Somewhere down in Louisiana’s bayou country, there’s a tug-barge with Talmer Bancorp’s name on it. Not literally—you won’t see the M.V. Talmerbank afloat. But all the same, the barge is owned by the company’s leasing operation.
Perhaps surprisingly, the $4.9 billion-assets Talmer Bancorp is based in Troy, Mich., a far cry from the bayou. Even more surprisingly, Craig Valchine, managing director and commercial relationship manager for the company’s equipment leasing operation, works out of Florida. And he’s running deals not only in the holding company’s footprint—Michigan, Ohio, and Wisconsin—but anywhere he can find them.
The company entered the equipment leasing business a little over a year ago, and has closed about $60 million in leases thus far. The variety of business that Valchine, a leasing veteran, will look at ranges pretty much as far as the concept of “equipment” will take you: from technology, such as computers and software, to fuel cells to “yellow iron,” which is leasing slang for bulldozers and other heavy construction machinery.
You might think that Valchine doesn’t see Florida much—that his job would take him on the road. But much of his time is actually spent at his computer. Much of the due diligence that a leasing operation must do to ride herd on applicants and lessee customers can be done remotely, using third-party inspectors and other assistance.
“We’ve had a really good run” so far, says Valchine. Talmer is among those community banks that have expanded their business finance activities by adding leasing in the last few years.
Why banks are looking at leasing
“Banks are getting into [leasing] again to find another source of income,” Valchine explains. Diversification also drives this decision. He points out that Talmer, historically, had a high concentration in commercial real estate lending and wanted to better balance its credit portfolio.
Annually, American businesses, government agencies, and nonprofit organizations purchase more than $1 trillion in capital goods and software, and more than half of that is financed through loans, leases, and other financial techniques, according to the Equipment Leasing and Finance Association. ELFA estimates that 16 million equipment lease contracts are executed annually in the United States, with 14 million of those deals done with small- and medium-sized businesses as well as large non-investment grade businesses.
Furthermore, “there’s a lot of pent-up demand,” says Steve Tidland. Companies that put off major equipment purchases need to act because they can only postpone purchases for so long. Tidland, with 40 years in leasing, is senior vice-president and manager in the equipment finance department at $236 million-assets Commerce National Bank, Newport Beach, Calif. (By the time you read this, the operation will have been acquired by Sterling Savings Bank, Spokane, Wash.)
Leasing isn’t a new business to banking, but a new opportunity for many institutions that haven’t tried it before. The large banks have been at it for years—some of the megabanks are active members in ELFA, for instance—and at the outset of the Great Recession, some banks exited the business, anticipating the period of cutbacks in capital investments as companies hunkered down.
How they’re doing it
Banks get into leasing in multiple ways, and sometimes they use more than one strategy. Some do direct leasing, working with the actual lessee company. Some work with vendors or dealers that offer leasing as an option to customers. Others buy portfolios of leases made by other leasing operations, and some acquire leases as indirect lenders—pretty much as banks traditionally acquired paper from auto dealers. In getting into the business, some banking organizations have bought existing leasing companies, while others have started their own operations, but hired experienced leasing executives or whole teams that know the business. There are banks that hold their leases, while others package leases for resale.
At $8.2 billion-assets First Midwest Bank, Itasca, Ill., Marc Parise, division manager for the specialty lending and leasing group, says buying paper has been the strategy thus far. But more recently, management, having already made a number of banking acquisitions, has been looking at potentially acquiring a leasing operation. A key prerequisite is staff who will stay on after the deal.
“We’re looking at bringing people here who have put together a good, sustainable process for building business,” Parise explains. “This is clearly a people business.”
According to Talmer’s Valchine, he’s worked with colleagues who have generated hundreds of lease orders in repeat business, annually, from single accounts with which they work closely.
“Statistics say that 80% of commercial companies lease something,” Parise says, “so if your bank doesn’t have a leasing company, that means your commercial customers are getting leasing from somebody else.” He says the possibility of leveraging the bank’s commercial base would be “huge.” Besides building assets at a time when many banks crave more, Parise says his bank hopes to build fee income as well.
