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 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 two organizations which have been committed to communities in Missouri for a long time. Combining the two companies will allow us to provide exceptional banking services to additional Missouri communities.
The pro forma franchise, including eight 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 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 an expansion of non-interest-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 two distinguished universities, Truman State University and the A.T. Still University, a regional leader in health sciences that is 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 one 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 will result 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 position to continue to execute on each. I couldn't be more excited about these announcements today, as I think it has meaningfully moves 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.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Terry McEvoy with Stephens Inc. You may proceed.
Hi. Thanks, congrats on today's news. The first thing I did was look into why the presentation was called Project Truman. So pretty, pretty, pretty cool story there. Maybe, Chris, 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, as you know 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 two-year time horizon as the additive EPS. If we were to take an alternative approach, Terry, and sell that portfolio and realize the liquidity, a portion of it would 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 two months ago, your outlook for next year was 3.45%-3.55%? Can you help me just, save me, save me a little time and back into what that would be on a pro forma basis with just, just the securities?
Yeah, Terry, I can send you the specific number. I've done the math, but I don't have it off the top of my head as to exactly what the NIM expansion is, but it is meaningful for 2024.
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 one-time merger expenses, so that's the $34.2. That's not, is that merger expenses that the seller's incurring, not the foreign change that you talked about as a one-time charge?
It is. It's inclusive of, Equity Bank's cost to facilitate the transaction.
Gotcha. Okay. Thanks for taking my questions.
Yeah.
Congratulations again. Yep.
Thank you. The answer to your question is 35 basis points for NIM expansion.
Perfect. Okay, thanks a lot.
Thank you. One moment for questions. Our next question comes from Jeff Rulis with D.A. Davidson. You may proceed.
Thanks. Good morning. Just a question on the, I guess, the kind of genesis of the acquisition. Just more interested in the kind of background. It sounded like, you know, from, as you led in, Brad, you talked about kind of been working on it for a couple of years. And just interested in the relationship there. Was this an auctioned or negotiated deal? And maybe lastly, just, you know, why are they selling?
Yeah, so, they've been held or owned by an individual family for 30-plus years. The individual, the principal 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 in their institution, had to release the transaction, and so then it came back to market. And so we started working with them, and negotiating with them, to get to this point.
... Okay. Fair. And maybe just on the credit side, looks like they've kind of worked down some non-performers over the last year. Interested in maybe the areas where those problem assets were and maybe the remaining bucket where, by segment, what is left?
Yeah, they really don't have many problem assets left. If you know any 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 you know they 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 a last one. Chris, I don't know, do you have just a goodwill estimate?
Yeah. 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. Think, you know, sub $1 million. That's all contingent upon how final fair evaluation comes out, but it, it's pretty low.
Sorry, you said sub 1 million?
Sub $1 million, yep.
Okay. Got it. Thank you.
Thank you. One moment for questions. Our next question comes from Andrew Liesch with Piper Sandler. You may proceed.
Hey, good morning, everyone. Congrats on the announcement this morning. Great to see. You know, the 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 shifts like other banks have. Is there anything unique about this deposit base that you like?
Yeah, you know, 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've served. We actually are excited about the fact that we're 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's 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, you know, it's just an attractive deposit franchise. And it's, you know, 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. Then we're able to grow off of that.
Got it. How much loan growth then are you expecting out of this franchise? It doesn't look like they've been growing too much, but is it, is, are there opportunities there, or are the opportunities really mostly on the, on the funding side?
Yeah, 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 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.
Great. Thanks for taking the questions here. I will step back.
Thank you. As a reminder, to ask a question, please press star one one on your telephone. One moment for questions. Our next question comes from Matt Rantz with KBW. You may proceed.
Hey, good morning, everybody. Matt Rantz filling in for Damon DelMonte . Hope everybody's 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 most ends up in loans, and you see a yield greater than 5% over the course of the year?
Yeah. So, the actual ultimate redeployment of those funds is still a little bit in limbo. We're looking at it as opportunity, right? From a really all three of those categories perspective. We'll always have some need to have bonds from the perspective of maintaining aspects of our 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 it into loans, obviously the yield can 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 provide 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 two play out.
Gotcha. Great color. Thank you. 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 around the conservatism? Is there just not that much to cut, or is there maybe planned team build outs that you have baked in there?
Yeah, they, 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, you know, we don't have to have those tough conversations. And so, you know, we're excited about that aspect. There just isn't—you know, 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 conservative number. I think it's a realistic number, based on the information that we have.
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.
Okay, great. Thank you. I'll step back.
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.