First Mariner Bancorp in Baltimore took a chance on a business line that many other banking companies were exiting when it established its consumer finance unit, Finance Maryland, in 2002.
It has no regrets about starting the unit. Today consumer finance is the $1.4 billion-asset company's fastest-growing lending sector, and it was one reason First Mariner reported record earnings for the first quarter. It is so bullish on the sector that it has opened two more Finance Maryland offices in recent months - it now has 20 - and is eyeing expansion into neighboring states.
Edwin F. Hale Sr., First Mariner's chief executive, said the growth in consumer lending "has been substantially greater than anything we expected."
Though the average loan is small - about $2,500 - the average yield is substantially larger than those on commercial loans or residential and consumer mortgages. And even though small consumer loans are considered more risky than others, First Mariner's credit quality has not suffered. Its first-quarter chargeoffs and nonperforming loans were below industry averages.
Joshua Johnson, Finance Maryland's CEO and a longtime consumer lender in Baltimore, said the key to succeeding in consumer lending is knowing and understanding the clientele.
"These customers are the blue-collar types - those hard-working Americans who like customer service." he said. "And in my opinion, there are special underwriting techniques that should be used to deal with certain customers that may not like a bank or want to go into a bank. It's a unique service."
Many of Finance Maryland's employees, including Mr. Johnson, came from Rose Shanis Financial Services LLC, a Baltimore consumer finance firm that Mason-Dixon Bancshares of Westminster, Md., bought in 1998. BB&T Corp of Winston-Salem, N.C., acquired Mason-Dixon in 1999. Three years later BB&T decided to restructure its consumer finance operations and asked Mr. Johnson to move to Atlanta. He declined and approached Mr. Hale about starting a consumer lending unit for First Mariner.
As of March 31, Finance Maryland had $52 million of loans on its books, or 44% more than it did a year earlier. The majority of its loans are made directly to consumers looking to buy big-ticket items like appliances or jewelry. The interest rates range from about 15% to 30%.
Finance Maryland also offers loans through merchants, such as furniture and electronics dealers.
Many banks steer clear of small consumer loans, which they do not see as worth the effort - or the risk.
Matthew Schultheis, an analyst with Ferris, Baker Watts Inc. in Baltimore, called Finance Maryland a "throwback to the savings banks days," when ultimately it was up to the branch managers to make a lending decisions not based on credit scores.
But Mr. Schultheis also said banks should never enter the consumer finance business without such an experienced staff. "That's the only way to run one of these operations. When banks try to run it themselves, without the right people in place, it's potential for serious disaster."
David Scharf, an analyst with First Horizon National Corp.'s FTN Midwest Research in Memphis, said convenience has also contributed to Finance Maryland's growth.
"Part of the reason they have been growing so much is that they have really been pushing the development of branches," he said.
Mr. Hale said that Finance Maryland opens branches near First Mariner Bank ones whenever possible, to encourage cross-selling and because many First Mariner branches are in working-class neighborhoods - Finance Maryland's target population.
Still, expansion costs money, and First Mariner's overhead is higher than that of most companies its size. Its efficiency ratio at March 31 was 85.08%, compared with the average of about 57% for banks in its asset class, according to the Federal Deposit Insurance Corp.
In fact, while its first-quarter net income rose 21% from a year earlier, to $1.7 million, its earnings per share of 25 cents fell 6 cents below analysts' estimates.
But Mr. Scharf said he is confident that the cost of adding staff and offices will pay off in the long term. "They are investing in the company for future growth."
Mr. Johnson said it is unrealistic to expect Finance Maryland's loan portfolio to keep increasing by 44% a year, though it can grow 20% or more over the next few years.
Finance Maryland has been hiring people from other Middle Atlantic consumer finance companies, and it conducts management training for recent college graduates.
The unit already has four branches in Delaware, operating under the name Finance Delaware. It is looking at moving into the other states that border Maryland, but it will not enter a market until it can find qualified staff, Mr. Johnson said.
"We are looking at states like West Virginia, Virginia, and Pennsylvania in the next year, but where we focus depends on the personnel we can put in place," he said.
Ms. Thompson Osuri, who covered community banks for American Banker from 2000 to 2005, is a freelance writer in Washington
