Alliance Partners is armed with new capital and is eager to jumpstart lending in an area that few small bankers have ever entered: equipment finance.
The group said Monday that BancAlliance, its cooperative with smaller banks, had hired a team of lenders to offer equipment finance loans to member banks.
Alliance recently raised $150 million from BlackRock (BLK) and BlueMountain Capital Management. The group, which launched an effort to boost commercial and industrial lending last year, plans to use the funding to expand into areas of specialty lending it believes are being overlooked by bigger banks.
"We see a real opportunity and value in that space and ... our members have a great deal of interest in equipment finance loans," says Lee Sachs, Alliance's chief executive. "Our prospective members are also interested. It's a good asset for banks."
"We're hearing that more community and regional banks are getting interested in" equipment finance, says William Sutton, the president and chief executive of the Equipment Leasing and Finance Association. Banks want "to diversify their portfolios and offer different services to clients."
It can be tough to gauge equipment finance trends. Originations have declined in each of the last two quarters. But industry observers note that most financing deals come together near the end of the year as borrowers look to tap into certain tax advantages.
Overall, originations in equipment finance are up 16% from a year earlier, Sutton says. He says the figures have greatly improved since the financial crisis and that recent forecasts indicate more momentum through next year.
"We are only now getting back to being close to the same level of business we had in 2007," Sutton says. Projections back "7% growth in capital investments over the next year."
Big banks have historically dominated specialty finance, but smaller banks are making meaningful moves. In March, TCF Financial (TCB) in Wayzata, Minn., formed a unit to specialize in asset-based and cash flow lending. TCF also has a growing equipment finance unit. People's United Financial (PBCT) in Bridgeport, Conn., hired a former Sovereign Bank executive last year to lead a new asset-based lending unit.
Industry observers say that these moves will help banks diversify their loan books away from real estate. With real estate viewed as a high risk and other commercial loans requiring bargain basement pricing, equipment finance has emerged as a better-priced, lower-risk product.
"We have a fairly good size portfolio of CRE loans; being able to do more equipment lending allows us to lower" the real estate concentration, says Art Johnson, the chairman and chief executive at United Bank of Michigan. The bank joined BancAlliance six weeks ago and is already participating with one loan while reviewing three others.
"A lot of community banks had this big influx of deposits and the challenge has been how to deploy it properly," he says.
Alliance executives say that forming an equipment finance group will allow small banks to compete for equipment loans that they often lose out on to bigger banks.
"There is not a significant reduction in demand of loans in our market" for big equipment financing, says John Delaney, an Alliance co-founder. "In the traditional community bank model, there's a dramatic reduction in demand for loans and the supply of dry powder [capital] is up."
It is unclear how much revenue small banks will gain from specialty finance.
In the first quarter, TCF's leasing and equipment finance revenue rose 24% from the fourth quarter but fell 15% from a year earlier. At People's United, interest income from equipment financing totaled $800,000 in the first quarter, surpassing income tied to CRE and C&I loans. A year earlier, equipment finance was the lowest income driver among the three.
Sutton says more companies are looking to replace equipment after a spending "hiatus" in recent years. "There's a lot of potential upside," Johnson adds.
BancAlliance spent most of last year trying to find members and loans to create enough business to market itself this year. Formed in January 2011, the group's first loan didn't close until August. The group now has 59 members in 27 states.
Banks were initially "cautious" but are getting more comfortable with the cooperative, Sachs says.
Some bankers remain hesitant after being burnt by past loan participations.
"I've seen efforts attempted by others to do something like this, but I personally would not want to" join in, says Joe Goyne, the chairman and president of Pegasus Bank in Dallas. "This may sound extreme, but it stretches community banking."
Goyne says a group of Dallas-area lawyers once tried a similar co-op with about a dozen banks. After three years, "it did not work out well," he says. "Community banks ... are just not as attuned to the risk, behavior and procedures of syndicating loans," Goyne says. "In some cases where they might have some input, it just turns out to be ugly. When it turns ugly, people file lawsuits."
Johnson says he understands that sentiment. "I've made that same statement before when our bank had a bad experience with shared credits," he says. "The test is always when there's a problem. We haven't had that with BancAlliance."