Commercial Equipment Lenders and Community Banks
By Rich Walter
Senior Managing Director, Bank Assetpoint
Welcome to the first edition of Meeting Point, where we look at interesting trends and developments within the bank asset marketplace. We’re starting this series with a look at the commercial equipment leasing and financing market, which has been attracting interest among community banks as a potential source of yield and diversification.
At a community bank conference jointly hosted by the Federal Reserve System and the Conference of State Bank Supervisors, researchers from the University of Southern Indiana recently presented findings that looked more closely at the incorporation of commercial equipment financing into community bank portfolios.1 They suggest that while this asset category is still underutilized by many community banks, the banks that have incorporated these assets are among those that have experienced the strongest organic growth over the past decade.
Commercial Equipment Loan Market Overview
The commercial equipment financing market is a diverse niche in the world of commercial lending. The underlying assets range from small office equipment to construction tools to large HVAC systems for commercial properties. Alongside large banks, which make up a significant portion of the equipment financing market, are a number of firms, varying in size and scope, that originate and service these loans, often with industry or regional specialization and a full range of risk/return options.
While large banks with divisions that focus on commercial equipment financing are a major player in this market, the specialization required to understand this market and effectively service these leases and loans has been a barrier to entry for many community banks.
From our perspective at Bank Assetpoint, these are some things that banks and non-bank commercial equipment lenders may want to consider.
For commercial equipment lenders considering relationships with community banks…
Community banks are well-capitalized.
Many non-bank lenders rely on external funding, usually through the securitization market or other sources of private capital, such as insurance companies, hedge funds, and family offices. Sometimes they look to community banks. Community banks currently comprise a relatively small portion of the buyers for these equipment loans, but represent a large opportunity. Community banks are currently sitting on over $40 billion in cash and treasuries and may be looking for new asset categories to explore.
By establishing relationships with community banks, lenders can maintain and grow their origination and servicing income while working with experienced parties with strong capitalization.
Community banks are regionally diverse.
It’s often the case that non-bank lenders that provide commercial equipment financing are more regionally focused than other categories of financiers, generally as the result of ties to a specific industry or set of industries. This regional focus also often applies to the pool of potential buyers of loans or leases, who frequently come from the same geographic areas and are working within the same financial environment.
This regional focus may put firms in this category at risk of facing a diminished buyer pool in the event there’s a localized economic downturn. Community banks also tend to be regionally focused in their funding and direct lending which may insulate them from economic trends affecting other areas of the country. By building relationships with a variety of community banks across the country, it may be possible for equipment lenders to diversify their pool of potential buyers and transcend localized slumps.
Community banks are interested in alternative lending options.
Community banks have had varying levels of interest in equipment financing in the past. Some banks previously offered commercial equipment leases and loans directly to clients but withdrew from the market during the recession. Other banks have some history of buying leases and loans from vendors. Still others have considered the market for years but haven’t yet found a way in.
What’s driving a lot of this interest from community banks is the desire to add new asset options to their lending portfolio that might increase their competitiveness in the changing bank environment. Community banks continue to face challenges in retaining their market of customers and their sources of revenue. The equipment financing market is viewed by many community banks as an asset segment that may allow them to leverage their strengths in risk evaluation and long-term relationship management, while earning a higher rate of return.
For community banks considering the commercial equipment leasing market…
Commercial equipment lenders may provide access to new assets.
Many community banks are currently holding a lot of low-yield assets, which may increase interest rate risk. The wave of refinancing that helped banks bridge some revenue gaps over the past few years appears to be waning, and there’s an industry-wide need for new revenue streams that can support organic growth without a dramatic increase in risk.
Additionally, after years of delay, there is evidence to indicate that companies are beginning to invest in new equipment, driven by the aging of the underlying assets and gradual market improvement. This pent-up demand may lead to new lending opportunities and revenue for community banks.
Commercial equipment loans have the potential to generate higher yields than some other assets that banks are currently using, but with a diverse array of underlying assets there’s a lot of flexibility for banks to define their level of risk according to their lending criteria.
Commercial equipment lenders have established support systems.
One of the biggest challenges that banks face when they are considering new lending options is gaining a sufficient understanding of the market segment. While larger banks can afford to build departments focused on originating commercial equipment leases and loans, for community banks, the challenge of learning about the market can be a significant barrier to entry.
The equipment financing market is serviced by a number of established and reputable lenders who have experience in providing orientation and support to new entrants and a commitment to building long-term, mutually beneficial relationships. Many have existing portfolios of loans at varied rates, as well as the capacity to explore new originations.
For community banks, these organizations can help accelerate their climb up the learning curve to gain access to this market segment.
Commercial equipment lenders may help banks offer new solutions to current customers.
Many community banks have existing customers with a need for commercial equipment financing but are going elsewhere for a solution since these services aren’t being offered by their bank. This is especially the case for small business customers in the fields of commercial real estate and agriculture.
By working with commercial equipment lenders, banks have the opportunity to offer their existing high value customers new solutions that they may currently be seeking elsewhere. This can be an attractive opportunity for banks; it allows them to build upon their existing relationship with a valued customer while accessing new revenue streams.
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About Meeting Point
Meeting Point is an ongoing series from Bank Assetpoint that looks at current topics and trends in the bank asset marketplace. For more information, visit BankAssetpoint.com.
1 You can find the entire report by the University of Southern Indiana at http://www.stlouisfed.org/banking/community-banking-conference.