Academic journal article ABA Banking Journal

Have Your Branch, and Sell It Too: Looking for a New Source of Fresh Capital? You May Find It at Your Feet-Literally

Academic journal article ABA Banking Journal

Have Your Branch, and Sell It Too: Looking for a New Source of Fresh Capital? You May Find It at Your Feet-Literally

Article excerpt

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Regulators keep advising--and sometimes demanding--that banks raise more capital.

But finding capital is tough, right now. Pooled trust preferred offerings have been dead in the water for months. Selling more common shares is a difficult proposition when bank stocks are a Wall Street pariah. Retained earnings require starting with something to retain, a harder proposition for institutions hit with narrower spreads.

Bankers scanning the horizon for an answer might do better to put down their telescopes and look at their feet. If your institution owns its headquarters, branches, and operations center, you may literally be standing on the capital you're seeking. Through the sale-leaseback of any or all of those facilities, the bank can turn them into capital.

Turning bricks into capital

Case in point is Harleysville National Corp., a $3 billion-asset holding company that turned 15 offices into more than $38 mil lion of fresh capital in November 2007. George Rapp, CFO and executive vice-president of the southeastern Pennsylvania bank, had done such a deal years before at Philadelphia Savings Fund Society. The time looked ripe to try another.

"The economics of this kind of transaction are compelling," says Rapp. "The only reason to own real estate is to have it appreciate."

This is not the business that banks are in, however, so owning real estate is, in Rapp's mind, a waste of capital. Under current federal risk-based capital standards, bank premises, fixed assets, and other real estate owned all fall into the 100% risk-weighted category. Indeed, Thomas Killian, principal, investment banking, at Sandler O'Neill & Partners, L.P., in N.Y.C., notes that many banks have between 5%-10% of their risk-weighted assets tied up in real estate. (Sandler O'Neill arranged the sale-leaseback for Harleysville National.)

So, "turning nonproducing assets into income-producing assets is appealing," Rapp continues. In the case of Harleysville National, the funds will be turned into loans. The sale-leaseback transaction, which Rapp is interested in trying again with additional properties, is part of a broader effort to rationalize the company's use of buildings and real estate.

But new lending is not the only use that such capital can be put to. For another potential use, one need look no further than Willow Financial Bancorp., Inc., which Harleysville National agreed to acquire in May. Willow Financial had been going through some difficulties, prior to the merger, and in one effort to strengthen itself, did a sale-leaseback of eight branches in February 2007, garnering more than $11 million in new capital.

Growing trend among smaller banks

Very large banks have used sale-leasebacks for some time--some are even selling help to other institutions looking to follow their lead. But in recent months, more mid-size and smaller community banks have been looking very seriously at sale-leasebacks.

Thomas Capello, a former banker who is now a partner at Bank Realty L.P., York, Pa., a firm specializing in such arrangements, says his company has seen a 50% increase in volume thus far in 2008, and he expects the trend to continue.

"It's driven by banks needing to shore up capital," says Capello. He and others working in sale-leasebacks say that regulators have no issues with the transactions. Indeed, Capello notes regulators suggested the approach to one bank as one of several options.

American Realty Capital Trust, Inc., a relatively new private real estate investment trust that has a specialty in sale-leasebacks for banking institutions, has purchased nearly 100 bank branches in the last eight months, as well as other bank properties, according to Nicholas Schorsch, chairman and CEO.

"Banks don't need to own their real estate--they need to control their real estate," says Schorsch, who became known for these deals at an earlier firm, and continued the practice at his present trust, based in New York City. …

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