In June, State Bank Financial Corporation, the holding company for State Bank and Trust Company, announced the acquisition of AloStar Bank of Commerce (AloStar). AloStar was founded in 2011 through the FDIC-assisted acquisition of Birmingham, AL-based Nexity Bank. It is headquartered in Birmingham, with commercial offices in Atlanta – where AloStar’s executive management team, lender finance and asset-based lending teams are headquartered. Recognizing its roots would always be in asset-based lending, AloStar focused on growing its business credit group and lender finance units methodically and aggressively. And, keeping the borrowers’ needs in the forefront, AloStar also launched a commercial real estate group in 2015 – which is focused on providing interim financing of under-construction projects. This “customer-focused” strategy established AloStar as a strong middle-market player on a national scale.

The acquisition of AloStar establishes new and complimentary lines of business for State Bank, and also provides AloStar with the enhanced access to capital and the strength of State Bank – allowing the AloStar team to scale its lending platform and provide expanded products and services to AloStar’s existing and prospective customers.

ABL Advisor met with Andy McGhee, Founder, President and CEO of AloStar, to learn more about the strategic acquisition of AloStar by State Bank, and to gain an understanding of his vision of the opportunities this new parent will provide the AloStar team, their customers and, ultimately, prospective new borrowers.

ABL Advisor: Thanks for your time today Andy. Please explain the rationale behind the acquisition of AloStar Bank of Commerce by State Bank Financial Corporation – why was State Bank interested in the AloStar lending model?

Andy McGhee: State Bank has traditionally been a leading lender in the commercial real estate market and possesses a tremendous reputation within their geographic regions of concentration. The bank also has a traditional C&I lending business operating in Atlanta and throughout the state of Georgia. More recently, the bank has been seeking opportunities to diversify balance-sheet risk. An example of this was the bank’s entrance into the equipment finance space with the acquisition of Patriot Capital Corporation in October 2015 – which has been a very successful acquisition for the bank. When the bank looked at AloStar, they viewed the acquisition as a new opportunity to diversify their balance sheet further and expand their loan portfolio significantly – with one single acquisition. So we are a new business line for the bank that significantly diversifies their lending book and puts them into new lines of business that will provide cross-sell opportunities for their equipment finance business as well as their C&I business.

ABL Advisor: Prior to the acquisition, did State Bank have any type of an asset-based lending platform?

McGhee: No, the bank did not have any asset-based lending capabilities, but our organizations and teams have known each other for years – which made for a great start. The bank had demonstrated an interest in AloStar for quite some time, but they employ a patient and strategic approach to executing their business objectives, so they wanted to get to know us, spend time with us, and learn more about our business. They took a very deep dive into our platform to be certain they were comfortable with the way we operate in our markets. To facilitate the investigation, they hired two outside consultants to assist in the due diligence process and ensure AloStar possessed strong business practices and expertise in our business lines. This level of due diligence was also important to us because when you are joining an organization that does not have an asset-based lending background, you want to be sure they understand the types of businesses your group lends to and the structures of deals your team utilizes. This provides confidence that they will be supportive of the business model going forward. Having all that settled upfront, the diligence process made us very comfortable that they understand how we operate in the market.

ABL Advisor: What makes State Bank “the right banking partner” for AloStar’s team from your perspective?

McGhee: We had a number of options available to us to create the required liquidity event for our private equity shareholders. It was important to us was that the AloStar team would remain intact so we could continue to deliver capital to the middle market in the same manner we have been since our founding more than six years ago. State Bank is more than willing to keep our team intact, as they are buying our team based upon our strong reputation in the market. We knew going in that we would be an important addition to State Bank, and that the bank would also provide us great stability of capital structure. Our private equity partners were excellent, but they have liquidity requirements; it was time to deliver that liquidity to our partners. So we were looking for a partner that would provide a long-term and stable base from which to run our business.

ABL Advisor: So the entire AloStar business will remain intact as a unit, including credit underwriting and business originations?

McGhee: Yes, it will. Our credit approval process will remain unchanged. We are known for being very responsive in the market and we wanted to make sure the organization we joined would allow us to be equally responsive to our clients. Our ABL and lender finance teams will remain in place, and our name will also remain unchanged in the interim. We all agreed it’s important to keep the AloStar brand alive in the marketplace. So the AloStar Capital Finance brand will remain in the market.

ABL Advisor: Please describe the markets you will focus upon for our readers.

McGhee: We will continue to focus on the same markets we have traditionally focused upon on a national scale – focusing on $5-20 million commitments as our sweet spot. We are looking for ways to deliver capital below the $5 million level, as we believe there will be leads generated from the State Bank platform, and we are anxious to do this business. We need to determine how to best underwrite that business and then manage the risk accordingly once the business is on the balance sheet. I don’t think our hold position will increase significantly. We believe a hold position of $5-20 million is appropriate for our group. We’ve underwritten transactions up to $60 million, so we are confident we can continue to do this type of business.

The interesting thing about being owned by private equity is that certain yield requirements are expected in order to achieve the goals of the private equity investors. Unfortunately, over the years we have had a number of clients graduate from a heavily monitored ABL structure to a C&I structure and were not able to respond to those structural needs due to our return requirements. This resulted in the loss of these clients. Now, with the State Bank team, we’ll be able provide banking services to clients throughout the lifecycle of their businesses – whether they are in a turnaround mode or an acquisition mode; and if the bank acquires a large, new customer creating concentration issues, they can initially be placed into an ABL structure and later potentially move toward a C&I structure.

This is a significant positive for AloStar, but we believe it will be an even bigger positive for our clients, because once they become an AloStar client, they don’t need to seek funding from another institution as their credit profile evolves – which saves on underwriting time and costs for the client. We are very eager about having the ability to maintain relationships with our clients for much longer periods of time than we were under the former AloStar model. This is very important to us and to State Bank.

ABL Advisor: You mentioned earlier that State Bank is a strong commercial real estate player. How will the two commercial real estate units work together?

McGhee: We started a commercial real estate business in 2015 and it’s been very helpful to have this real estate expertise as part of our organization. State Bank’s expertise in commercial real estate will essentially allow us to double our ability to make smart decisions on deals with real estate components.

ABL Advisor: The ABL market is described by many as hyper-competitive with tremendous margin compression resulting from too many new players entering the middle market. Do you agree with this statement? How do you see the market as we enter the final stretch of 2017?

McGhee: There is significant pressure in the ABL market both on pricing and structuring. This first started to show up in late 2015, continued throughout 2016, and is still an issue in 2017. We are seeing competitors that are willing to take greater risk, price at low rates and loosen underwriting standards, and we think this is going to continue for a period of time. Fortunately we been able to maintain our margins throughout this period and we are consistently closing deals that are AloStar-type transactions. We are continuing to appropriately price deals relative to borrowers’ risk profiles. There is a lot of capital chasing all types of transactions. We have seen these cycles in the past, but we will continue to maintain our pricing and underwriting strategy.

ABL Advisor: How would you summarize the most significant positive of this new relationship with State Bank?

McGhee: As a result of this acquisition, we how have the ability to hold a customer for a much longer period of time. If you asked me six-plus years ago to look toward the future and tell you my vision for what

AloStar would look like, I would have told you that we want to become something that looks exactly like this State Bank situation. I believe this merger with State Bank puts us in hyper-speed towards what we wanted to become as a company. We now have the benefit of a larger balance sheet, a stable capital base, and a more diverse funding structure – all of which are positives for AloStar’s referral sources, clients and prospects. We are very excited about this opportunity to be a part of the State Bank team.