These days, it's hard for most bankers to admit they are sending salespeople out looking for $45,000 deals to finance.
But Ira Romoff, senior vice president and head of small business banking for European American Bank, is not only looking for these deals, he's making money on them.
In October, EAB paid $106 million to CoreStates New Jersey National Bank for Wasco Funding Corp., a small-ticket leasing company based in Manhattan.
With a $100 million lease portfolio and about 4,000 small and midsize companies as customers, the new subsidiary is paying returns as much as 400 basis points higher than traditional bank loans, without the volatility.
"It's not as interest sensitive as a commercial loan would be, so you can get a better yield," the EAB executive said.
"We make more money on leasing" than on a loan, he added, because it's cheaper to run a leasing business than a bank.
This is so, he said, because Wasco is run differently from a commercial banking enterprise. For one thing, a small staff of commissioned salespeople is solely responsible for drumming up new business. The administrative functions are handled by a credit shop in Manhattan that approves each transaction and handles all billing and collections.
And since the credit staff is attuned to scoring smaller credits quickly, the subsidiary operates more efficiently than it would in a bank setting.
"It doesn't take a lot of time to approve a $45,000 deal," he said.
A commercial bank's lending officers, besides searching for new business, are responsible for account management and credit analysis, among other things.
Leases have other advantages over bank loans, said Sam Eichenfield, chairman and chief executive of the Phoenix-based Finova Group, formerly known as Greyhound Finance. Because ownership of the leased equipment remains with the lessor, the credit is fully secured.
But this means that the lessor also takes on the expense and risk of ownership. Nonetheless, the risk has its rewards.
"It is a higher-cost transaction which lends itself to higher margins," he said.
Mr. Romoff said many of the pitfalls of ownership can be prevented, though. For instance, EAB offers a discounted price at the end of the lease term as an inducement to get the lessee to buy the equipment. In this way, the bank does not have to determine the equipment's value, nor does it have to dispose of it.
That's not to say the bank is taking a loss on the residual value, though. If done right, he said, rentals are set to cover the bank's financing costs.
Nor does it mean that poorer credits are sent to the leasing subsidiary for funding.
"A lot of older guys in the banking business say that the leasing company is where you put the bad paper," Mr. Romoff added. "We're just the opposite. Deals that are not approved at the bank are not approved at the leasing company, either."
But the leasing business was not Wasco's only value. Of equal importance was the company's customer base. This captive market is prime territory for cross-selling of banking products.
It also gives the bank another product in its arsenal. Already, small business customers buy an average of 5.4 products. Much of this cross- selling comes from the bundling of a number of products and services into one package.
But will EAB's move into small ticket leasing last? Banks have had a spotty track record in leasing, jumping into and out of the business with regularity.
That's for good reason, though, said Finova's Mr. Eichenfield. With tax deferral an important factor in the leasing business, loan losses in the late 1980s reduced the tax incentive for banks to offer this service.
"Banks have had their ups and downs in recent years, and that affects their appetite for the leasing business," said Mr. Eichenfield. "If you look at finance companies and leasing companies, however, they do not seem to suffer from the same volatility in loan losses."
Not to worry, said Mr. Romoff. EAB's Amsterdam-based parent, ABN Amro Holding, is an experienced lessor on a global scale and is looking to expand its leasing presence in the United States. And with new business running at a $65 million to $80 million a year clip, Wasco is expected to enhance EAB's small business efforts.
"We are strongly into the small business market. With an average transaction size of $45,000, it's not so small that it becomes an operational mess," he said.