Officially, the deal doesn’t close until July 1, but Umpqua Bank’s acquisition of Federal Way’s Financial Pacific already has the equipment leasing company’s staff excited.
The deal, a $158 million purchase by Umpqua from private equity firm Flexpoint Ford, LLC, was described by FinPac President and CEO Paul Menzel as a “mutually beneficial marriage that will bring positives for both (FinPac) and Umpqua.”
In particular, FinPac, which grants loans to businesses for the purchase of “capital-earning equipment,” stands to gain access to a sizeable amount of loanable funds because of its new relationship with the Portland, Ore.-based bank.
“From a business standpoint, being part of a bank gives you access to lower cost of funding,” said Menzel. “As a private equity-owned independent, as we are as of today, we have to go and borrow from banks. After July 1, we will get to leverage the deposits that Umpqua has and invest those in small business equipment leases.”
That’s no small development; Umpqua is currently the largest bank in Oregon, reporting an operating income of $200.6 million in 2012. And with such a diversified, national customer base â€” FinPac finances for everything, Menzel explained, from bounce houses to x-ray machines, copiers to dump trucks and tanning beds to phone systems â€” FinPac’s business only looks to grow by tapping into such a large new pool of funds.
Not, of course, that FinPac is looking to leave its date at the dance, so to speak. The company, according to Menzel, is well aware that conservative financial strategy, sharp risk management evaluation and focus on small business are the foundations that have driven its success, and a new funding source and banking affiliation isn’t going to change FinPac’s core model.
“The interesting thing is we’ve gotten very effective and very good at evaluating the credit of very small businesses,” Menzel said. “We call them microbusinesses â€” Mom-and-Pops, sole proprietorships, partnerships. Typically less than $10 million in revenue. Could be down to $500,000 in revenue. Our average transaction size is $25,000. That will probably grow to a larger average, but that’s still pretty small.”
“Interestingly enough, the general banking industry has not been good at serving that segment of small businesses,” he continued. “That’s the advantage that Umpqua is getting. They now have somebody who understands that type of client, knows how to evaluate their risk and can provide that kind of financing at a fair return that protects the bank’s assets, because, obviously, as a regulated institution, that’s the important thing.”
Umpqua knows what it’s buying: As one of the banks lending FinPac money to invest, Umpqua has long been able to evaluate FinPac’s financial performance on a quarterly basis. An inquiry into potential acquisition was made last year, according to Menzel, and with the final regulatory hurdle cleared on June 18, all that’s left now is to wait until the month and quarter close before the transaction can be finalized.
And along with FinPac’s obvious assets and the brand recognition that comes from 38 years in the equipment leasing realm, Umpqua also pulls within its umbrella FinPac’s calculated, data-driven approach to investing.
“We’re a very data-driven company,” said Terey Jennings, senior vice president at FinPac. “I think, over the last 10 years, we’ve financed over $1.2 billion worth of small ticket equipment purchases for businesses all over the country. And with that, we’re able to learn a lot about how those transactions perform and really fine-tune our product offering to find out what works for us and what doesn’t work for us. It’s just enhanced our product quite a bit.”
“We have to manage the risk effectively, and that’s what attracted (Umpqua Bank) to us,” chimed Menzel. “We’re very, very good risk managers in a specialized part of business: the smaller borrower.”
FinPac’s management strategy has been so sharp that, while the company wasn’t immune to the struggles that befell financial services firms around 2008, its rebound has been significant. Last year, FinPac posted its all-time record year, both in terms of profitability and minimizing loss.
Menzel declined to talk specifics regarding the company’s numbers, but Umpqua’s release announcing the purchase had FinPac’s total assets of $279 million as of April 30, 2013, with tangible equity of $57 million expected at close. The statement also cited a sale price of “eight times 2012 earnings,” which puts FinPac’s revenue last year at roughly $19.8 million.
“The fact that we were active while a lot of firms went out of business or had to contract fairly severely because of the downturn in the economy, we were able to pick up some market share because of that,” Menzel said.
From a big picture standpoint, FinPac certainly isn’t the first independent equipment leasing company to be acquired by a bank, nor is Umpqua the first bank to take on an equipment financing subsidiary. Still, the transaction isn’t an insignificant one given that, traditionally, the equipment leasing sector, at least from a banking perspective, has been typically dominated by major national banking giants.
“If you study it, all the major banks â€” Wells, BofA, Chase, US Bancorp â€” they all have a presence in equipment leasing,” Menzel said. “Umpqua didn’t, so they felt like they were a little bit behind the curve, which motivated them to go out and find the business as well.
“Now, there are also a lot of community banks that are looking more and more to equipment leasing to help them grow. Smaller banks than, say, an Umpqua, are getting involved. I think there will be increasing pressure to do it more and more.”
Evidence of the trend isn’t difficult to spot. Menzel and Jennings, for example, cited the acquisition of First American Equipment Finance in 2012 by City National Bank, the second largest bank headquartered in California. And just recently, Capital One expanded its equipment finance business with 13 new staff members in its Towson, Md., office.
And while equipment leasing is a mature industry in its own right, regional banks are continuing to get wise to its potential as a growth stimulator.
“As an industry, equipment leasing and finance have been emerging for many years, particularly in the last 10 years on the banking side,” Menzel said. “As banks witnessed how well equipment leasing came through recession downturns as compared to other asset classes like mortgages and commercial real estate, that gave them confidence. I guess you could say equipment leasing and finance has been legitimized within the banking environment over the last probably 20 years or longer, but particularly in the last 10.
“(Banks) are looking for growth,” Menzel continued, “and if you look at small businesses as a percentage of the commercial side of GDP or a nation’s economy, probably 90 percent are small businesses. People are used to reading about the stock market and these large companies, but 90 percent of businesses in the U.S. are small businesses, so there’s a great opportunity there. It’s just understanding how to serve them, and classic banking approaches don’t work as well for a small business that might not have audited financial statements. The way they track their businesses may not be as sophisticated, so it’s more difficult for a classic bank to provide service there.
“We’re able to manage the risk in a different way that the banks are used to, so (Umpqua is) acquiring that knowledge.”
Whatever the case, it’s an exciting time for Financial Pacific Leasing. While specific benchmarks have yet to be officially agreed upon, there is optimism inside the walls of the company’s Weyerhaeuser campus office.
“Umpqua’s going to be $12 billion in assets,” Menzel said. “They’re not going to be satisfied unless we’re probably 10 percent of that, so we’ve got some growth goals. I think that we’re going to be looking at being $1 billion in three to five years.”
It’s particularly exciting for Jennings, who has been with FinPac since 1986. He described the company’s culture as one that encourages employee retention, so for him to see the company embark into the next phase of his growth with so many long-time colleagues on board is special.
“It’s exciting, because it is a next step,” Jennings said. “This will be definitely be different from what we have been in the past. For me to be here with some of the people who I’ve known and work with for 10, 20 years and we’re all seeing this through, it feels good.”