Equipment lending could take off under new tax structure

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Timing is everything.

Several banks have announced plans to expand in equipment finance in recent days, including United Community Banks in Blairsville, Ga.; Midland States Bancorp in Effingham, Ill.; and Meta Financial Group in Sioux Falls, S.D.

Leaders at those banks already had a multitude of reasons to make bold moves, including a chance to diversify in commercial lending, access to high-yielding loans and an opportunity to spread risk over a number of smaller credits.

Recently passed tax reform, which has spurred optimism that businesses will use savings to upgrade equipment, could provide an even greater lift to banks keen on financing those purchases.

“A reduction in the user cost of capital … will allow companies to increase investment,” researchers at the Equipment Leasing and Finance Association projected in their 2018 outlook, released before reform legislation was passed.

The association forecast that, absent reform, equipment investment in areas such as agriculture, computers, mining and oilfields and railroads could still increase by double digits this year.

That’s good news for banks looking to lend to a wider array of industries.

The $12 billion-asset United Community had been looking to enter equipment finance for some time before agreeing on Tuesday to pay $130 million in cash and stock for the parent company of Navitas Credit in Ponte Vedra, Fla.

United passed on other potential deals before Navitas, which “checks all of the boxes for what we’re looking for in a specialty lending partner,” said Jimmy Tallent, the company’s chairman and CEO. Key among those requirements was a management team committed to continued expansion.

Navitas has originated more than $1 billion in loans since its creation in late 2008.

“We had made our investment bankers and others know that we were looking for an opportunity like this,” said Lynn Harton, United’s president. “When this one became available … we spent a large amount of time with the management team, which is really what sold us.”

Navitas, operating as part of United, aims to add more specialty verticals to a list that already includes medical equipment, restaurant franchises and construction equipment.

“Our larger balance sheet will enable them” to service larger accounts, Harton said.

Midland States also plans to expand its equipment-finance products after hiring a lending team from Scottrade Bank Equipment, said Leon Holschbach, the $4.3 billion-asset company’s CEO. Midland States also plans to rebrand its Heartland Business Credit unit as Midland Equipment Finance, while moving the business to the St. Louis area.

“Not only will the size of our equipment financing team expand, but we will also expand our offerings to include loans, leases and hybrid products,” Holschbach said.

The equipment finance unit had focused primarily on medical equipment, obtaining most of its business through brokers. Though it won’t abandon that channel, the rebranded and expanded business, led by veteran lender Fred Van Etten, will take a different approach.

“The big-dollar future is going to be working directly with equipment manufacturers,” Holschbach said.

“What we have with medical equipment is fine, but I wouldn’t want to have five times that volume and be that concentrated in one area," Holschbach added. "We think it will help speed up the growth and also bring some diversification to the lease portfolio.”

For Meta, largely known for its dealings in the payments space, the $321 million purchase of Crestmark Bancorp in Troy, Mich., provides a national lending platform that can leverage the more than $1.3 billion in deposits on its balance sheet. Meta only had $493 million in net loans on Sept. 30.

Crestview has $171 million of equipment finance loans and leases on its books, making up a fifth of total loans at the end of the third quarter. About 60% of the overall loan portfolio consists of asset-based loans.

“With this acquisition, we continue to deliver on our goal of growth and innovation through diversification,” said J. Tyler Haahr, Meta’s chairman and CEO. The acquisition “will allow us to significantly add on-balance sheet loans at attractive yields.”

United also expects to benefit from higher-yielding loans, which will be increasingly important as funding costs rise. A typical loan at Navitas has a yield of 9% to 10% and an average duration of four years.

For Navitas, generating more growth should be easier with a bank's balance sheet backing it. The firm's business model relies heavily on partnerships with equipment manufacturers and dealers. But that model forced the lender to pass on certain deals that were too large for it to handle.

“Our larger balance sheet will enable them” to service larger accounts, Harton said. "That’s meaningful.”

Navitas will also accelerate United’s transformation from the largely rural, commercial real estate lender that existed before the financial crisis to an urban-centric business bank. Navitas represents the company’s first dedicated move into equipment finance, though management had been working on an in-house product.

“Over the past five years, we’ve been very methodically building the company into a more diversified, commercially oriented business focused on metropolitan areas,” Harton said.

“As part of that we needed to build out a commercial product set, which helps us compete in those metro markets and helps diversify the portfolio,” Harton added. “A typical bank’s process isn’t set up for the one- to two-hour approval and same-day close that … I think our customers want."

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