements today as I think it has meaningfully moved our EPS forward and allows us to stay focused on our strategic objectives. Thank you for your time this morning and your interest in Equity Bancshares. We will now open the line for questions.

[Operator Instructions] Our first question comes from Terry McEvoy with Stephens Inc.

Congrats on today's news. The first thing I did was look into why the presentation was called Project Truman, so pretty cool story there. Maybe, Chris, to start with a question for you. Within the EPS accretion from the bank deal, what's your assumptions on the excess liquidity that comes from the transaction and their securities portfolio?

So the excess liquidity are just like the securities portfolio on the Truman side of the deal. Right now, the modeling is actually including maintenance of those securities. So they're very short-lived. All the cash flow on those bonds is currently scheduled in 2024 and 2025. So as we've modeled it for the purposes of EPS accretion, we're looking at it as accretion of that AOCI mark over that kind of 2-year time horizon as the additive EPS. If we were to take an alternative approach, Terry, and sell that portfolio and realize a liquidity, a portion of it will be reinvested into securities. And then to the extent loan demand was there, we'd have opportunity on the loan side as well.

Okay. And then if you isolate the securities restructuring. How would that impact the 2024 NIM outlook, which last month or 2 months ago, your outlook for next year was 3.45% to 3.55%? Can you help me just save me a little time and back into what that would be on a pro forma basis with just the securities?

Yes. Terry, I can send you the specific number. I've done the math, but honestly I don't have it off the top of my head to say exactly what the NIM expansion is, but it is meaningful for 2024.

And then just a last question. Within the slide presentation, the capital -- give me a second to go back there. The capital that will be delivered -- I'm sorry, the net of onetime merger expenses, so that's the $34.2 million. That's not, is that merger expenses that the seller is incurring, not the foreign change that you talked about as a onetime charge?

It's inclusive of Equity Bank's cost to facilitate the transaction. The answer on your question is 35 basis points for NIM expansion.

Our next question comes from Jeff Rulis with D.A. Davidson.

Just a question on the, I guess the kind of the genesis of the acquisition, just more interested in the kind of the background. It sounded like from a, as you led in, Brad, you talked about kind of been working on it for a couple of years. So just interested in the relationship there, was this an auctioned or negotiated deal? And maybe lastly, just why are they selling?

Yes. So they've been held or owned by an individual family for 30-plus years. And the individual, the principle of that passed away several years ago. So they were looking for strategic opportunities. We talked to them 2.5 years ago, approximately started working with them, they did select someone else during that process, couldn't -- because of their issues and their institution, had to release the transaction. And so then it came back to market. So we started working with them and negotiating with them to get to this point.

Okay. Fair enough. And maybe just on the credit side. It looks like they've kind of worked down some nonperformers over the last year. Interested in maybe the areas of where those problem assets were and maybe the remaining bucket where if by segment, what is left?

Yes, they really don't have many problem assets left and it's a very, very clean portfolio, some of their issues that they were working out of, I believe, were related to agriculture deals, but they, those have all improved. And so this is really a very, very clean portfolio. Doesn't have a lot of issues in it, mostly single-family houses, consumer and agricultural loans.

Great. And then just the last one. Chris, I don't know, do you have just a goodwill estimate?

Yes. Based on current modeling with the level of core deposit intangible and the relative insignificance of other marks, goodwill is going to be relatively low, I think, sub-$1 million. That's all contingent upon how the final fair valuation comes out, but it's pretty low.

Sorry, you said sub-$1 million?

Sub-$1 million, yes.

Our next question comes from Andrew Liesch with Piper Sandler.

Good morning, everyone. Congrats on the announcement this morning. Great to see. It looks like you're bringing on a great deposit base here, high level of non-interest bearing. I guess is there anything you can point to that drove that? I mean they've not really seen, from what I can tell, the big shift like other banks have. Is there anything unique about this deposit base that you like?

Yes. They've been in this market for a long time. They have a real concentration of customers in this market. So they're just a really good retail bank in the markets that they have served. We actually are excited about the fact that we are able to bring some true differentiators in the electronic services to this market. They don't have remote deposit capture that they offer today. And so there are some things that we think we're actually going to be able to increase value for those customers. And so we actually think there might be some growth opportunities in that market. And so it's just an attractive deposit franchise. And it's really, Andrew, what we do as a company. If you look at the rest of the acquisitions we've done in these kind of markets, it's very, very similar to what we do and then we're able to grow off of that.

Got it. How much loan growth are you expecting out of this franchise? It doesn't look like they've been growing too much, but is it, are there opportunities there? Or is the opportunity is really mostly on the funding side?

Yes. I mean I think -- this is Rick. I think that there are some opportunities for loan growth on it as we are able to bring a little bit of a larger balance sheet, maybe a little level of sophistication on some of these. There's some really good C&I names in that space. But I think this, again, it's mainly about the deposit franchise. That's what we're really excited about here.

[Operator Instructions] Our next question comes from Matt Renck with KBW.

Matt Renck filling in for Damon DelMonte. I hope everybody is doing well. With respect to the bond portfolio repositioning, could you provide some color on the redeployment of the proceeds? Do you think most will end up in cash? Or is there a possibility of most ends up in loans and you see a yield greater than 5% over the course of the year?

Yes. So there's actual to the redeployment of those funds is still a little bit in limbo. We're looking at this opportunity, right, from really all 3 of those categories' perspective. We'll always have some need to have bonds from the perspective of maintaining aspects for deposit base that require pledging positions. So there's going to be a need to redeploy some of it into a bond portfolio. Other aspects we can hold in cash for a period of time. And then it's really where loan demand goes from here. If we have the demand and can reposition in the loans, obviously, the yield could be meaningful, but meaningfully better and we can continue to facilitate customer growth and balance sheet growth, that we're looking for organizationally. Alternatively, we can maintain it in cash for a short period and continue to look at investment opportunities as they come that we think provides comparative upside for the bank. So it's really driving flexibility at the moment and ultimate disposition, we'll see how the next quarter or 2 play out.

Got you. Great color. And then one last one. Just the cost savings for the deal at 18% seems kind of on the lower end of what we usually see. Can you just provide some color on the conservatism? Is there just not that much to cut? Or is there maybe planned team build-outs that you have baked in there?

Yes. They've run a very efficient organization from an employee standpoint. And so there's just not a lot of employees that need to be taken out as part of the transaction, which is a positive from one aspect because we don't have to have those tough conversations. And so we're excited about that aspect. There just isn't, I wouldn't say it's conservatism. Honestly, I don't think you're going to see that we announced 18%, we're going to come back and have cuts of 25%. So I wouldn't model in that that's a conservative number. I think it's a realistic number based on the information that we have. And they've done a good job with their data processing contracts and other things. So there just isn't a lot of expense to cut out of this.

Thank you. Ladies and gentlemen, seeing no further questions, that will conclude today's Equity Bancshares conference call. Thank you for joining, please have a great day.