Equity Bancshares, Inc (NASDAQ:EQBK) Equity Bancshares, Inc. Merger with City Bank and Trust Company Conference Call June 13, 2018 10:00 AM ET


Jacob Willis – IR

Brad Elliott – Chairman and CEO

Bill Docking – Chairman, President and CEO of Docking Bancshares

Jim Webster – President of The City Bank and Trust

Greg Kossover – CFO


Nate Tower – Stephens

Adela Dashian – KBW


Good day, ladies and gentlemen, and welcome to the Equity Bancshares Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Mr. Jacob Willis, Investor Relations Officer. Sir, you may begin.

Jacob Willis

Good morning and thank you for joining our Equity Bancshares presentation and conference call. Presentation slides to accompany our call are available for download at investor.equitybank.com, as is our press release detailing our discussion on today’s call. You may also click the event icon for today’s call posted at investor.equitybank.com. If you are viewing this call on our webcast player, please note the slides will not automatically advance.

Please note Slide 2 including important information regarding forward-looking statements. From time-to-time, we may make forward-looking statements within today’s call and actual results may differ. Slide 3 also details important additional information for investors and shareholders. 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 Brad Elliott.

Brad Elliott

Good morning. I’m Brad Elliott, Chairman and CEO of Equity Bancshares based in Wichita, Kansas. This morning, we’re in Guymon, Oklahoma to announce a merger with City Bank and Trust, an outstanding bank in the Oklahoma Panhandle owned by Docking Bancshares of Ark City, Kansas. With me this morning is Bill Docking, Chairman, President and CEO of Docking Bancshares and Jim Webster, President of The City Bank and Trust. Also joining us is Equity Bancshares CFO, Greg Kossover.

City Bank and Trust is 172 million 1 branch bank with attractive core deposits, we are excited to add to our Equity Bank franchise. It represents our sixth Oklahoma location and 40 miles from Liberal Kansas location we closed last month, which adds nicely to this region for us and our bank overall. This Southwest Kansas-Northwest Oklahoma region will now represent approximately 250 million in loans and 430 million in deposits. Regarding the closing last month of the First National Bank of Liberal and Adams Dairy Bank in the Kansas City suburb of Blue Springs, each converted onto the Equity Bank processing systems and platform on May 4th as expected. We will have all of our cost savings completed during the second quarter.

I want to thank our operating teams for another outstanding job in making these mergers look far easier than they really are. The teams in Liberal and Blue Springs should be commended for their integration into the Equity Bank family, and we’re excited to do the same with the team in Guymon and all the customers they serve. It has been our pleasure to work with such a high quality, with such high-quality people as Bill Docking, Jim Webster, Amada Alvidrez and David Marshall. Of course, the Docking family has an outstanding reputation in the Midwest, and it comes as no surprise to us that Bill has surrounded himself with such high-caliber people. Bill?

Bill Docking

Thank you, Brad, for the kind words. And yes, we feel strongly about Jim, Amada and David and the people who have built and managed City Bank and Trust. My family and the directors of our bank have known throughout that these people have made all the difference to City Bank and the customers we serve. And Equity Bank has the expertise and financial strength to carry on the types of banking City Bank and Trust has performed historically for Guymon and its citizens.

Equity has lending and retail platforms suitable for agriculture, commercial, consumer, manufacturing, real estate and just about anything else our customers may need. We are very happy that as we pass with the baton to Equity Bank, the city of Guymon is banking patrons and the team at City Bank will all be treated with the same professionalism Equity maintains in all its markets. Jim?

Jim Webster

I’m glad on behalf of the team members here at City Bank, welcome to Guymon and one of the wonderful customer base we serve. City Bank has been the leader in this area for many years and I know you and Equity team will continue that level of service in fact with the larger capital base and the broader suite of customer products I think you are a proud successor for our bank and for our community.

And to our entire team here in Guymon, please note Equity will be first-class banking platform for you. Brad as CEO and all of these executives at Equity have meaningful personal investments and the ownership of Equity Bank. And it is my belief their goals and our goals will be very much aligned.

Bill Docking

I agree, Jim, and working with Brad and Greg and Equity’s team on this transaction gives me the confidence they will be totally professional to all the stakeholders including the bank staff and the patrons in Guymon.

Brad Elliott

Thanks Bill. We will treat all the stakeholders like all of our customers. And like in all our banking communities, we will keep the local executive base here at Guymon and a local decision making authority. I once again thank Julie Huber, Patrick Harbert, Patrick Salmans, Rolando Mayans and all the Equity leadership, who have worked so hard on this transaction. They each gives unselfishly to make these mergers possible.

At this time, Greg and I will move to discussion of the transaction. Greg?

