Banks vie for share of trillion-dollar equipment finance market

Equipment finance is big business at a growing number of banks around the country — and it’s getting bigger, as institutions jockey to hire or buy their way into the $1 trillion industry.

“We are seeing more competition,” Eric Bunnell, president of the 15-year-old Arvest Equipment Finance in Fort Smith, said in an interview. “We’re seeing more banks get into the business. Some are re-entering, others are getting in for the first time … Everybody wants to get in and get a piece of the business.”

Equipment finance loans and leases are made across a wide spectrum, with corporate aircraft at one extreme and relatively small-dollar restaurant kitchen equipment at the other. Arvest Equipment Finance, a subsidiary of the $26.8 billion-asset Arvest Bank in Fayetteville, Arkansas, has made equipment finance loans as large as $9 million, Bunnell said, while Customers Bancorp’s new small-ticket equipment finance business will consider deals as small as $25,000, according to Sam Smith, founder and president of Customers Commercial Finance.

Lenders are attracted to the equipment finance space because it thrives in good times, when both start-up firms and expanding established companies buy equipment. At the same time, mission critical equipment buys can’t usually be put off, so the industry rarely sees big drops in activity, analysts say.

Indeed, “in a downturn, you actually get more people that were paying cash for equipment coming in and doing financing,” Bill Verhelle, CEO at QuickFi and the former chairman of the Equipment Leasing and Finance Association. ”In an upturn, when things are really going, you just get more equipment being sold, so there is more financing. [Equipment financing] tends not to have deep dips, even during recessionary periods.”

Building a business

Customers Commercial Finance dates to April 2015 when Customers, the holding company for the $19.6 billion-asset, West Reading, Pennsylvania-based bank of the same name, hired Smith and his eight-person team away from EverBank in Jacksonville, Florida. Since then, CCF has built a $700 million equipment finance portfolio. It expects to originate $340 million of new business in 2022, according to Smith.

That target may prove significantly conservative. In March, Customers recruited John Donohue, a veteran CIT Group executive to launch a small-ticket equipment finance business at its Customers Commercial Finance subsidiary.

Donohue, who will serve as executive vice president and managing director at CCF, has more than a quarter century of small-ticket equipment finance experience, first at Direct Capital, a Portsmouth, New Hampshire-based independent finance company; and then at CIT Group, following its 2014 acquisition of Direct Capital. At CIT, Donohue helped lead a small-ticket business that routinely originated loans and leases in excess of $500 million. In 2020, Donohue’s last year with the company, CIT’s equipment leasing portfolio totaled $5.1 billion of assets and generated $279 million of revenue.

“John was a natural fit,” Smith said in an interview. “We were delighted to bring him in to help us build the small-ticket business.”

Smith said his existing CCR team focuses on deals of $1 million or more “though we’ll look at a transaction that is a little smaller.” Small-ticket lending, which ranges from $25,000 to $500,000, offers the opportunity to establish a service continuum that doesn’t exist now.

“It fills that void from where we are currently,” Smith explained. “We can start with a customer when they have a very small need and continue to service them as the business grows.”

Customers’ hiring of Donhue and corresponding move into small-ticket lending is among the latest in a lengthy line of banks that have gone prospecting for growth in the equipment finance space. It came nine months after the $9.3 billion-asset First Commonwealth Financial in Indiana, Pennsylvania, entered equipment finance by hiring veteran lender Rob Boyer to run a newly formed First Commonwealth Equipment Finance Group. First Commonwealth reported making 17 new hires between October and December, mostly to staff Boyer’s new unit.

Similarly, in October, the $35 billion-asset Associated Banc-Corp hired Scott Dienes, a veteran Wells Fargo commercial lender, to lead a new equipment finance business line. Associated is projecting the new unit will generate loan balances of $300 million by the end of 2023.

Banks are also relying on mergers and acquisitions to bulk up in equipment finance.

In March, the $7.1 billion-asset Peoples Bancorp in Marietta, Ohio, acquired Vantage Financial, a $147 million-asset equipment finance lender in Excelsior, Minnesota for $54 million in cash. The deal came less than a year after Peoples paid $47.5 million for North Star Leasing in Burlington, Vermont, gaining an $84 million lease portfolio as part of the transaction.

