Independent equipment finance (EF) companies and banks are two businesses irreversibly tied together by funding. The partnership is often collaborative — sometimes competitive and sometimes strategic via mergers and acquisitions. Until recently, all banks approached the EF market similarly, i.e., balance sheet growth and diversification with noncommercial real estate commercial and industrial (C&I) assets.
Super Regional Banks
Historically, the super regional banks have been significant participants and drivers in the equipment leasing and finance industry. However, in the recent 12 months or so, the super regional banks have vacillated between being interested in leasing as a national business line and/or leasing as a bank product. Banks can engage with third parties to help them move from a limited leasing product to a leasing business line that generates material assets on the balance sheet.
In response to regulatory capital increases, declining deposits and other pressures post-Silicon Valley Bank, the super regionals have pulled back on lending to preserve the balance sheet for high-value, multiproduct customers within their footprint. While they live to fight another day, they have created opportunities in equipment leasing and finance for independent leasing companies, smaller regionals and community banks.
Diversification, Growth and Profit
Small regional and community banks must be more pragmatic and strategic. Regulators, analysts and shareholders have encouraged these institutions to reduce their commercial real estate concentrations. But what should they diversify into?
Equipment leasing is an excellent product for community banks because most are too small to have a footprint that matters in C&I lending. Equipment finance immediately brings them a national concept for asset growth. Leasing also runs at higher net interest margins (NIM), improving bank profitability ratios.
Moreover, equipment finance helps community banks diversify by business type, product type and geography while improving safety and soundness in the eyes of their varied stakeholders.
A significant commonality between small regional and community banks and equipment finance companies is that small and medium businesses (SMBs) are their target market. SMBs can be regional, but their behaviors from a credit perspective are not. Does a small business in Houston generally act differently than one in Minneapolis? Generally, a well-run small business will react and work the same way regardless of location. However, the myth about staying in footprint is simply a result of community banks’ historical overreliance on CRE, which is indeed local.
“We do not understand equipment leasing and finance.”
It is not uncommon for many banks to avoid this space because they have never done it, and feel they do not understand it. Equipment leasing and finance advisors are adept at providing education sessions for banks’ C-suite and leadership teams. As a proof point, several banks that have entered the equipment finance market over the past few years began with these education sessions.
Knowing who you are is the first step in this process. Does the bank leadership want to grow, or are they more comfortable holding their existing position? If growth is a focus, the next step is considering geographical limitations, transaction sizes and risk profile. For example, if you’re a very small community bank, it is not rational to consider national large ticket transactions.
Net business fixed investment makes up about 10% of gross domestic product. Equipment manufacturers will continue to sell their goods, but the largest equipment finance providers by dollar amount came from the super regionals.
As these banks pull out, manufacturers and their distribution channels will need to find new equipment finance providers to work with. Smaller regionals and community banks will get a window of opportunity while the super regionals are just living to fight another day.
Rinaldi Advisory Services is presenting a breakout session “Charting New Financial Frontiers: Equipment Leasing Redefining Banking” at Acquire or Be Acquired on Monday, January 29th at 11:25 am.
