With its planned acquisition of AloStar Bank of Commerce, State Bank Financial Corp. seems determined to remain independent to capitalize on growth in its home base of Atlanta, analysts said.
"[State Bank's] commentary has shifted from that of a seller to that of a bank that wants to be around longer and take advantage of the health in Atlanta and continue to grow for a few more years," Stephens Inc. analyst Tyler Stafford said in an interview.
Stafford said that, in previous years, many on the Street had anticipated that former CEO Joseph Evans would look to sell the company. Evans stepped down in June and remains chairman of the company. State Bank acquired several failed banks after the financial crisis and steadily built the company up to one with more than $4 billion in assets and a return on average assets above 1% by the end of 2016. Evans had previously telegraphed that once State Bank eclipsed those levels the bank would be open to selling. He had previously guided two other banks down a similar path to sales.
State Bank said it would pay an estimated $196 million in cash to buy AloStar. While the seller is based in Alabama, it has an executive management and prized lender finance and asset-based lending team in Atlanta.
During a call with analysts to discuss the deal, State Bank CEO Thomas Wiley Jr. and other executives touted its financial and strategic merits. They notably mentioned the target's middle-market asset-based lending team in Atlanta and its lender finance line of business, which the buyer said will complement and help expand its existing specialty finance group.
As Stafford noted, the move comes as Atlanta shows signs of prolonged economic vibrancy.
The metropolitan area has in recent years produced steady population growth and its economy has expanded faster than that of the nation as a whole, Scott Brown, chief economist with Raymond James, said in an interview.
The acquisition of AloStar will push State Bank above $5 billion in assets and give it added scale in Atlanta. Gabelli & Co. analyst Steven Comery said that is important because, while the banking industry has consolidated notably in Atlanta in recent years, the market still has several community banks vying for commercial loan deals and new customers. By gaining heft and adding more lending talent, State Bank could make bigger loans and offer more services than other community banks.
State Bank also gets that added size at a "favorable" price, Comery said. The bank valued the deal at 1.0x tangible book. That is below what most buyers have been paying this year in the Southeast. The price, combined with using cash to do the deal, will make it minimally dilutive to existing shareholders, State Bank said, adding that it expects to earn back dilution within 1.5 years. Investors typically have favored earnback periods shorter than three years.
Comery said the industry has not seen many all-cash deals this year because prices typically have been high relative to last year. Often, bank buyers have used their own elevated stock values — following a run-up in bank stocks late in 2016 — to cover part or all of deal price tags. But with State Bank paying a relatively low price, it makes sense to pay cash and minimize dilution, he said.
Stephens' Stafford agreed. But he noted that, while the target has strong credit metrics and an attractive operation in Atlanta, it comes with a funding mix that some investors are questioning.
Big chunks of AloStar's deposits come from internet and correspondent banking channels — sources that will provide the buyer with funding diversity but that also are often viewed as being of lower quality. Stafford thinks that is why State Bank was able to cinch the deal at a relatively low price, and that likely is weighing on investors' minds. He said it helps explain why shares of State Bank fell nearly 1% in morning trading June 15 despite other strong financial metrics.