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What’s driving nonbanks to buy banks? Cheap deposits

Like other nonbank lenders that have recently struck deals to buy banks, DLP Real Estate Capital was largely motivated by the chance to scoop up low-cost deposits to fund its loans.

The private real estate investment company said that the $97.8 million-asset Sunnyside Bancorp could also manage cash flow and house 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 of mostly core deposits that DLP, with dual headquarters in Bethlehem, Pa., and St. Augustine, Fla., found most attractive. The firm offers residential mortgages, but those loans are currently funded by higher-cost private placement funds. Bank deposits will shrink the cost to fund those 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 million deal. “That’s a huge thing, especially when you’re in a very competitive market like residential lending.”

The deal, announced late Tuesday, continues a microtrend of nonbank lenders purchasing banks. Last week the San Francisco fintech Social Financial, better known as SoFi, said it would pay $22.3 million in cash to buy Sacramento, Calif.-based Golden Pacific Bank and its holding company. Meanwhile, LendingClub became the first U.S. 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 opted to buy banks in large part to lower the cost of funding loans.

Sunnyside Bancorp is the parent of Sunnyside Federal Savings and Loan Association in Irvington, N.Y. Apart from the deposits, Sunnyside is an attractive target to DLP because it’s primarily a real estate lender, Reinhardt said. About 75% of its loans are in real estate and nearly 50% are in one- to four-family mortgages.

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

At the same time, DLP plans to pump capital into the bank, to help it expand geographically, beef up its digital banking capabilities and create two key fee income drivers: wealth management and trust services.

“This is about setting up a banking enterprise that is connected to a very successful real estate enterprise, with an opportunity to grow this bank largely on a digital platform,” Reinhardt said.

Sunnyside has just one branch in Irvington, in Westchester County. In the future, there may be a physical presence — a branch, interactive teller machine or shared space in a loan production office are all possibilities — in DLP’s headquarters cities and other major markets, including Asheville, N.C., Reinhardt said.

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

Brickell was sold to Banesco USA in 2019.

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

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

Last year the firm surpassed $1 billion of assets under management. This week it bought multifamily properties in Florida and Kentucky, bringing the total number of managed housing units to 12,600 across 21 states.

How the DLP deal gets structured will be important from a legal and regulatory standpoint, financial services attorneys and an analyst said. A separate entity called DLP Bancshares has been established, but it will be critical for DLP to show separation between DLP Bancshares and the business activities of DLP’s other companies, including its lending arm, DLP Lending, which provides short-term acquisition and renovation financing for real estate investors through private placement funds.

“Some of the line drawing around permissible activities is going to be important in terms of 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 bank regulatory team at the law firm Alston & Bird.

“There’s the old adage: Don’t let the fox into the henhouse,” analyst Terry McEvoy of Stephens said. “So that balance between a real estate investor and a bank that’s managing the risk … if that relationship favors one side over the other, it’s rough over the long run to make that work.”

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

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

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

DLP’s deal could spur other real estate investment companies to make similar moves, Reinhardt said.

“I suspect there will be more people looking at it, just like fintechs looking at other types of banking platforms,” he said. “I think the landscape is certainly changing.”

The deal is set to close in the fourth quarter. DLP has 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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