Lending Ace Sees Banks as Endangered Species

By Crockett, Barton | American Banker, January 11, 1996 | Go to article overview

Lending Ace Sees Banks as Endangered Species


Crockett, Barton, American Banker


Maybe it's friendly advice from a tough competitor.

Samuel L. Eichenfield, chairman, chief executive, and president of one of the nation's most successful nonbank commercial lenders, has prepared an analysis of what ails banking.

And he's sharing it with bankers.

As the head of Finova Group Inc., Mr. Eichenfield, 58, has made a fortune competing with banks. This gives him an unusual perspective on banking.

His prognosis: Banks must go through wrenching changes - or face almost certain extinction.

"I think the traditional role of the banker has passed its prime," he said. "Over the next 10 years, there's going to be major, major change in the banking scene."

Mr. Eichenfield's record at Phoenix-based Finova gives bankers a good reason to listen. Since successfully shepherding the company through a public spinoff from the Dial Corp. in March 1992, he has led it to impressive growth.

The company's assets and market capitalization have more than tripled since then to $6.8 billion and $1.3 billion, respectively. Mr. Eichenfield's stock and option holdings alone are worth $13 million. Meanwhile, Finova's annual net income has risen from $30 million to more than $95 million, and its net worth has grown from $275 million to $805 million. New loan originations in 1995 totaled $2.4 billion. And prospects for 1996 also look bright. Some analysts rate Finova's stock among the best buys in the financial services sector. Joseph A. Jolson, a managing director at Montgomery Securities in San Francisco, predicts 1996 per-share earnings of $4.10, and a $70 stock price. Finova has recently been trading near $47, or about 14 times earnings, well above the average 10 times-earnings of the 65 biggest banks.

Finova's success is attributed to smart niche marketing. The strategy: to make secured loans to midsize companies that tend to be ignored by banks.

Most of its customers have credit ratings in the B-plus/A-minus range, and annual sales between $10 million and $300 million. The value of Finova's loans and leases ranges from $500,000 to $35 million. This means its credits tend to be too big for small banks to handle, and too small for many big banks to bother with.

To help it market loans with relatively high interest rates, Finova develops national expertise in selected business lines. These include lending for resorts, medical systems, and franchisees as well as factoring and inventory finance. Further, Finova is increasing its focus on cross selling. The upshot: Mr. Jolson says Finova should increase loans at well over twice the 6% growth of its chosen markets.

Meanwhile, Finova keeps costs low. Its general and administrative expenses consume just under 45% of revenues, making it run much leaner than banks, which have efficiency ratios in the 55% to 65% range. In fact, Finova runs even more efficiently than most finance companies. So what, in Mr. Eichenfield's estimation, ails banks? Essentially, they've become worse than nonbanks at gathering funds and making loans. As evidence, he cites research showing that banks' share of commercial and industrial loans fell to 54% in 1995 from 73% in 1983. Meanwhile, finance companies' share rose from 19% to 31%. He also says mutual fund companies have gotten better than banks at gathering funds. One problem banks have had in lending is that regulators have tightened leverage requirements. …

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