Back in January, the $16.3 billion-asset First Financial Bancorp in Cincinnati completed a $121 million-asset cash-and-stock deal for Summit Financial, the nation’s fourth-largest independent equipment financing lender.

That same month, the $2.1 billion-asset American Bank in Corpus Christi, Texas, announced it would acquire ACG Equipment Finance, an Austin-based lender that has made more than $1 billion of equipment finance loans during its 20-year history.

CCF’s Smith said the level of consolidation within the equipment finance space created an opportunity his company was keen to exploit.

“Whenever there’s consolidation — banks acquiring independents, banks acquiring other banks — there’s this sort of chaos that occurs,” Smith said. “As a result, we think the market is underserved.”

“There’s been a lot of disruption in the marketplace, a lot of acquisitions over the past several years,” Donohue added. “You’ve seen some companies come in and acquire some [independent finance companies] where maybe the integration hasn’t been the smoothest, so there’s a good market opportunity from my perspective.”

Arvest hasn’t done any deals recently, but it’s moved aggressively to grow its $800 million equipment finance portfolio.

According to Bunnell, Arvest Equipment Finance recently purchased and renovated a 9,000-square-foot building on three acres in Fort Smith to serve as the unit’s headquarters. “That gave us the space for growth,” Bunnell said. “I think we’ve hired 12 people already this year.”

Bunnell’s group has expanded its footprint to cover 27 states in the past year, mostly in the Midwest and Southeast. It hired an experienced lender, Anna Matthews, to lead a push into the medical equipment sector, and it established an inside sales team to focus on repeat business. Bunnell expects the sharper focus on inside sales to pay especially big dividends.

“Our contracts on equipment are usually four years or less, so we have a lot of quick payoffs or paydowns,” Bunnell explained. “We want to try to recapture those customers and get the next purchase they have.”

As things stand, those moves helped push Arvest Equipment Finance to its best month ever in March, with new business up 50% from March 2021. The company is on pace to originate more than $600 million of loans in 2022, Bunnell said. It originated just under $420 million in 2021.

Banks aren’t the only ones benefiting from the hot equipment finance market. Independent lender Amur Equipment Finance in Grand Island, Nebraska reported Monday it too achieved record origination volume in the first quarter of 2022 and is on pace to surpass its $1.5 billion target for full-year originations.

‘Always a need’ for equipment

In general, banks are attracted to equipment finance because companies’ need for equipment creates a constant demand.

“Businesses always have a need for equipment,” Bunnell said. “They’re either expanding and they have to have more of it, or it’s wearing out and they’ve got to replace it.”

Beyond those fundamentals, Bunnell said at least two more trends are driving the industry’s growth. The end of COVID-era relief programs has meant companies that were able to buy equipment outright in 2020 and 2021 are once again resorting to financing.

“Now, as interest rates are starting to pick up, companies are going to sit on their cash and hold it in reserve,” Bunnell said. “They’re going to borrow some money and finance” their purchases.

Bunnell also expects the package of infrastructure improvements Congress enacted in November would also boost equipment finance activity.

“There are a lot of roads and bridges across this country that need to be repaired,” Bunnell said. “It’s all going to take equipment…There’s going to be a lot of opportunity over the next couple of years to find good, solid business.”

The Equipment Leasing and Finance Association is predicting industry-wide growth of 4.6% in 2022.

“The demand for equipment, capital expenditures has really increased,” said Ralph Petta, president and CEO of the trade group. “Last year, a lot of our member companies had their best years. There was that blip when the pandemic occurred in 2020, but the economy recovered quite quickly and so did our industry. It’s basically back to pre-pandemic levels of originations and profitability.”

For Donohue, the opportunity to create a new business from scratch was a big motivator behind his decision to join Customers.

“When I went to work for Direct Capital in 1996, there were six of us in the office. That’s what I was looking for,” Donohue said. “I wanted to get involved in something that was more entrepreneurial, more innovative…Something I could put my DNA and my fingerprints on.”