Heartland Financial USA (HTLF) is hoping to generate more greenbacks by financing energy efficiency projects.
The Dubuque, Iowa, company is working with BluePath Finance in San Francisco to provide funding for energy-efficient projects by commercial and industrial companies, as well as efforts in the nonprofit groups and governmental agencies.
A slow economy and artificially low interest rates have forced banks to find new ways to boost their bottom lines. Many are selling new products to existing customers, lending to small businesses or focusing on niche markets. Heartland's effort touches on all of those methods. The $4.6 billion-asset company is also looking to tap into an area that is ripe for growth, industry observers say.
"It's another arrow in our quiver in how we approach our customers," says John Schmidt, Heartland's chief financial officer and chief operating officer. "We want our customers to be more successful. This is one of the tools that can help them achieve that."
BluePath works with companies that perform energy audits of businesses, municipalities, hospitals, and other groups. If an audit unearths ways to improve energy efficiency, BluePath will provide the capital to get the work done. Heartland's banks will provide loans to BluePath so it can fund the projects.
Heartland also bought a minority stake in BluePath for an undisclosed amount.
"We can get deals done quickly," says Warren Jones, a former investment banker and BluePath's chief executive. "There's a dedicated source of capital rather than being worried about where the next project dollar comes from. From Heartland's end, they put their money to work but also we help them understand energy projects. We help them diversify their investment portfolio."
Banks were once reluctant to fund energy efficiency projects, but they are warming up to the idea, says Angela Ferrante, director of alternative energy solutions at Energi. Private equity has already started managing funds for these types of deals, she says.
Banks face several challenges with efficiency lending, including questions over what can be used as collateral, Ferrante says. Loans for renewable energy projects, such as solar panels, are relatively straightforward. Banks use the equipment as collateral. But in the case of efficiency projects, the upgrade "becomes part of the building," she says.
Businesses typically apply for a commercial real estate loan or use a building's existing equity to fund big efficient projects, says Bill Peterson, chief credit officer at New Resource Bank in San Francisco. Falling real estate values have made it more difficult to fund projects that way, he says.
Instead companies may focus on smaller upgrades funded with shorter-term equipment loans. This means that there are fewer upgrades that can pay off quickly enough to make the deals worthwhile, Peterson says.
About 80% of BluePath's deals focus on upgrading lighting and heating/air conditioning, Jones says. BluePath services the loans, which usually have five-year durations. It structures deals so that the monthly financing costs for the clients are less than what they are saving from the upgrades.
"If you are only financing for five years, there are few improvements other than lighting that can pay for itself within that time," Peterson says. "Most of them take 10 to 15 years or even 20 years. That is the challenge for the financing industry."
Most businesses that could benefit from energy-efficient upgrades are smaller firms, Peterson says.
Heartland touts the relationship as a way to reach small businesses. BluePath mainly targets groups with annual energy bills of at least $100,000, or those with 100,000 square feet of office space.
Heartland expects the BluePath agreement to bring in new customers and deepen ties with existing clients. BluePath executives have visited Heartland's banks, where they were introduced to customers who might be interested in energy efficiency efforts.
BluePath has identified areas such as municipalities, universities and hospitals as pipelines for Heartland. BluePath has the capacity to fund $150 million of projects in the next few years, with transactions generally ranging from $100,000 to $5 million.
Heartland is "still in the infancy of building a pipeline" for the loans, but the prospective loans it has reviewed so far "are very good and with solid companies," says Ken Erickson, the company's chief credit officer. The first installation should receive funding later this month.
Heartland has "seen pretty strong growth in various markets over the past year" and has focused recently on acquisitions, says Daniel Cardenas, an analyst at Raymond James. Last year, Heartland bought Heritage Bank in Phoenix and First Shares in Platteville, Wis.
Heartland has also been "looking for organic growth opportunities, so this is another piece of their strategy," Cardenas says. "It may not be a huge growth area, but it could be a good niche market they explore."
Energi, which provides risk management and insurance for the energy sector, is working with several banks on funding energy-efficient projects and expects this to increase, Ferrante says.
Energy efficiency should gain traction in the next decade, as businesses and other organizations look to become more energy independent, Peterson says.
"I think it will be learning process" for banks, Peterson says. "As the economy improves and properties appreciate . . . more traditional financing will become available again. But that could be a little bit of a wait, and there's the need for the financing now. Innovating banks will make it work."