Small Banks Move Into Leasing

A few years ago, First Security State Bank, Charleston, Mo., bought a million dollars worth of paper from a lease broker. When the $100 million community bank analyzed what it had purchased, it turned out that many of the leases belonged to existing customers. That's when the bank knew it needed to get into leasing.

Learning first-hand the trials and tribulations of developing its own leasing program, the bank set up a lease consulting subsidiary, BancLease. Since 1994, BancLease has helped 188 community banks in 34 states overcome leasing hurdles.

Leasing activities have gained more prominence with banks, with their growth and earnings impact receiving more attention. In a 1999 survey by Financial Institutions Consulting, a New York research firm, bank respondents reported a 22.5% growth in lease financing. Bank leasing companies reported an average return on assets of 1.2%. Respondents attributed this low ROA figure-the lowest of all lessor types-to their propensity to take high credit quality customers as well as relationship-based pricing.

Bank-owned lessors see customer relationship as a major competitive advantage, enabling them to win high credit quality business. Where once it was presumed that the only relationship a leasing company had to its existing customers was through repeat business, now a bank-operated lessor has a potential relationship with its parent's customers as well.

The high cost of documentation development has kept most community banks from starting their own programs, according to Matt Wright, vice president and marketing instructor of the BancLease program. "By the time you figure attorney fees for documentation development, you're well into the $50,000 to $60,000 range."

In addition, there isn't any real training available to help bankers understand the nuances and intricacies of a lease, which is different from a typical loan. "There's no place for them to learn without trial and error," said Wright. "And trial and error in banking gets real expensive."

In return for a one-time fee of $8,250, banks receive two days of training, software, a marketing package, and telephone support via an 800 number, as well as the documentation and federal regulations needed to write commercial, agricultural, municipal, and consumer leases. There's also a yearly maintenance fee for continued telephone support and updated documentation.

The Windows-based software, recently upgraded to work with NT shops, guides users through document execution. "You simply enter in your information and hit print," said Wright. "Once you get comfortable with the software, you can go from start to finish on a lease in under 10 minutes."

Leases average about 100 basis points better than a similar loan product, making it a great source of income, said Wright. However, for most community banks, the biggest benefit is that it brings in customers they would never be able to touch otherwise.

Jerseyville Banking Center, a community bank in a southern Illinois farming community, signed up for the program six years ago. "We'd seen some of our customers going to John Deere or other equipment companies, and there was another bank an hour away offering leasing," said Alan Karcher, senior vice president at Jerseyville Banking Center, Jerseyville, Ill. "We were losing some of that business, and we felt we needed to do this to stay competitive and retain our own customers, as well as attract new customers."

Even though only about 5% of its business is currently in leases, Karcher says the program has paid off from the start. Not only do leases provide a better return than loans, but they've also helped the bank attract new business. "We picked up some customers from an adjoining bank that didn't offer the leasing program at that point," he said.