Hoping to capitalize on the departure of competitors, Tennessee Commerce Bancorp of Franklin is stepping up its nationwide business of financing equipment purchases for small companies.
Last month Tennessee Commerce announced a deal with a unit of the Independent Community Bankers of America to sell seasoned equipment loans to members of the trade group that want to diversify their portfolios. The $1.2 billion-asset company has sold $137 million of such loans to other banks over the last four years, and it says expanding the network of buyers will fuel lending.
"We think 2009 will be a challenging year for businesses, but we are positioned to jump into that fray by providing loans to them for growth," said Michael Sapp, Tennessee Commerce's president.
As a result of the deal with the ICBA, "we now have a much broader distribution network," he said. "We've gone from 40 banks to possibly 4,500 banks, and that certainly increases our ability to lend to small businesses."
Analysts called Tennessee Commerce's business plan solid but said investors are worried about its expansion in equipment finance. The company's traditional portfolio — commercial and industrial and commercial real estate loans — also poses problems.
"They have an unusual but highly efficient business model, and it really isn't something that could be easily duplicated," said James Schutz, an analyst at Sterne, Agee & Leach Inc. However, "as with many banks, asset quality is going to be a challenge."
Tennessee Commerce's fourth-quarter earnings rose more than 25% from a year earlier, to a record $2.6 million. In December it received a $30 million infusion from the Treasury Department's Troubled Asset Relief Program; the company has said the money will go toward funding loans this year, when it expects total loans to increase 20%.
This company is different from most in the banking industry. It makes 60% of its loans from its Franklin headquarters — the company's sole banking office — to customers within a 250-mile radius. The rest of the loans come from loan production offices in Birmingham, Ala., Atlanta, and Minneapolis, as well as from the equipment finance business.
In that business, Tennessee Commerce works with a network of leasing agents to help commercial customers finance everything from printing presses to truck fleets. The money is lent to the agents, which buy the equipment and lease it to their customers. Tennessee Commerce considers those customers' financial figures in its underwriting; the equipment serves as collateral for the loans.
Mr. Sapp said there are fewer qualified borrowers than there used to be, though there are also fewer asset-based lenders in the market, so Tennessee Commerce sees an opportunity to use its familiarity with equipment finance to expand.
Doug Rogers, the senior vice president of the company's indirect lending business, said: "This is something we have all grown up with and are very comfortable with."
Tennessee Commerce continues to service the loans after they are sold. Market uncertainty temporarily froze buying demand from other banks in the third quarter, when loan sales dropped 60% from a year earlier, to $3.9 million. But sales picked up again last quarter, rising 2.7% from a year earlier, to $39 million.
The company has already sold one package of performing loans that had been on the books for at least six months to an ICBA member. It said it is expecting more sales after an ICBA conference next month in Phoenix.
Citing the company's stock price, which is roughly half its book value, David Darst, an analyst with First Horizon National Corp.'s FTN Equity Capital Markets Corp., said, "Investors appear to see the company as having too much embedded risk in the balance sheet."
Nonperforming assets more than tripled from a year earlier to $30 million at yearend, or 3.5% of total loans. A $16.6 million loan on an assisted-living facility accounted for much of the increase. The company said that loan is close to being resolved.
Mr. Sapp said Tennessee Commerce is monitoring the equipment finance business more closely. It has raised credit standards and is requiring some borrowers to have deposit relationships with the bank. "That concern is there, and we are focusing on it every day," he said. "But we don't lend them toys. We lend so they can get what is essential to keep their businesses going."