Rick Remiker,
Vice Chairman,
The Alta Group

March 10, 2023, marked a stark transition point in the equipment finance industry, as well as the wider global financial sector. With the FDIC’s seizure of failed Silicon Valley Bank on that date, our industry shifted immediately from an environment of optimism and projected growth, coming off strong new business volume growth in 2022 and early 2023, into a dramatically different mode.

The collapse of SVB, followed two days later by the failure of Signature Bank and then First Republic Bank on May 1, 2023, prompted depositors to rapidly shift hundreds of billions of dollars from community, regional and super-regional banks to those “too big to fail” banks, known also as global systemically important financial institutions (G-SIFIs) such as JPMorgan Chase, Wells Fargo, Bank of America and their peers.

It was one of those events that provoked an immediate shift in the operating stance of the community, regional and super-regional banks. Almost overnight, these banks became hyper-focused on preserving capital. Lending efforts focused only on existing bank customers, and only at a very profitable level. The complete focus became gathering and retaining deposits and reassuring existing customers — activities that takes place on the opposite end of the balance sheet from where equipment finance operates.

These actions were driven by intense worries about a crisis of confidence. The bank failures of spring 2023 demonstrated that we are living in an age where everyone from individual consumers to large commercial clients can move large amounts of deposits in mere minutes. Depositors moved $42 billion out of Silicon Valley Bank on March 9, 2023, and on March 10 — the day the FDIC shuttered the institution — bank leaders had reportedly told regulators they expected another $100 billion to leave the bank that day based on client requests.¹

SVB’s failure caused a ripple effect, as depositors shifted money from smaller banks to larger institutions in the weeks that followed. A significant portion of those deposits have since returned to the smaller banks, but the crisis dominated Q2/23, causing lending to remain tight late into the year and early into 2024.

Alongside the dramatic and immediate impacts of the 2023 bank failures, banks continue to grapple with a slow-burning crisis surrounding commercial real estate loans in large metropolitan areas. America’s post-pandemic breakup with office culture as we know it continues to negatively impact the big-city office market, putting a damper on lease activity and renewal in large office properties. This dynamic will play out over a period of years as various leases and loans reach maturity. It adds to the overall mood of caution within much of the American banking sector.

Even one year after the bank failures, the community, regional and super-regional banks are still in the mode of conserving capital, with lending only happening if the returns are appropriate. This continues to put immense pressure on equipment finance operations within banks.

IMMEDIATE PULLBACK HURTS EQUIPMENT FINANCE
The swift shift away from growing new business volume to focus on higher-profit, risk-adjusted returns predominantly for bank customers posed a major hurdle to most bank-based equipment finance operations.

Many banks developed a hyperfocus on existing customers. Often, equipment finance lines of business serve customers who may do no other business with the bank, often with the hopes that the bank can later grow the relationship with these borrowers across other business lines. When the banks’ focus shifted from growing new business volume to intensely scrutinizing profits, the willingness to serve these non-bank customers dried up.

As the year wore on, we saw several bank parents analyze exiting or selling their equipment finance businesses. In many cases, this was not feasible, as many of these loans and leases were created in a wildly different interest-rate environment, and today’s higher-rate environment made those assets unattractive or uneconomic for a sale.

The alternative to sale or exit became retrenchment. Most bank equipment finance businesses cut back on their third-party originations and shut down their buy desks. They exited or slimmed down vendor finance and other lines of business not directly related to bank customers. Many bank parent companies told their equipment finance business leaders not to focus on growing new business volume. In fact, some encouraged a “shrink to survive” mentality, indicating they’d be pleased if the equipment finance business shrunk year over year, in the name of preserving capital.

But the banking crisis did not coincide with a downturn in the need for capital to finance equipment purchases across the global economy. In fact, the bank retrenchment opened opportunities for independents, captives and non-depository funded competitors to grow their share of the vital equipment finance market.

While the results are not available as this article is being written, this Monitor 100 issue will provide evidence many of us have been anticipating, showing how the 2023 bank failures and ensuing lending pullback have shifted the top players in equipment finance.

But we know the current environment will not last forever. As conditions improve, equipment finance will continue to be a strong line of business in which banks can grow their assets. While we have unfortunately seen a few banks exit the business in recent months, the reality is that scrapping the equipment finance line of business is not a sound long-term move for most banks. When asset growth becomes a priority again, those banks that have cut their equipment finance businesses will have a hard time ramping back up.

Equipment finance leaders working within banks today can take proactive steps to ensure they are seen as a fully aligned partner in the company’s overall goals. Don’t make the mistake of thinking that just because you haven’t been targeted for closure, these issues are not impacting your bank parent. Few bank-based equipment finance businesses are immune to the immense pressure banks continue to face, and it’s important to take steps to show that you are contributing to the path through these difficult times.

