Thursday, October 4, 2012

OZRK Acquisition of Genala Bank

OZRK announced after market close today that they have entered into a $27.3 million agreement with Genala Bank which operates The Citizens Bank (not to be confused with Citizen's Bank), a one-office bank in Geneva, Alabama.This announcement marks a first for Ozarks as it is not an FDIC-assisted acquisition, but rather that of traditional M&A. OZRK CEO called the company "a healthy bank with solid market share," which makes for an entirely different situation from the failed banks they have purchased in recent years. OZRK will be issuing $13.9 million in stock and paying $13.4 million cash in exchange for all outstanding Genala shares. As of Q2 2012, Genala carried approximately $170 million in total assets, $45 million in loans, and $142 million deposits on its balance sheet. However, other financial statement information is not available. This transaction is expected to close late December of this year or early Q1 2013. This acquisition was unanimously approved on both sides.

OZRK has a history of making sound decisions and investments, and clearly they believe that this will have a net benefit to the company, but this is a difficult transaction to analyze. Very much on the surface, OZRK is exchanging $27.3 million in assets and equity for $28 million in net assets, which sounds like a good deal. However, a lot of information is not available, like the quality of the loan underwriting and the deposit mix can make a huge difference. Having deposits more than 3x loans has to be a significant drag on net interest income and margin. The combined Q2 balance sheet represents $3.9 billion assets with $2.7 billion loans and $2.9 billion deposits, which is 1.08x loans. On their own, OZRK's deposits are 1.06x loans and their net interest margin significantly surpasses peers at almost 6% (most peers weigh in around 3.5%), which is even more impressive in the current interest rate environment. With OZRK's size, I think the loan/deposit mix is still reasonably balanced, although I certainly expect some negative impact on net interest income and margin.

I expect a dip in OZRK share price tomorrow in response to the news, but I think it will be largely superficial, particularly considering that OZRK reports Q3 earnings next Thursday. Last quarter, OZRK stock climbed nearly 9% in the day following earnings. This timing is advantageous, and no doubt strategic.

Without more information, I am not sure whether to anticipate net gains or losses from this acquisition, although I expect net gains are far more likely. OZRK closed at 34.12 and my current price target is 35.77, although that will be revised post-earnings. I certainly maintain my hold position through the earnings release, at which point the model will be updated and the price target revised.

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