Bank of the Ozarks Bets on CRE in Its Biggest Deal Yet

Bank of the Ozarks is raising its bet on its hottest lending sector.

The Little Rock, Ark., lender's agreement to pay around $228.5 million for Intervest Bancshares — a $1.6 billion-asset commercial real estate specialist based in New York — is its biggest deal ever and its twelfth since 2010.

It's also a bid by Ozarks Chief Executive George Gleason to make the banks' strongest business for the past several quarters — commercial real estate lending — even stronger. CRE is a shared strength of the two banks, but their subspecialties within that niche differ. For that reason, and the light geographic overlap, the two were billed as a good fit.

"This is not a cost-cutting merger — this is a business development merger," Intervest CEO Lowell Dansker said.

Intervest lends in several niches that Ozarks does not focus on — bridge loans to stabilize troubled commercial real estate properties, and so-called triple-net leases that put the onus of taxes and other costs on tenants. Intervest lends in 25 states, but its branches are in New York and Florida, where Ozarks has a relatively small presence.

Ozarks' cheaper funding and higher loan limit should allow it to offer better terms and larger loans to Intervest's existing customers.

"There is virtually no overlap in the customer base of the two companies, and it is believed that these two lending platforms will be very complementary to one another," Gleason said.

It's a move that makes sense for Ozarks, and it would come at a fair price, said Sterne Agee analyst Peyton Green.

The agreement calls for Ozarks to pay $10.17 a share, a premium of about 27% to Intervest's Thursday closing price, or about 110% of tangible book value.

"George Gleason has been a real estate lender for a long time, and he's always been attracted to niche businesses," he said.

The market reaction to the deal was extremely positive, with Ozarks' stock rising 3.5% and Intervest's up more than 17% on Friday.

Ozarks is building on a strength. The bank's real estate specialties group, which offers primarily construction, development and land loans to high-end commercial real estate customers, has been the bank's best-performing unit recently — "king of the hill," in Gleason's words. It generated about $309 million of loans in the second quarter, the most of any of Ozarks' business lines.

Much of that growth came from Ozarks' New York lending office, which opened last July and booked around $118 million in loans in the second quarter. Ozarks has no plans to combine its office with the current Intervest office there, which suggests that the main aim of deal is to add the Intervest business line rather than to expand in New York.

"This deal seems like more of a niche play than a geographic play," FIG Partners analyst Brian Martin said. But "Florida is also a market that should perform well for them over time."

While Ozarks expects cost savings of around 20%, the plan is to add Intervest as a semi-separate unit rather than absorb it. Intervest's entire staff will stay on, and the bank will operate as a separate "stabilized properties group" within Ozarks. Dansker will lead this group, and Intervest President Keith Olsen will be Florida market president.

The deal would also help strengthen Intervest's main weakness, a high cost of funding. Intervest made a $10.2 million profit through the first six months of the year, despite a net interest margin of 2.80%. Because of a heavy reliance on certificates of deposit, Intervest paid an average of 1.5% on interest-bearing deposits in the first quarter.

Ozarks' was just 21 basis points. It plans to use excess deposits from its branch network to lower the cost of funds for the Intervest unit after the deal closes. That should open up "good yielding loans at interest rates that [Intervest] couldn't get on their own," Sterne Agee's Green says.

Like Ozarks, Intervest runs a sleek operation and has low overhead. Its efficiency ratio was 42.13% at the end of the first quarter, while Ozarks' was 47.12%.

It's one of few similarities between two different, but potentially well-matched banks.

"We're a little bit different, but it's what we've been doing our entire existence," Dansker said. "I think this is a tremendous opportunity to join with another winning organization who are like-minded and want to do the very best they can."