Banks, navigating choppy seas, tap their branch networks for cash

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Banks are turning to another onetime source of revenue as the industry hits tougher times, and institutions look for creative ways to offset losses from bad investments.

This recent spate of deals entails the sale of certain branches to real estate firms, which then lease back the branches to the banks and collect rent for years to come. 

Proponents say the strategy makes sense even in regular times, since it frees up banks' balance sheets for day-to-day business, rather than leaving money sitting in valuable real estate. But so-called sale leaseback deals have additional benefits as the industry navigates choppier waters.

"It's a sign of the times," said Todd Baker, managing principal at Broadmoor Consulting and a lecturer at Columbia University, noting that the moves generate "cash and capital that can then be used to deal with some other problems." 

For some banks, one problem right now centers around bonds that they bought back when interest rates were low. Rising interest rates starting in 2022 tanked the value of those bonds, saddling the banks with large "unrealized" losses on securities that don't pay much interest. 

Once last year's turmoil in the banking system subsided, banks started getting rid of their low-yielding bonds and replacing them with newly issued ones that pay more. But that's a painful trade to make, since banks are selling at a loss, thus making their previously unrealized losses real.

The fix: pairing those losses with gains from selling some of their most treasured branches.

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Banks that have done sale leaseback deals in recent months include Sierra Bancorp in California, Finward Bancorp in Indiana and First Northwest Bancorp in Washington.

Another branch seller is Plumas Bancorp in Reno, Nevada. In February, the $1.6 billion-asset bank said that it sold nine branches to the real estate firm MountainSeed, which in turn leased the buildings back to the bank for 15 years.

The $25.7 million deal gave Plumas the flexibility it needed to restructure its bond portfolio — basically swapping out low-paying bonds for higher-yielding ones. Doing that required the bank to take a capital hit, but selling the branches at a gain negated the blow.

"The restructure will result in higher yields and interest income streams for years to come," Andrew Ryback, Plumas Bancorp's president and CEO, said in February.

The communities where those branches operate benefit, too, Ryback added, since the bank is effectively committing to 15-year leases at a time when banks continue trimming their branch footprints.

"You're doubling down on the communities that you're in when you do a sale leaseback," said Carl Streck, the CEO of MountainSeed. "It's counterintuitive, but it really is true."

MountainSeed has been behind several of the sale leaseback deals announced over the last year. The Atlanta-based firm, which offers various real-estate services to the banking industry, recently raised $2 billion to arrange more such deals. Streck said he expects to close 100 of them this year.

The large investment firm Blue Owl Capital has also been active in sale leasebacks for years, striking deals with large and regional banks. It's seen an uptick in activity recently and says that it has a robust pipeline of deals.

Marc Zahr, Blue Owl's head of real estate, said sale leasebacks present a "massive opportunity" for companies to "unlock" the value of their real estate and put it toward loans or other investments.

"If you can use the proceeds, unlock the value that is tied up, not earning anything on your balance sheet and redeploy back into operations … that should be accretive to your shareholders," Zahr said. "That's what CFOs and treasurers should be focused on in the banking sector and all other sectors."

Last month, Blue Owl did a sale leaseback deal with Fulton Bank, which picked up the scraps following the recent failure of Philadelphia-based Republic First Bancorp. The parent company of Fulton Bank sold 40 locations to Blue Owl and signed 15-year leases on them, with the possibility of extensions for another 15 years.

Lancaster, Pennsylvania-based Fulton recorded a $20.4 million gain on the transaction, which offset a $20.4 million loss it took from restructuring its bond portfolio.

Atlantic Union Bankshares in Richmond, Virginia, did its own sale leaseback deal with Blue Owl last year. Atlantic Union spokesperson Beth Shivak told American Banker at the time that the deal, which involved 25 branches, "enables us to turn a fixed asset into an earning asset."

The deal also helped Atlantic Union Bank's parent company to make a bond restructuring trade, largely offsetting $27.7 million in losses with a $22 million gain from the branch deal.

Baker, the bank consultant and Columbia University lecturer, credited those banks' finance heads for finding some "little nuggets that can be pulled out" when needed.

Another tactic that some banks have used to offset their losses: selling shares they've long held in the payments giant Visa, whose value has skyrocketed since it went public in 2008.

Meanwhile, other banks are raising capital by selling their highly valuable insurance subsidiaries. That's a trickier move to execute since it means surrendering the earnings from those insurance agencies for years to come.

Sale leaseback deals outside of the banking sector have drawn criticism under certain circumstances. Sen. Elizabeth Warren, D-Mass., recently criticized Red Lobster's past private equity owners for having "saddled" the bankrupt restaurant chain with lease payments that it was ultimately unable to repay.

As more banks consider sale leasebacks, industry executives must weigh what they want their branch footprints to look like many years ahead, said Paul Davis, a consultant and founder of The Bank Slate. 

Banks may want to avoid putting too many branches into the deals since doing so may constrain future plans to trim branches. Banks can negotiate exiting leases early, but that process is different from selling branches, Davis said.

The onetime moves are helping banks plug holes today, but bankers also have to keep in mind that they're exhausting those options for the future.

"Branches are a finite source of revenue," Davis said. "You can only sell a branch once."