Create capital to grow your core business.
Sovereign has worked with many regional and community banks to help them monetize their owned real estate to raise capital and convert non-earning assets into working loans and other income-generating investments. In this disrupted economic environment, financial institutions cannot afford to have substantial capital tied up in non-earning, illiquid assets that provide a drag on earnings.
The banking industry has entered an era in which increased scrutiny is being applied to regulated entities. Capital ratios will become crucial to an institution's access to capital. Running a successful financial institution in this market environment demands efficient asset allocation and maintaining adequate liquidity.
A sale-leaseback transaction of bank-owned real estate is the ideal way to:
- Improve performance ratios such as ROE and net interest margin;
- Bolster GAAP earnings by eliminating depreciation expense associated with properties sold, amortizing the gain on sale over the lease term, and increasing net interest income from the reinvestment of the cash proceeds less the rental expense;
- Obtain cash to fund investment in earning assets, stock repurchases, dividends, repayment of debt or M&A activity;
- Mitigate the risk of further decline in the market value of real estate;
- Reduce 100% risk-weighted assets by reinvesting in lower risk-weighted assets such as loans and securities.
Other considerations include:
- Concerned about loss of control of office buildings, operation centers and retail branch facilities? This can be addressed by giving multiple renewal options beyond the initial 15-, 20- or 25-year lease term and/or a right of first refusal or repurchase option at fair market value at the end of the lease term.
- What is the potential impact on the future merger-market value of the bank? Since the primary factor determining a financial institution’s valuation is sustainable earnings, the increase in recurring earnings from a sale-leaseback will generally enhance both the shareholder value and the bank’s market valuation.
