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Community Banks in Our Industry: The Impact on Direct Lessors (Part 2)

June 03, 2014, 07:00 AM

Part one of this blog series entitled Community Banks Entering Our Industry focused on some of the reasons community banks are entering or should enter our specific category of C&I finance. It concluded with my personal belief that this trend is a positive for our industry and its practitioners. My rationale had more to do with a hypothesis that greater participation by community banks will increase business awareness of equipment leasing and finance and thereby potentially improve the penetration rate of lease to cash sale, our biggest competition.

In the second installment, I will discuss the impact community banks will have on small- and middle- market independent lessors. I will also explore some possible benefits to lessors, as well as discuss the ways community banks and lessors can work together for mutual gain. Before I begin, let’s get a level set. First, some community banks consider themselves to be regional banks while some regional banks prefer to be thought of as community banks. So as not to offend anyone this early in the article, I will just use the term “banks.” Don’t worry; I am sure there will be other opportunities for offense to be taken. Second, the opinions expressed in this post are mine and mine alone and are in no way affiliated with those of King Commercial Capital, the ELFA, or even my favorite bar.

Banks entering the industry typically do so in one of three modalities. They are:

  • As direct lessors – most common approach
  • As vendor-based lessors
  • As wholesale/lease industry financers

Let’s discuss the potential range of impacts (negative) to independent lessors of the increasing numbers of banks entering the equipment leasing and finance industry.  To do so, we have to first segregate the lessors into definable types since the impacts are different for each. For this conversation, let’s assume that there are two types of independent lessors: direct lessors and vendor program lessors. I am excluding operating lessors from this conversation since true operating lessors by the nature of their full line of services (equipment leasing & rental, new and used sales of equipment, maintenance, etc...) should be somewhat immune from the same potential impacts being discussed.

Impacts to Direct Lessors

Banks entering the industry find direct leasing to their footprint customers the most readily understandable strategy. After all to these banks, a capital lease and a term note are the same. Ever heard the analogy, “ to a carpenter with only a hammer in his tool belt, everything looks like a nail”. A bank can divert the equipment acquisition from being funded by utilizing the customers’ line of credit, to a term note/capital lease if they want to be creative. They are all just nails after all. These banks’ footprint customers can tend to be overlooked by their big bank competitors along with their leasing units. The independent direct lessors on the other hand have always found great opportunity in those customers for the same reason and the fact that these customers tend to appreciate the value add created in a relationship with direct lessors. So without question, a good percentage of banks coming into the business and going down this road to non-residual- based equipment leasing, will present downward pressure on pricing for direct lessors. However, lessors adept at residual based FMV leasing have much less to worry about. These new bank entrants will have a hard time getting comfortable with taking the plunge into true equipment leasing and operating leases. But, let me complicate matters.

If FASB does in fact rule that all operating leases will be put on the balance sheet, all bets are off. While I can’t definitively say that operating lease accounting changes will have tragic consequences for operating leases, I can safely say that capitalizing operating leases won’t increase the market for them. You can take that to the bank, literally.  According to the ELFA’s 2013 Survey of Equipment Finance Activity, well over 10% of all leases are FAS operating leases (equivalent to some $80 Billion annually). That represents approximately 6% of US annual business fixed investment that is financed using the operating lease product or about 1/2pt of nominal GDP contribution. These numbers are understated in my opinion because many large ticket operating leases are probably not captured in the Survey (think airliners, wind farms, ocean vessels, etc…). I am not a fan as you may have surmised. Capitalizing operating leases is just a bad idea for myriad reasons.

Opportunities for Direct Lessors

Let’s talk about something more positive – the benefits of more banks entering the market are tangible. More banks mean more competition for non-recourse discounting of direct middle-market type leases and loans. So, provided you don’t have to compete on the same deal with the new leasing departments of these banks, direct lessors should find an increasing demand for discounting of their transactions. After all, discounting of a lease or loan still looks like a loan to the banks. They just pull out their trusty hammer! This is a good model for banks that want to enter the industry and generate quick interest income bearing assets, especially if they hire some experienced well connected leasing industry pros. Everyone wins here!

A more significant opportunity is that direct lessors could strategically partner with these banks in their comfortable footprints by providing their expertise in residual risk, lease origination, lease accounting and the necessary back office. There are a plethora of reasons why this is a much more economical and productive model than the banks hiring several people to build a direct leasing business within their existing culture replete with hardened business unit silos. Direct lessors can target the banks’ current customers/prospects and, in turn, fund transactions for these accounts with their bank partners.

Finally, direct lessors can look to these new banks as an exit strategy. There is great deal of precedence, as you all know. The trick is not being too greedy of a seller thereby allowing the buyer to be more reasonable and generous in the integration and earn out structures respectively. It can work well if there is a cultural fit from the beginning as opposed to each party thinking they can change the other over time.  If not, it would be like voluntarily standing in front of a batting cage pitching machine until your dollar runs out – the movie Happy Gilmore comes to mind.

In the third installment of this blog series, we will explore the impact community banks are having on another important group of lessors in the equipment finance industry - vendor program lessors. Until then, I would like to hear your thoughts and comments.

Readers may also read Part One of this exclusive blog series from Bob Rinaldi:
Community Banks Entering Our Industry - The Implications

Robert J. (Bob) Rinaldi
Chief Executive Officer | Commercial Industrial Finance, Inc.
Bob Rinaldi is Chief Executive Officer of Commercial Industrial Finance (“CI Finance”), a national equipment finance company headquartered in Cincinnati, Ohio. CI Finance was acquired in 2015 by CBank, a Cincinnati-based community bank focused on commercial and industrial lending to SMBs. CI Finance specializes in the development and implementation of sales-aid finance programs for manufacturers, vendors and distributors of capital equipment.

Rinaldi was SVP of CSI Leasing, responsible for its organic and inorganic growth strategies. Previously, Rinaldi was Executive Vice President of National City Commercial Capital Company (NC4), now PNC, and President of NC4 Canada. Rinaldi has held positions including Senior Vice President of Provident Bank and Executive Vice President and Principal at Information Leasing Corp.(ILC), later acquired by Provident. As a founding partner of ILC, Rinaldi helped grow the company to the fifth-largest bank-owned leasing company in the United States with annual originations of over $3 billion and $8 billion in assets.

Rinaldi is the immediate Past-Chairman of the Equipment Leasing and Finance Association (ELFA), the premier trade association representing the $1 trillion equipment finance sector. He is also a member of the Equipment Leasing & Finance Foundation’s Research Subcommittee and Development Committee. He is a past Trustee of the Foundation and past Chairman of ELFA’s LeasePAC. Rinaldi was the recipient of the Foundation Research Committee’s 2013 Steven R. LeBarron Award for Principled Research and ELFA’s 2014 David H. Fenig Distinguished Service in Advocacy Award.

Rinaldi can be found on LinkedIn and on his website dedicated to the pioneers of the modern equipment leasing industry as we know it today --
Comments From Our Members

Diane Croessmann
Bob, always enjoy reading your blogs. There's a lot of change on the horizon and survivors will need to embrace all of it. Can't wait for installment #3 on Vendor programs. Keep them coming!
6.4.2014 @ 11:10 AM

Mary Venturella
Great blog Bob! As usual,very interesting and informative. I'm looking forward to part 3!
6.6.2014 @ 9:43 AM
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