Just as some banks have been venturing into leasing for strategic reasons, a bank also may leave it for strategic purposes. For example, earlier this year, Michigan’s Flagstar Bank, having decided to exit some businesses to concentrate more directly on traditional banking products and its national mortgage operation, sold a major part of a large portfolio that included equipment leases to CIT. Meanwhile, the team that handled leasing at Flagstar landed elsewhere—New York Community Bank.
Many of the leasing executives interviewed for this article, though often running relatively new operations for bank employers, have long experience in this business—typically decades of seeing the ups and downs of leasing. An unspoken warning arising from these talks is that this is a business for community banks, but not a business for neophytes dipping their toes into the water: If you don’t have expertise, get it.
Competition can be tough, and they say that this is a business for the aggressive, not the order taker.
“People are looking for larger spreads than they are getting in other asset classes,” explains David Normandin, who founded the leasing program at $2.1 billion-assets Pacific Trust Bank, FSB, Irvine, Calif., a year and a half ago.
One of the challenges for community banks in this space, according to Normandin, a 20-year veteran, is thinking of equipment leasing as a variation on traditional C&I lending.
“Reality is very different,” says Normandin. “So many things about leasing are different. You really need seasoned staff who know how to do this well.” That, he says, and willingness to grow the business carefully—not letting enthusiasm lead to overexpansion. “The secret,” says Normandin, “is discipline.”
Pluses and cautions
It is helpful to consider why companies may find leasing attractive. This illustrates how the business differs from lending, and also may help bankers assess the appeal to their own institution.
For one thing, leasing typically covers 100% of the price of the equipment. “When you tell a banker that you are lending at 100% of collateral value, they’ll look at you as if you were crazy,” points out Talmer’s Valchine. The key, according to Valchine and others, is to continue to work as a traditional cash-flow lender, while engaging in a service that provides a built-in collateral fallback.
On the other hand, plenty of leasing companies have had their share of trouble historically, despite the collateral protection. Steve Tidland says an overall goal for his operation has been to concentrate on “essential-use equipment—items critically important to the company for revenue generation or for cost savings, things that they really need in order to operate.” In his experience, bankers aren’t good at selling collateral, so veering from cash-flow discipline can be tricky.
The 100% financing opportunity, though matched by some commercial lenders now, remains an attractive feature to smaller firms that want to conserve cash for other purposes, while acquiring essential equipment or software. Customers are financing use of the equipment, rather than the item itself. (Though often, bank leasing winds up being another path to eventual ownership.) The related benefit to the lessee is that there is no down payment, and typically the equipment is the only encumbered item, versus loans that might entail pledging other assets.
Another argument often used in favor of leases is protection from obsolescence. Because the lessee doesn’t own the collateral, they can move on to newer equipment. Some bank leasing operations will not get involved in equipment that has a short shelf life.
“Think fax machines and pagers and medical equipment; items that become doorstops or boat anchors,” says Pacific Trust’s Normandin. “You really have to know the collateral you are basing the lease on.”
Generally, leases are made at fixed interest rates, which has appeal in general, but even more now as rates have nowhere to go but up.
Talmer’s Valchine points out that fixed-rate leasing gives small businesses surety, versus variable-rate commercial loans. For the term of the lease, he says, “you know exactly what it’s going to cost you.” In fact, executives say that this puts lending and leasing into a competitive posture in some situations.
Steve Tidland points out that leases can be structured with more flexibility than loans. For example, the lease deals are not as tied up in financial covenants as are traditional commercial loans.
Bankers find that leases can sometimes command a better rate because of the advantages outlined to the customer. However in an environment where many hungry lenders price loans aggressively, this isn’t always the case.
Leasing arrangements can involve accounting and tax issues that banks and their customers must consider as deals are weighed. In addition, significant changes in how lessees account for leases have been pending for some time at the Financial Accounting Standards Board. ABA has been active in the multi-year deliberations, and has urged that any change be accompanied by a significant transition period.