Exploring Leasing. Opportunities for Community Banks

Transcription

1 Exploring Leasing Opportunities for Community Banks

2 Agenda Update on Leases Project Market Opportunity Recent M&A Transactions Opportunities for Community Banks Summary Resources

3 Update on Leases Project

4 Why a Leases Project? Lessee Most lease assets and liabilities are off balance sheet Limited information about operating leases Lessor Lack of transparency about residual values Consistency with lessee proposal and revenue recognition proposal $1.25 trillion Of off balance sheet operating lease commitments for SEC registrants* * Estimate according to the 2005 SEC report on offbalance sheet activities

5 Proposed Right of Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

6 Lessee Model Approach All leases (more than 12 months) are recognized on the lessee s balance sheet Current U.S. GAAP vs. IFRS IASB FASB Capital (Finance) Leases Type A Type A Operating Leases Type A Type B Convergence? All leases are the same Not all leases are the same

7 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Lease asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Type B Right of use asset Lease liability Single lease expense on a straight line basis Cash paid for lease payments

8 Short term Lease Exemption Recognition and Measurement Exemption for Lessees For leases with a term of 12 months or less No longer based on maximum possible term, now aligned with definition of lease term

9 Lessor Model Approaches IASB A lessor should determine lease classification (Type A vs. Type B) based on the concept underlying existing U.S. GAAP and IFRS lessor accounting Same lease classification test (Type A vs. Type B) as IASB FASB A lessor will not recognize upfront profit for Type A leases that do not transfer control of the underlying asset to the lessee This aligns with what constitutes a sale in the recently issued revenue recognition guidance

10 Lessor Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Net investment in the lease Interest income and any profit on the lease Cash received for lease payments Type B Continue to recognize underlying asset Lease income, typically on a straight line basis Cash received for lease payments

11 Market Opportunity

12 Equipment & Software Investment Outlook

13

14 MLFI 25 New Business Volume Source: June 2014 Equipment Leasing & Finance Association

15 Aging of Receivables Over 30 Days

16 Average Losses (Charge offs) as a % of Net Receivables

17 Credit Approval Ratios As % of all Decisions Submitted

18 Recent M&A Transactions

19 Active M&A Market Favorable conditions give rise to M&A activity Substantial liquidity in banking system Historically low interest rates Record stock market prices Improving P/E multiples of publicly held companies Improving economy Need to deploy capital Pent up demand for both buyers and sellers

20 Bank Owned Leasing Companies Traditionally banks have been in the middle to large ticket deals, but some recent deals highlight viability of small ticket markets Spotlight on recent deals Element Financial CIT Group Umpqua Prime Alliance Bank

21 Recent Transactions 10 Most Recent Deals Company Status Date AIRMALL USA Completed 8/4/2014 Dave McBride Leasing (Commercial Leasing Operations) Completed 8/4/2014 Direct Capital Completed 8/4/2014 Innotech Products Completed 7/31/2014 Founders Bank and Trust Announced/In Progress 7/28/2014 Ormet (1,700 Net Mineral Acres) Completed 7/25/2014 WCS Enterprises Completed 7/22/2014 Edge View Properties Completed 7/17/2014 CBRE Chicago Completed 7/16/2014 Texas Oilfield Operator & Producing Oil Leases Announced/In Progress 7/9/2014 Top 10 Deals by Size Company Size (millions) International Lease Finance 7, PVR Partners 5, Ally Financial (Auto Financing) 4, Global Tower Partners 3, Edison Mission Energy 2, GE Capital (Business Property Lending) 2, Dollar Thrifty Automotive Group 2, Colonial Properties Trust 2, Corporate Property Associates 16 Global 1, Commonwealth Reit 1,900.00

22 Recent Transactions

23 Opportunities for Community Banks

24 Typical Strategies Warehouse lines, equity lines, term facilities to independent leasing companies In house, branch origination model Indirect, third party originations Purchased pools and portfolios of business Investment in asset backed securities

