Though many commercial banks peddle "soup-to-nuts" financing to middle- market companies-where there are still spreads to be made-Finova Group remains loyal to its customer base.
In its third-quarter earnings report, issued Tuesday, the Phoenix-based company announced that it had increased fee income 27% from a year earlier, to $994 million.
Finova, which was spun off from Dial Corp. in March 1992, focuses on corporate customers that can't seem to get commercial banks' attention but are beyond community banks' reach. Finova provides secured debt, subordinated debt, preferred stock, mezzanine financing, and junior debt up to $35 million.
The company has chosen its markets carefully, specializing in areas such as resort finance, transportation finance, commercial real estate finance, and equipment finance. It steers clear of the commoditized parts of the middle-market business rather than shave margins to compete in businesses that have reached their peak.
"If we believe that one of our activities is tending to get commoditized, and we can't command premium pricing, we'll exit it," said Samuel Eichenfield, Finova's chairman, chief executive, and president. If a business is commoditized, "we're not being paid for our brains, we're being paid for our brawn," Mr. Eichenfield added.
The company made such an exit last November when it sold its manufacturer and dealer services division, a small-ticket leasing business, to Green Tree Financial Corp.
Observers say that Finova has remained competitive because it has established a reputation for "being there through thick and thin" for its customers.
"Finova has been focused on niche areas for a long time, and been able to build it while others have a record of coming in and out," said analyst Michael Hodes of Goldman Sachs & Co. "They're there in good times and bad, and know this business as experts."
Analyst James Thayer of Prudential Securities said that though "there's increasing competition from the banks, I see no evidence of it" in Finova's earnings.
"I don't see any sign of them shaving points in order to get business, and their business continues to be very strong," Mr. Thayer said.
About two years ago Finova started developing the infrastructure to provide a wider array of products. Its latest step on that path was the purchase last week of Belgravia Capital Corp., an Irvine, Calif.-based commercial mortgage lender, for $180 million.
Also about two years ago the company started building equity funds for specialized purposes. In January 1996 Finova announced a strategic alliance with the California Public Employee Retirement Systems to form a $100 million investment fund through fund manager Doyle & Boissier LLC. The fund is to provide equity and debt for the growth of underperforming assets of midsize businesses.
Finova also established a $150 million fund to buy airplanes that do not comply with Federal Aviation Administration regulations and sell the planes after upgrading them to those standards.
One customer, Tim Stripe, co-president of Grand Pacific Resorts, a timeshare developer in Southern California, has turned to Finova five times in the last year for about $170 million of financing.
Mr. Stripe says his relationship with Finova is enough to keep him from going to its competitors-even if they offer better rates.
Saving half or a quarter of a point might not be worth the turmoil that the loss of flexibility in loan commitments would entail, he said. Another customer, Jim Thaxton, president of Thaxton Group, a Lancaster, S.C.-based consumer finance business, has also been pleased with the service he has received in the six years he has worked with Finova. In that time, he said, he has gone from $5 million of credit to $100 million with the company.
"We're not big enough to get attention of the banks," Mr. Thaxton said, but his company's financing needs are "too complicated or variable for the local banker.
"Finova tends to be a little more sophisticated and focused on what they do, and they've helped me run my business." u
