(This article originally appeared in January on Monitor)

Scott Nelson, president and chief technology officer of Tamarack Technology, sat down with Bob Rinaldi, CLFP, CEO of Rinaldi Advisory Services, to discuss how banks can not only understand, but enter into and succeed within the equipment finance industry.

Equipment Finance companies and banks are two industries irreversibly tied together by funding. The partnership is often collaborative, sometimes competitive and sometimes strategic via mergers and acquisitions.

This is the everyday world of the Rinaldi Advisory Services team (RAS). RAS works with banks and equipment finance companies, helping each execute growth strategies, improve financial performance with strategic go-to-market initiatives, and do so together when appropriate. Roughly 60% of RAS’s clients are independent equipment finance companies, and the remaining are community banks.

Bob and his team are in a unique position to recognize the differences between how the two are adapting to economic trends and the opportunities for each. I spent time with Bob to glean insight from his views on the future banks and equipment finance companies have together.

Q: How do community banks and regional banks differ when it comes to equipment finance?

First, some definitions are needed regarding how we see the banking market. The traditional community bank can range from $50 million in assets to $10 billion. The small community-styled regional bank transition is around $20 billion today and runs to $80 billion. At $100 Billion, we are in the realm of the super-regional banks, and following that are the big money center banks.

Super-Regional Banks: P&Ls, Funding and Vacillation

Over the past 18 months, the super-regional banks vacillated between being interested in leasing as a business and leasing as a bank product. One of the services we sell to our bank customers is helping them to move from a limited leasing product to a leasing P&L/business line, generating material assets on the balance sheet. Most super-regional banks have leasing groups, national players in capital markets, vendor programs, and direct lessors in equipment leasing.

Recently, assets on the balance sheet have had to be tightened due to deposit flight, the devaluation of the banks’ securities portfolio, and, more importantly, increased capital requirements. In response, the super-regionals have pulled back on lending to reserve the balance sheet to high-value multi-product customers. The super-regional banks have always been partners in funding independent leasing companies. Still, they vacillate more with economic conditions and regulatory demands for equipment finance than most community banks.

Regional and Community Banks: Diversification, Growth and Profit

Regional and Community banks must be more pragmatic and strategic. Regulators, analysts, and shareholders have encouraged these institutions to reduce their commercial real estate (CRE) concentrations for years. The question is –, Where can they go to replace those assets? They often struggle to generate C&I assets outside of CRE. Equipment leasing is an excellent product for community banks because most are too small to have a footprint that matters in commercial 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. 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.

Another critical value to regional and community banks is that small and medium business (SMB) is the central market segment of the leasing industry. SMBs can be regional, but their behaviors from a credit perspective are not. Does a small business in Houston, TX, generally act differently than one in Minneapolis, MN? Nope! A well-run small business will react and work the same way regardless of where they’re located, acts of God excluded, of course. However, the myth about staying in footprint is simply a result of community banks’ historical over-reliance on CRE, which is more local.

When it’s all said and done, independent lessors should continually educate and cultivate community banks. It’s an obvious win-win. The RAS team invests much time holding education sessions for community banks’ C-suite and leadership teams. As a proof point, more than several new bank entrants over the past few years started with these RAS education sessions.

Q: How does the continuing bank consolidation present challenges for equipment finance companies?

The challenge is different from what you would think. The issue is not supply; it’s finding the right banking partners in 5000 banks. Within the regional and community bank arena are roughly 1500 zombie banks. A zombie bank doesn’t have much institutional knowledge to grow non-CRE C&I assets, and even if they can figure it out quickly, they can’t lend right now because they don’t have enough core deposits. Buying deposits costs more, and they don’t know how to deploy that money with enough margin because they’re used to just taking excess deposits with zero cost of capital and buying securities or government bonds with it.

RAS has developed our proprietary scoring system for community banks as partners for independent lessors. We provide a ranking of regional and community banks based on specific elements from the FDIC data set. We’re scoring the banks based on these elements to predict if they are “equipment leasing ready,” a term RAS uses to classify if a bank can enter the equipment leasing and finance market. For example, suppose a bank with meager cash levels, a loan-to-deposit ratio of 98%, and the securities held for maturity are underwater by greater than 15%. In that case, they won’t get an excellent RAS score. We look at all those things and what percentage of their loan portfolio is not CRE. The RAS scoring model helps us understand which banks can lend in the C&I marketplace where the leasing companies fit. The scoring quickly reduces the list to less than 1/3 of all banks.

Q: What guidance do you have for banks who are watching the equipment finance space continue to grow in both revenue and profit faster than banks? What should their first step be?

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? In our experience, less than 20% of community banks have an authentic growth culture that starts at the top. If growth is a focus, we must discuss geography (footprint), ticket size, and risk profile. If you’re a small community bank, it is not rational to consider large ticket transactions nationally. If you’re pushing toward regional bank size, you can’t afford to get into small ticket leasing that only generates $40 to $100 million yearly in equipment finance assets. It’s a bit like a jigsaw puzzle, but once we sit down with the bank and dig into its growth culture and strategy, we can figure out what part of the leasing industry best fits.

 

Surprisingly, looking for a leasing company acquisition is easier than a bank. Unfortunately, we don’t have 5000 independent equipment leasing companies to evaluate.

 

Q: What are the key insights that are important to remember?

Even though shrinking in numbers, community banks remain a vital part of the US economic business growth fabric. However, independent equipment finance companies have been a bigger driver to small business growth and will continue to be. Equipment finance companies are very adaptable and always have been. They welcome change and will always thrive regardless of what the market is doing. As some banks pull out, we’ll find new ones and continue to grow.

We will figure this out.

 
Written by

Scott Nelson

President & Chief Digital Officer, Board Member

Scott Nelson is the president and chief digital officer of Tamarack Technology. He has more than 30 years of strategic technology development, deployment and design thinking experience working with both entrepreneurs and Fortune 500 companies. Nelson is a sought-after speaker and contributor on topics related to IoT and digital health. His involvement in technology in the local and national technology community reflects an ongoing and outstanding commitment to technology development and innovation.

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