What prompts non-banks to buy banks? Cheap deposits

Like other non-bank lenders who recently made deals to buy banks, DLP Real Estate Capital was largely motivated by the ability to collect low-cost deposits to fund its loans.

The private real estate investment company said that the $ 97.8 million Sunnyside Bancorp asset could also handle cash flow and real estate deposits for DLP’s six individual business lines, while allowing it to introduce wealth management and trust services to clients – primarily high net worth investors. and small businesses – throughout its 21-state footprint.

But it’s Sunnyside’s $ 79 million in mostly core deposits that DLP, with its dual headquarters in Bethlehem, Pa., And St. Augustine, Fla., Has found most appealing. The company offers residential mortgages, but these loans are currently funded by higher-cost private equity funds. Bank deposits will reduce the cost of financing these loans.

“The real key is that bank deposits are cheaper funds,” said Fred Reinhardt, a longtime banker who will become president and CEO of Sunnyside Federal, pending regulatory approval of the 12-month deal. millions of dollars. “It’s a huge thing, especially when you’re in a very competitive market like home loans. “

The agreement, announced Tuesday evening, continues a microtrend of non-bank lenders buying from banks. Last week, San Francisco-based fintech Social Financial, better known as SoFi, said he would pay $ 22.3 million in cash to purchase Golden Pacific Bank, based in Sacramento, Calif., and its holding company. Meanwhile, LendingClub became the first US online lender to buy a bank when it acquired Radius Bancorp in Boston in January. It now operates under the name LendingClub Bank.

Like DLP, LendingClub and SoFi have chosen to buy from banks largely to reduce the cost of financing loans.

Sunnyside Bancorp is the parent company of Sunnyside Federal Savings and Loan Association in Irvington, NY. Besides deposits, Sunnyside is an attractive target for DLP as it is primarily a real estate lender, Reinhardt said. About 75% of its loans are real estate and almost half are mortgages from one to four families.

Owning a bank could help DLP quickly jump into new lines of business, including commercial real estate and commercial and industrial lending, Reinhardt said.

At the same time, DLP plans to inject capital into the bank, help it grow geographically, strengthen its digital banking capabilities and create two main revenue drivers: wealth management and trust services.

“It’s about building a banking business connected to a very successful real estate business, with an opportunity to grow that bank largely on a digital platform,” said Reinhardt.

Sunnyside has only one branch in Irvington, Westchester County. In the future, there may be a physical presence – a branch, an ATM, or a shared space in a loan production office are all possibilities – in DLP headquarters cities and other major markets, including including Asheville, NC, said Reinhardt.

“It can really be a prototype of a nationally chartered community bank,” said Reinhardt, a 20-year Merrill Lynch veteran who started a de novo bank in Connecticut before joining Miami-based Brickell Bank in 2012 in as president and chief executive officer.

Brickell was sold at Banesco USA in 2019.

DLP was founded in 2009 as a real estate company that bought and flipped homes. It expanded to Florida the following year and launched building and real estate management divisions through which it began acquiring and transforming multi-family housing and commercial properties. DLP Capital Partners was established in 2013, the same year the first equity fund was established.

In 2015, more than $ 50 million in investments were secured, according to DLP’s website. In addition to the real estate company and DLP Capital Partners, which provides real estate equity and debt funds to high net worth investors, other DLP subsidiaries include a property management arm, a loan company, a loan management company. and title insurance and escrow services. division.

Last year, the company surpassed $ 1 billion in assets under management. This week, he bought multi-family properties in Florida and Kentucky, bringing the total number of managed housing units to 12,600 in 21 states.

How the DLP deal is structured will be important from a legal and regulatory perspective, financial services lawyers and an analyst said. A separate entity called DLP Bancshares has been created, but it will be essential for DLP to show the separation between DLP Bancshares and the business activities of other DLP companies, including its lending subsidiary, DLP Lending, which provides acquisition finance. and short-term renovation for real estate investors through private equity funds.

“Some of the lines around licensed activities will be important in whether they can continue to do what they do today under the wing of a regulated savings and loan holding company,” said Cliff Stanford, who leads the banking regulatory team. at the law firm Alston & Bird.

“There’s the old adage, don’t let the fox get into the chicken coop,” Stephens analyst Terry McEvoy said. “So that balance between a real estate investor and a risk-managing bank… if that relationship favors one side over the other, it’s hard in the long run to make that work. “

DLP Lending transactions “will continue to be funded by private equity funds,” said Reinhardt.

From an efficiency standpoint, the deal seems to make a lot of sense, said Chip MacDonald, lawyer at Jones Day.

“I think the important thing is that a bank will help them be able to set rates and terms uniformly in all the states where they make loans,” MacDonald said. “It allows them to do interstate business much more efficiently. “

The DLP deal could spur other real estate investment firms to take similar action, Reinhardt said.

“I suspect there will be more people looking at it, as will fintechs who will be interested in other types of banking platforms,” ​​he said. “I think the landscape is definitely changing.”

The deal is expected to be finalized in the fourth quarter. DLP had an introductory meeting with the Federal Reserve and the Office of the Comptroller of the Currency to discuss the sale, Reinhardt said.

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