Greg Kossover

Congratulations, Bill, to you and the City Bank and Trust team. Each of your associates has been a pleasure to work with to make this transaction possible. For listeners who may not be entirely familiar with Equity Bancshares, Pages 4 through 7 of the deck describes some of our financial and company highlights.

Moving to Page 9 of the deck and a discussion of the City Bank and Trust merger, the consideration for the transaction is all cash of $18,900,000, and will only include the assets and liabilities of City Bank and Trust. Docking Bancshares has another bank under its ownership and that bank and Docking Bancshares is not included in this transaction.

City Bank has one branch with just over $170 million in assets, loans of about $77 million and deposits of approximately $140 million. Core deposits defined as all deposits less jumbo CDs is 88%. 75% of their deposits are signature deposits. As we have previously stated, we derive significant amounts of our deposits from our community markets, and City Bank is an excellent example of a bank that protects core deposits. They have very clean credit with non-performing assets of only 21 basis points to loans and only $354,000 of OREO. Brad?

Brad Elliott

As we said earlier, City Bank has been very successful in the Guymon market, and we will continue to provide support to the local bankers here to keep decision making level to Guymon. This is now our third merger west of Wichita since our 2015 initial public offering and our sixth location in Oklahoma, we are proud to be in the Guymon market and to have a banking platform where community markets and their associates and patrons are the utmost importance to the Equity Bank family. And because Guymon is geographically close to our new Liberal market, we can provide even more banking opportunities to this region of our footprint.

Turning to Page 12, we will be purchasing 100% of City Bank and Trust for $18,900,000 in cash. The total consideration represents a price to tangible book value of 1.30 times and 15.5 times last 12 months earnings. After a special dividend of $4.8 million, the price is 1.41 times City’s 3/31/18 tangible book value. Price to 2018 net income with cost savings is approximately 8.3 times. The core deposit premium is 4.5%. Team management will be retained. The merger is subject to regulatory approval and we would expect to close early in the fourth quarter of this year. Equity would remain well capitalized on all ratios.

On Page 13, we see the transaction was structured within Equity’s key transaction metrics with minimal tangible book dilution of about 2.8% and about 5% earnings per share accretion in 2019 or about $0.14 per EQBK share and $0.17 per share in 2020. This results in a pro formed earn back using a cross over method of 2.75 years. The internal rate of return is 25%. We believe our net interest margin may slightly improve and our asset liability position would not change materially. Brad?

Unidentified Company Representative

Also on Page 13, I would like to point out, we will not have any credit concentration concerns and our cost savings are derived from operating redundancies. City Bank ranks number one in deposit market share, something we hope to grow with our broad product suite and their strong credit culture will fit nicely into the culture Craig Anderson and Wendell Bontrager are leading in all of our markets. Greg?

Greg Kossover

On Page 14, we see the cost saves are approximately 30% or $1 million after tax in 2018 and 100% will be achieved in the fourth quarter of 2018. There are no traditional revenue enhancements and we are performing a shift in City’s investment securities to loans resulting in a loan to deposit ratio of 62% in 2019 and 72% in 2021, which is consistent with and still conservative to Equity Bank’s current loan to deposit ratio of 89%.

Looking at Page 15, we see nice double digit earnings per share accretion of $0.14 in 2019 and $0.17 in 2020 as well as the 2.75 year earn back as previously stated although tangible common equity to tangible assets pro forms to finish the fourth quarter at 8.10%. Our pace of earnings and an expanding return on assets allows us to build capital rapidly and repay the cash used in these types of transactions.

In addition, in the second quarter, we have put our self registration up for use if needed, if and when we see the desire to raise capital. Some merger partners desire cash and some desire stock. We feel given our current pace of earnings and our current strength of our stock along with having the self-registration file, we are poised to be able to meet any potential merger partner desires.

Greg Kossover

Our total assets pro formed post merger to about $3.9 billion, total loans of approximately $2.5 billion and total deposits go to about $3.0 billion, taking a loans to deposits to approximately 85%, and we are excited about the core deposits City Bank has work hard to grow and retain. As previously stated, our capital ratios remain safe and competitive.

Brad Elliott

A special thanks to Bill, Jim, and their team for getting this transaction across the goal line. And a special thanks to the Equity Bank teams for all their hard work and dedication to Equity Bank allowing us to grow organically and through mergers. This has been a very productive trailing 12 months for us with the Tulsa and Ponca City mergers, the Liberal and Blue Springs mergers and this important transaction with Docking Bancshares and City Bank. And we remain poised with financial capital and human capital to continue growing our company an increasing shareholder returns.

Thank you for joining us today and we’ll take questions at this time.

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Terry McEvoy of Stephens. Your line is open.

