Resource America: LEAF to Close Former Pacific Capital Location

Aug.20.08 | About: Resource America, (REXI)

It is not known at this time the employment status of 25 plus employees from the announcement by LEAF Corporation of the closing of LEAF Third Party Funding in Southern California (formerly Pacific Capital Bank Leasing, Santa Barbara Leasing,) headed by Paul Menzel, CLP, 2006 Leasing News Person of the Year, including his long time loyal staff.

No one is talking right now to Leasing News, referring everything to a press release that was aimed at announcing the office expansion in Columbia, South Carolina to in a 20,000 square foot facility to house 150 employees “in a consolidation for all third party originations.”

Dwight Galloway “promoted”

Dwight Galloway, former president of NetBank Business Finance and now LEAF Specialty Finance “was promoted and will run the operation,” the press release said. He is pictured above yelling, “Geronimo!”

“Although combining operations is the right thing to do from an efficiency standpoint to better serve this market segment, it is personally very difficult to close our Santa Barbara office, said Crit DeMent, chairman and CEO of LEAF Financial Corporation in the press release spin.

The very talented employees, while only a small percent of our overall staff, have been a big part of LEAF’s growth and success over the past year.

The opening of our new facility and expansion of our operations in Columbia demonstrates our commitment to the indirect market. While several financial institutions have abandoned this segment in the past several months, LEAF continues to be committed to supporting our valued partners.

Contrary to DeMent’s opinion, strange as it lets a group of talented people go, but in a typical company press release spin on the subject, “brags” that they are going against the trend and “supporting’ their valuable partners (who are they? the brokers who Pacific Capital developed.) As to the commitment to the small ticket marketplace, the only major financial institution to abandon this marketplace has been Irwin Commercial Finance, who sold their USA unit to improve liquidity. Main Street Bank purchased Studebaker-Worthington, whose parent State Bancorp was also having liquidity issues.

There have been many local and regional banks entering the small ticket market, including the announcement of $200 million closing at Varilease in today’s edition as well as the former president of Marlin Business Services, Gary Shivers, who announced in February he was getting back into the fray when his non-compete entered. Even the companies LEAF recently purchased were doing very well in the small ticket marketplace. Who is DeMent trying to fool?

There is certainly more in this story and perhaps those who attend the leasing meetings and conferences ahead will learn what really is going on with LEAF. The press release is really a poor band aid to the story.

In the company press release it stated:

The consolidation will not affect any of the existing program or transactional commitments currently supported through the Santa Barbara office, and LEAF’s third party originators will be contacted individually to insure a seamless transition. Santa Barbara will continue to accept new applications and process business through the transition period which is targeted for completion by early September.

Doesn’t look like good news for existing employees as LEAF continues to buy its way into the leasing marketplace. Brokers are looking for “C” and “D” sources. There are plenty of “A” and “B” around.

Galloway wants good paper…

There also are questions about a 150 employee facility. Readers will see that when LEAF bought NetBank Business Finance, the company had 80 employees. There was some consolidation. Alco all were let go, changes at the other companies and with the elimination of the Santa Barbara operation, the count is below 100, so plans for a 150 employee solely third person originations may be a goal plan, unless direct and vendor sales will also be located here. Rates will have to be lowered by LEAF to attract more business, or credit criteria.

More importantly his parent company has got to be doing a lot better to support the leasing operations.

LEAF Corporation is a subsidiary of Resource America (NASDAQ:REXI) whose financial release on August 16 showed an $8 million loss for its third fiscal quarter of June 31, 2008 quarter and December 31, 2007 year-end showed a $11 million loss. It has many entities and means to offset both assets and debts as the company specializes in this type of “management.”

The problems with REXI appear not be with Resource America. In the June 31, 2008 statement filing, Resource America noted leasing revenues increased and their use for their own liquidity was of major importance (the following is directly from their statement to the SEC and you can see how the fees and earnings are passed internally around - see here)

  1. A $4.6 million (108%) and $29.4 million (267%) increase, respectively, in LEAF commercial finance revenues primarily as a result of the NetBank assets acquired and the growth in lease originations. In January and April 2008, we sold 49% and 51%, respectively, of the NetBank portfolio to LEAF Fund III. As a result of these sales, our finance revenues and interest expense will decrease significantly; however, we will earn ongoing fund asset management fees;

  2. Merit Capital Advance, or Merit, provides small businesses through a credit card receipt advance program. For the three and nine months ended June 30, 2008, Merit posted revenues of $1.2 million and $5.5 million. No revenues were recorded for the nine months ended June 30, 2007.

  3. a $230,000 (5%) and $9.5 million (130%) increase, respectively, in asset acquisition fees resulting from the increase in leases sold. Sales of leases increased by $148.0 million (56%) to $409.9 million and $775.5 million (193%) to $1.2 billion for the three and nine months ended June 30, 2008, respectively, principally related to commercial assets sold to our investment entities as a result of the NetBank and Dolphin Capital Corp. portfolio acquisitions;

  4. a $2.0 million (63%) and $5.4 million (62%) increase, respectively, in fund management fees resulting from the $561.0 million increase in assets under management; and

  5. a $973,000 (325%) and a $4.3 million (279%) increase, respectively, in other income, primarily reflecting net gains on equipment finance dispositions, which typically vary widely from period to period, but increased as a result of holding the NetBank acquired lease portfolio on our books.

