Integration of Equipment Funding into Community BanksBy Scott A. Wheeler
Banks are active and significant participants in the commercial equipment financing and leasing industry. Many larger banks and a select number of smaller community banks have found that commercial equipment transactions provide strong assets for the bank, provide additional products to engage new business clients and allow the bank to increase its value proposition to all of its stakeholders. I recently completed a research study for the Equipment Finance & Leasing Foundation entitled: “Community Banks And Equipment Finance – What It Takes To Be A Success”.
Our study found that, among several key attributes that must be present for success, integration of the equipment division into the overall mission and strategy of a bank is essential for success. Especially for smaller banks, the mission of the equipment leasing/financing division must be properly and fully aligned with the mission of the community bank in order to create sustainable success.
Too often, community banks enter the equipment arena as a side-line business with little thought of how the equipment assets will enhance the overall strategy of the bank, enhance the bank’s ability to grow its franchise, enhance the ability to cross-sell products and better serve the bank’s targeted customer base. In many instances, the equipment division/subsidiary has a distant relationship with its parent company and the equipment products are treated as non-core bank products by bank executives at the top and by key bank employees on the front line. In addition, bank employees are often unaware their bank even offers equipment leasing or financing products and, if they are aware, have little or no training in regards to the benefits of equipment products.
During the course of the study, I met with several banks who have diligently worked to integrate their equipment divisions into the fabric of the community bank and by doing so have been able to successfully leverage their equipment products. Full integration requires the equipment products to be understood throughout the bank and the equipment products must be viewed as vital instruments which contribute to developing additional business relationships for the bank on every level. Integration is a two-way street and requires the equipment division (executives and employees) to understand the bank’s products, mission, objectives and goals. The commercial equipment division needs to engage its commercial clients for the purpose of generating equipment transactions and additionally for the purpose of introducing their customers to all other bank offerings.
Equipment Financing as a Core Product
Everyone within bank operations agree that integration is a necessary objective. Many superficially have initiatives in process to improve integration. However, the study found few community banks actually fully executed on integrating their equipment funding operation into the bank as core products and divisions. We also found that many executives of bank owned equipment leasing/financing companies openly describe their operations as separate and definitely not equal to other divisions within their bank. Employees of equipment divisions routinely describe themselves as non-bankers, who benefit from the cost of funds, yet have little or no common practices as their fellow bank employees. The lack of integration causes an equipment division to diminish its value to the parent company, and too often encourages a community bank to diminish or cease its equipment activity. Several executives of bank owned leasing operations expressed integration as a major factor which has or will contribute to their on-going sustainability.
The study confirmed differences between traditional community banking products and equipment leasing and financing products. However, there are many similarities; not the least being, that community banks and equipment leasing/financing operations typically serve the financial needs of small and medium sized businesses. The commonality of shared customers creates tremendous opportunities for those institutions, which are able to join forces and complement one another’s efforts.
Openly Communicate, Educate and Share Ideas to Achieve Synergy
Synergy is best achieved through open communication and education. Usually this task is delegated to a strong diplomatic leader who is well versed on all aspects of equipment funding and who has proven ability to work within the community bank culture. Several such leaders, interviewed during the study, expressed their consistent ability: to work closely with the bank board of directors to educate them on changing conditions within the industry, to work closely with other top bank executives to share resources and ideas, and to consistently participate in bank-wide educational sessions to disseminate information concerning equipment products to front line personnel. One equipment executive stated that he considered integration his primary responsibility and the key factor in determining his divisional success within the community bank environment. The process need not be daunting when professionals have an open minded approach and are willing to work together to advance the strategy of the community bank.
Our interviewing process, during the study, found several consistent attributes or initiatives which helped to create stronger integration and more success for community banks which are involved in the equipment leasing/financing arena. They include:
- Top-down support for equipment products and their integration into the institution
- Strong communication of equipment products as a core banking product
- Shared resources and systems throughout the bank
- Shared footprint of business activity
- Loan officers (business developers) having equipment leasing/financing generation as a measurable responsibility on their monthly/quarterly/annual objective score cards
- The ability to properly compensate, recognize and reward cross-selling opportunities between departments/divisions/subsidiaries
- On-going product education for all employees of the organization in regards to equipment products
- The equipment leasing/financing originators being responsible and measured on their ability to introduce commercial clients to the bank and encourage additional products and depository relationships
Community banks are being forced to re-consider their mission, because of the changes caused by the recent financial crisis, and the diminished opportunities in their traditional real estate backed products. Therefore, the timing is right for many community banks to re-evaluate their ability to enter or expand their involvement in the commercial equipment arena. One of the primary considerations should be the integration process and how an equipment division/subsidiary will enhance the institution’s ability to reach its vision. Integration and synergetic activities are a process and with proper execution can create tremendous value for a community bank. Equipment products have a proven record of historically producing strong assets for banks – with delinquency rates and charge-off rates of lease receivables and C&I assets being significantly less than all other assets held by banks nationwide. Therefore, there is a great opportunity in the market for community banks to embrace the commercial equipment financing/leasing industry and integrate these products into their institutions.
To order a copy of the study: “Community Banks And Equipment Finance – What It Takes To Be A Success”, visit the Equipment Leasing and Finance Foundation’s website at http://www.store.leasefoundation.org/cgi-bin/msascartdll.dll/ProductInfo?productcd=CommBanks2011
For questions contact Scott Wheeler at Wheeler Business Consulting: email@example.com or 410 877 0428