25 Bank Owned Leasing Companies Low cost of funds Higher leverage ratios Existing customer base Cross selling opportunities Diversify portfolio/collateral base Finding experienced personnel Increased competition New business model Regulatory concerns New accounting standard & Basel III requirements

26 Bank Business Model General Regulatory Provisions for Leases Full payout lease reasonably expects to realize its full investment & financing costs from: Rentals Estimated tax benefits Estimated residual value [Note: Reasonably expected renewals by governmental entities permitted] Net lease basis not obligated to provide, directly or indirectly, maintenance, insurance, parts or accessories for the leased asset Can arrange for an independent third party to perform these services at the expense of the lessee

27 Bank Business Model (cont d) General Regulatory Provisions for Leases (cont d) Tangible Personal Property Acquisition General rule: Only after it enters into a conforming lease, obtained a legally binding agreement indemnifying the bank against loss in connection with the acquisition, or entered into a legally binding commitment to lease Exception: Can acquire property to be leased if consistent with current leasing business or business plan to expand the business, or to enter the business (limited to 15% of capital) Property Disposition Dispose or re lease as soon as practicable, generally no longer than 5 years

28 Bank Business Model (cont d) Leasing under General Authorities Functional equivalent of loans Reliance on residual value </= 25% of OEC No limit on aggregate carrying amount CEBA Leases (1987) No limit on estimated residual value to satisfy full pay out requirements Minimum lease term of 90 days Aggregate book value </= 10% of consolidated assets

29 Bank Business Model (cont d) Lessee s outstanding obligation PV of both lease payments + residual value Limited to </= 10% of consolidated total assets Nonrecourse debt is not an obligation of the lessee to the lessor

30 Bank Business Model (cont d) Common bank products $1 out or leases intended as security 100% financing Fixed or variable Leases with residual value guarantees Lessee Third party Tax advantaged leases Longer term preserves ITC (> 5 years) and creates deferred tax benefits (turn around of MACRS benefit) Leveraged lease accounting mirrors tax economics

31 Basel III Capital Implications Capital leases receive 100% capital impact No change from current practice Lease financing also generally receives 100% capital impact One exception is where the lease financing is related to acquisition, development, or construction (ADC) of real property 150% capital impact imposed on ADC related leases Additional cost of making these financing decisions and could be passed on to the customer

32 Basel III Capital Implications FASB leasing project may have significant impact When/if operating leases are recorded on the balance sheet a right of use asset (ROUA) may also be recorded Is this ROUA a true asset or an intangible and how will it be treated for capital purposes? Treatment of this ROUA may impact capital held by banks, pricing of leases, and the lease/buy decision

33 Focus on Regulatory Compliance Fair Lending Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) Third Party Compliance Risk Quality of capital and earnings Information Technology

34 Summary

35 Factors for Success Strong internal origination Proven credit model Strong management teams Risk/reward match Strong collections & collateral expertise Board level support with long term commitment Diverse portfolio or niche specialization

36 Resources Equipment Leasing & Finance Association Financial Accounting Standards Board atepage&cid= # Office of the Comptroller of the Currency Handbook

37 Contact Information Charlie Shannon, Partner Moss Adams LLP Puget Sound Region (O) (C) Charlie has a combined 20 years of private and public accounting experience. Charlie specializes in providing auditing, compliance, and consulting services to both private and publicly held companies within our financial services practice such as community banks, leasing companies, factors, payment processors, distressed asset buyers, and other financial service and technology based companies. He has experience with mergers & acquisitions, SEC reporting, initial public offerings, and routinely deals with complex accounting topics such as transfers and servicing of financial assets, business combinations, financial instruments, leases, and fair value. Charlie also functions as a lead and concurring engagement partner on a number of our audits of privately held community banks and venture capital portfolio companies. He provides ongoing leadership in our staff training and development, and leads our development of the Specialty Finance practice. Charlie is a frequent author and speaker for the firm s financial services industry conference as well as state and national trade associations, including the Western Independent Banker s magazine and the Equipment Leasing and Finance Association. Charlie is also a member of the Equipment Leasing and Finance Association s Financial Accounting Committee.