Costs and Expenses - Three and Nine Months Ended June 30, 2008 as Compared to the Three and Nine Months Ended June 30, 2007

Costs and expenses from our commercial finance operations increased $5.6 million (102%) and $19.1 million (141%), respectively. We attribute this increase primarily to the following:

  1. an increase of $5.1 million (134%) and $14.4 million (146%) in wages and benefit costs, respectively. The number of full-time employees increased to 444 as of June 30, 2008 from 237 as of June 30, 2007 due to our recent acquisitions and to support our expanding operations; and

  2. an increase of $419,000 (26%) and $4.8 million (128%) in operating expenses, respectively, as a result of our increase in origination capabilities, primarily due to our recent acquisitions.

  3. Revenues - Three and Nine Months Ended June 30, 2008 as Compared to the Three and Nine Months Ended June 30, 2007

  4. Revenues increased $9.0 million (70%) and $54.0 million (190%) for the three and nine months ended June 30, 2008, respectively, as compared to the prior year period. We attribute these increases to the following:

  5. a $4.6 million (108%) and $29.4 million (267%) increase, respectively, in LEAF commercial finance revenues primarily as a result of the NetBank assets acquired and the growth in lease originations. In January and April 2008, we sold 49% and 51%, respectively, of the NetBank portfolio to LEAF Fund III. As a result of these sales, our finance revenues and interest expense will decrease significantly; however, we will earn ongoing fund asset management fees;

  6. Merit Capital Advance, or Merit, provides small businesses through a credit card receipt advance program. For the three and nine months ended June 30, 2008, Merit posted revenues of $1.2 million and $5.5 million. No revenues were recorded for the nine months ended June 30, 2007.

  7. a $230,000 (5%) and $9.5 million (130%) increase, respectively, in asset acquisition fees resulting from the increase in leases sold. Sales of leases increased by $148.0 million (56%) to $409.9 million and $775.5 million (193%) to $1.2 billion for the three and nine months ended June 30, 2008, respectively, principally related to commercial assets sold to our investment entities as a result of the NetBank and Dolphin Capital Corp. portfolio acquisitions;

  8. a $2.0 million (63%) and $5.4 million (62%) increase, respectively, in fund management fees resulting from the $561.0 million increase in assets under management; and

  9. a $973,000 (325%) and a $4.3 million (279%) increase, respectively, in other income, primarily reflecting net gains on equipment finance dispositions, which typically vary widely from period to period, but increased as a result of holding the NetBank acquired lease portfolio on our books.

Costs and Expenses - Three and Nine Months Ended June 30, 2008 as Compared to the Three and Nine Months Ended June 30, 2007

Costs and expenses from our commercial finance operations increased $5.6 million (102%) and $19.1 million (141%), respectively. We attribute this increase primarily to the following:

  1. an increase of $5.1 million (134%) and $14.4 million (146%) in wages and benefit costs, respectively. The number of full-time employees increased to 444 as of June 30, 2008 from 237 as of June 30, 2007 due to our recent acquisitions and to support our expanding operations; and

  2. an increase of $419,000 (26%) and $4.8 million (128%) in operating expenses, respectively, as a result of our increase in origination capabilities, primarily due to our recent acquisitions.

The statement also recapped (see here):

During the three and nine months ended June 30, 2008, our commercial finance operations increased assets under management to $1.6 billion as compared to $1.1 billion at June 30, 2007, an increase of $561.0 million (52%). Originations of new equipment financing for the three and nine months ended June 30, 2008 were $147.9 million and $1.0 billion, respectively, as compared to $396.9 million and $655.9 million for the three and nine months ended June 30, 2007, respectively, a decrease of $249.0 million (63%) and an increase of $391.0 million (60%), respectively. We have not yet commenced marketing LEAF Equipment Finance Fund 4, L.P. to investors. LEAF Fund III closed its offering in April 2008. Our growth for the nine months ended June 30, 2008 was driven by our first quarter fiscal 2008 acquisitions of the net business assets of Dolphin Capital Corp and NetBank Business Finance, or NetBank, our continued growth in new and existing vendor programs, the introduction of new commercial finance products and the expansion of our sales staff. As of June 30, 2008, we managed approximately 96,000 leases and notes that had an average original finance value of $24,000 with an average term of 50 months.

In November 2007, we also acquired a $412.5 million portfolio, at a discount, comprised of over 10,000 leases and small business loans originated by NetBank Business Finance, the equipment leasing division of NetBank, which was being operated in receivership by the Federal Deposit Insurance Corporation, or FDIC. In addition, we hired approximately 70 of the former NetBank employees in Columbia, South Carolina. These employees have further expanded our third party funding business unit which we established with our June 2007 acquisition of the leasing division of PCB. Financing for this acquisition was provided principally by Morgan Stanley Bank, or Morgan Stanley. We completed the sale of the NetBank portfolio to LEAF Fund III in April 2008. Until then, we carried the leases and loans and related debt on our consolidated balance sheets, thereby increasing our investment in commercial finance assets, borrowings, finance revenues, interest expense and provision for credit losses during that period of time.

Disclosure: none