Buyer avoids red tape, seller builds on strength in Sound Bank deal

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The sale of Sound Bank in Morehead City, N.C., was a strategic turning point for two groups based nearly a thousand miles away from each other.

The recapitalization of the soon-to-be-renamed Dogwood State Bank will put its new ownership on a fast track to build a high-performing bank across North Carolina. At the same time, the seller can focus on turning its remaining bank unit — West Town Bank in North Riverside, Ill. — into a bigger player in government-guaranteed lending.

Organizers of Dogwood State originally were "going pretty hard down the de novo path” until West Town reached out about selling Sound, said Steve Jones, the buyer's new CEO. Scott Custer, former CEO of Yadkin Financial, is Dogwood State's chairman, while Greg Heaton, former Charlotte region president for F.N.B. Corp., is its president.

The goal is to rebrand Sound in the third quarter and expand in Raleigh, where the bank has a branch, and to enter Charlotte, the state’s biggest city.

Buying a bank “gives us a platform [and] operating systems so that from day one we’re off and running,” Jones said. “With a de novo, you start off underwater. Under this scenario, you start on top, not below the surface. … Our goal is to [build] a top-quartile performer — just like we did at Yadkin.”

Jones was Yadkin's chief banking officer when it was sold to F.N.B. in 2017.

Despite the pivot, the business plan for Dogwood State remains unchanged — capitalizing on the recent consolidation that has washed over North Carolina’s banking market in recent years. The number of banks in the state has fallen by 37% since the financial crisis, to 81, while the amount of deposits has increased by 20%, to $366 billion, according to data from the Federal Deposit Insurance Corp.

“The consolidation rate in North Carolina is more than double the national average,” Jones said. “There’s a scarcity of community banks. Given the vibrancy of the markets we [plan] to operate in, we just saw a huge need for [serving] small-business customers.”

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Dogwood State will focus on commercial-and-industrial lending to borrowers with annual revenue of $50 million or less. It also expects to establish homebuilder and regional Small Business Administration business lines.

West Town’s ownership group started out the much the same way, pursuing a plan to open a North Carolina de novo until it had a chance to buy and recapitalize West Town for $8.5 million in 2009. The group moved its headquarters to Raleigh in 2014 and opened branches in Greenville, N.C., and Edenton, N.C., before acquiring Sound in September 2017.

While it was expanding in North Carolina, the group was also building a nationwide SBA platform. It expanded its SBA involvement in February 2017 when it bought a 43.5% stake in Windsor Advantage, a firm that offers white-label government-backed services to other lenders.

West Town acquired the remaining stake in Windsor in April 2018.

The company, which received $28 million for its stake in Sound, intends to use a portion of the proceeds to expand its dealing in government-guaranteed lending. West Town reported first-quarter results Wednesday, including $900,000 million in revenue from SBA and U.S. Department of Agriculture lending, as well as a $2.1 million contribution from Windsor.

Revenue tied to government-guaranteed lending totaled $15.8 million last year.

West Town’s government-guaranteed lending operations — especially Windsor — offer “an unusual upside opportunity,” John Howard, an analyst at Equity Research Services, wrote in a recent note to clients.

“The notion of having an outside entity like Windsor enabling community banks to engage in this highly profitable, but complex, area of lending is a compelling one, and it potentially changes, at least in our view, how West Town might one day be valued,” Howard added.

Windsor "throws off a tremendous amount of cash," so West Town will use some of the proceeds from Sound to expand that business, said West Town CEO Eric Bergevin. West Town is also looking at buying back stock and acquiring other banks.

“Moving forward, our primary focus is on the growing West Town ... into a robust, full-service community bank,” Bergevin said.

West Town’s sale of Sound seems to fit with a growing trend of financial services companies divesting peripheral assets to focus more on core business lines. Roughly 85% of financial services firms polled in Ernst & Young's recent Global Corporate Divestment Study said they plan to divest assets in the next two years, with streamlining the operating model ranking as the top reason.

In that light, the decision to exit North Carolina to focus on government-backed lending seems "about right," said Phil Timyan, a bank investor who writes a blog on community banking and owns a stake in West Town.

The way Bergevin sees it, West Town will be able to build on the government-guaranteed foundation it's already laid.

"We can take the capital and apply it to what we already do well," Bergevin said.

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