Nate Tower

Hi guys. This is actually Nate on for Terry. I have a few questions. Just a few questions. Maybe we can start off with just can you guys give us some information on the back end of the deal? Was it negotiated? And then maybe some insight into what was the motivation for Docking Bancshares generally to let City Bank and Trust be sold to you guys?

Greg Kossover

Well, we’ve been talking to Bill and his team for many months, Nate, and I’m going to let Bill handle the Docking side of this answer of course. But for us, it’s obviously having close Liberal, and in a month ago, this is a nice subsequent, sequential transaction for that, with a great deposit base and great leadership. It was a very natural thing for us to get excited about. It’s 40 miles from Liberal. We can manage this very effectively in our new Southwest region that has developed in the last 6 months with these two mergers. And so for us, it was a very nice and attractive transaction, of course we follow Bill and his team. They’re just down the road from us in Ark City. They run great banks and so we’re very excited. Brad, do you want to add anything to that?

Brad Elliott

No. I mean this transaction just something that we think fits very well with the area that we’re putting together out here. And we think that it will allow us to bring products and services and have a branding presence in this marketplace. Bill?

Bill Docking

Thank you, Brad. Docking Bancshares based in our Kansas City has a separate bank, as was mentioned during the earlier remarks. It is the Union State Bank based in Ark City, Kansas. And over the last 10 or 12 years, Union State has expanded considerably. We bought The State Bank of Winfield in 2006 and in 2015 we bought RelianzBank in West Wichita. In addition, we now have a loan production office in Bartlesville, Oklahoma that we’re in the process of converting into a full service branch. So we have geographically, a fairly good size footprint and by selling City Bank which is about 270 miles from Arkansas City, and using those proceeds to reinvest in our Union State Bank footprint, we will be able to better manage and have one management team in charge of more assets rather than having a separate management team here.

Nate Tower

That’s great insight, appreciate it. And then maybe Greg, could you touch on the remix of the balance sheet as you move to some higher loan to deposit ratio levels in that market? Is that included in your accretion estimates? And how do you think that might impact to margin going forward?

Greg Kossover

Yes, it is included in the accretion estimates. Currently they have a loan to deposit ratio of about 50%. And as you know we’re up against 90%. So it is a natural change and the mix for us to begin to use our lending platform to relend some of the assets that they carry in the investment portfolio. I believe we have still been relatively conservative in those assumptions as stated on the prepared remarks on the calls. We don’t get crazy with the remix low 60% in 2019, low 70% in 2020. We probably have the capacity and capacity to exceed that.

The margin will be help a little bit. The bank has not of enough size to where it will be terribly impactful to margin. But their cost of deposits comes in at about 37 basis points, which is lower than ours. And their yield on loans is about 575 which is slightly higher than ours. When you put those two into the mix of net interest margin and then show the rebalance of investment securities to loans, we should see a little tick up in net interest margin, but don’t get carry away. It won’t be substantial.


Thank you. [Operator Instructions] Our next question is from the line of Michael Perito of KBW. Your line is open.

Adela Dashian

This is actually Adela Dashian on for Mike Perito. Congrats on the deal. Good morning. I just have few questions. First of all, could you please identify what the key enhancements of this deal? And give us some more color on those opportunities?

Greg Kossover

Yes, there are no non-interest income revenue enhancement. So Adela, we typically do not pro form revenue enhnacements into our transactions and we did not this time either. The only thing that we done in this transaction is what we just spoke with Nate about a second ago, and that is a small rebalance of investment securities moving into loans.

Brad Elliott

And if you take the percentage number looks big, but it’s on $77 million in loans. And our lending limit out here to move that percentage means that we added $3.5 million or $5 million loan that’s not a stretch, so…

Adela Dashian

And also with the closing of the two deals and made this announcement last night. What’s your current upside for more deals in the future? And how does pipeline looks start today?

Brad Elliott

Yes. So, we are continuing having conversations and always working on other opportunities. Our pipeline is as active as it’s ever been. And I know we continue to say that, but we continue to announce deals after saying that. So I think we have the ability to continue to do transactions very similar to this one and others in the surrounding area. So there’s still a lot of interest in partnering with Equity Bank and Equity Bancshares.

And so as long as we continue to do these mergers well, the 2 mergers we just completed, honestly, went as smoothly as anything we’ve ever done. And so as long as we continue to do that, continue to be able to have a strong currency. I think that the merger opportunities will continue to stay very active in our pipeline, and we’ll continue to announce and close transactions.


And at this time, I’m showing no further questions. I’d like to turn the conference back over to Mr. Jacob Willis.

Jacob Willis

Thank you all for joining the call today. Have a great day.


Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everybody, have a great day.

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