FOCUS ON ALIGNMENT
This is not a time to hide and stay under the radar until things get better. For leaders working within bank-based equipment finance organizations, now is an important time to be proactive about showing your alignment with the goals of the parent company.

Stay aligned with your treasurer, your chief financial officer and your asset-liability committee. Can you find an opportunity to present an overview of your business to the board of directors or executive leadership of the bank?

It’s important to defend your business, and to highlight to leadership the overall strength of the equipment finance industry through the various economic cycles. Remember, the need to grow assets will return. Equipment finance is an area banks will want to be able to tap once the mood shifts.

PLAY THE COMPANY ROLE
Deposit growth and retention is the key focus for many bank parents right now. While it’s not traditionally the focus of equipment finance organizations, efforts to show you can contribute to this goal can help ensure equipment finance is seen as a contributing part of the business.

So run a deposit-gathering campaign. Even if you aren’t tremendously successful, it’s likely you could gather some deposits from a customer, vendor partner or supplier you are working with. Even if you bring in no deposits, just by making the effort, you are showing you are listening to the issues the bank is facing.

FOCUS ON THE BOTTOM LINE
Now is not the time to be hyper-focused on growing new business volume or year-over-year asset growth. Doing less business, but doing it more profitably, will be looked on more favorably by bank parents in this environment.

It’s important to focus on profitability and return. A smaller, more profitable equipment finance business line may stand a better chance of surviving than a higher-volume, less profitable enterprise.

SLIM DOWN STRATEGICALLY
It’s important for bank-based equipment finance leaders to closely scrutinize markets that lie completely outside the bank’s footprint, such as vendor finance. This might be a good time to analyze whether you have
critical scale, or what your market positioning is versus the competition in lines of business that are not typically aligned with bank customers. This may be a good time to de-emphasize or minimize those businesses.

Same with the buy desk. Many banks immediately shut down their buy desks after SVB’s collapse, not wanting to help competitor banks offload less profitable assets. While minimizing this activity still makes sense, it’s probably smart not to exit this area altogether, as buying equipment finance loans originated elsewhere can be a quick path to asset growth once market conditions improve.

DON’T BE A PROBLEM
Bank-based equipment finance leaders should take steps to gain a clear understanding of their portfolios. If there are credit issues or residual loss issues, identify them early and give leadership advance notice so that they can take appropriate actions to work through them.

This is not a time to surprise anybody. A third-party examination of the portfolio can turn up issues before they become unwelcome late-breaking news. This kind of thorough review can also build greater confidence and understanding toward the equipment finance line of business within the bank leadership.

ORIGINATE TO SYNDICATE
Keep in mind that liquidity issues are primarily impacting community, regional and super-regional banks. The larger financial institutions do not share these liquidity concerns and are in asset-growth mode.

A possible strategy could be to originate equipment finance loans and leases specifically to sell to some of the larger bank-based equipment finance operators. This could be challenging to do, but it keeps you in business and provides some fee income without using balance-sheet capacity.

KNOW WHEN IT’S GO TIME
In the face of any market trend, it’s important to think about when you should play the contrarian. With so many smaller banks moving in lockstep to pull back their equipment finance activity, think about when it’s time to bet on the future. That could be later this year or early next year. Can you get there before others do? If you can get the timing right, you can have a market advantage by being out in front of the competition.

Amid all your efforts to stay aligned and be a team player while reacting to the fallout from last year’s bank failures, don’t forget to keep an eye on the future.

Bank-based equipment finance executives have an important role to play as the 2023 bank failures continue to ripple through the community, regional and super-regional banking industry. Anyone who says, ‘But my bank is different. This doesn’t apply to me’ is likely to be wrong. While the degree of severity varies, no bank is immune from the issues facing the industry.

Equipment finance is a solid business that has performed well for banks through numerous economic cycles. Banks may want to alter the shape of their equipment finance businesses in the current environment, but equipment finance leaders who can help bank parents to see the long-term value in preserving a footprint in this industry are helping them to preserve an important source of asset growth that will be helpful once things turn around. •

¹ Son, Hugh, “SVB customers tried to withdraw nearly all the bank’s deposits over two days, Fed’s Barr testifies,” CNBC, Mar. 28, 2023.

Rick Remiker is a vice chairman with The Alta Group. He has extensive leadership experience at the bank parent level and has shepherded organizations through challenging economic cycles as a C-suite company executive and industry leader. Remiker has considerable experience in the middle- to large-ticket sectors of the equipment leasing and finance industry, as well as extensive accomplishments in corporate banking, commercial finance and specialty lending. He served as chairman of the Equipment Leasing and Finance Association in 2013.