Having shored up capital following the financial crisis, many banks are flush with cash and in search of ways to put it to use. For Old National Bancorp, a solution to its capital glut came in the form of 14 leased branches that it opted to buy.
It's an idea that could make sense for others.
Like many banks, the $11.9 billion-asset Old National sold branches during the financial crisis to boost capital. Long-term leases ensured that the company could continue to occupy the locations.
Such transactions — often called sale-leasebacks — have been a popular option for banks in recent years. One advantage is that it allows them to realize sales gains. And they can invest that cash in new technology, for example.
But with the industry on the rebound and interest rates persistently low, real estate investments have started to look appealing of late, says Christopher Wolking, Old National's chief financial officer.
"We don't have as much opportunity to deploy cash" — and Old National has a lot of it — Wolking says.
Besides reallocating excess capital, the move is helping Old National get ahead of a new accounting standard recently passed by the Financial Accounting Standards Board that will require companies to record the value of operating leases on their balance sheet. Most property leases are currently considered off-balance-sheet activities, industry experts say.
The change, which won't go into effect until 2019, will undermine a key selling point of sale-leasebacks — taking liabilities off the balance sheet, says Gerry Levin, senior managing director at Mesirow Financial, which specializes in real estate investing.
That doesn't mean buying is the way to go in every case.
Some banks continue to pursue sale-leasebacks, particularly in markets where real estate valuations are quickly rising.
Flushing Financial in New York, for instance, recently completed a sale-leaseback, cashing in on the fast-rising value of branches in trendy Brooklyn neighborhoods. Others have used the deals to lower costs and boost capital for making more loans.
Wolking, however, made it clear that he thinks other banks should look into buying back their leased locations. His Evansville, Ind., company, which now owns about 40% of its 164 branches, paid two real estate firms $66 million for the 14 properties on which it had previously done sale-leasebacks.
"I cannot imagine that people who had done those aren't considering [buying them back] today," Wolking says.