Before Home Depot Inc. came along, EnerBank USA was a little-known niche lender that had just had its first profitable year.
But now that the retail giant has a deal to buy the $91 million-asset industrial loan company, EnerBank, of Salt Lake City, has suddenly become part of the debate over the mixing of banking and commerce. The debate has attracted widespread attention following Wal-Mart Stores Inc.'s application to charter an industrial loan company in Utah.
Home Depot's application needs the approval of Utah banking regulators and the Federal Deposit Insurance Corp., which is under pressure from community groups and lawmakers to reject the bid. But EnerBank's president, Louise P. Kelly, says that even if the deal falls through she is confident that the company - whose only business is making unsecured installment loans for home improvement projects - can succeed on its own.
"We're thrilled with the way our business model is working now," Ms. Kelly said. "We see a really rosy future for the bank, irrespective of the sale."
EnerBank's loans generally range from $1,000 to $35,000, and are interest- free if they are repaid during a so-called cash-only period, which can be anywhere from three months to a year.
Consumers are either referred to the bank by a contractor or obtain the loans through a contractor approved by EnerBank to issue the loans. EnerBank calls its partners "loan program sponsors."
EnerBank says it has worked with thousands of home improvement contractors to provide financing for consumers on painting, kitchen remodeling, septic-tank work, landscaping, and the like.
"If you can think of it, we probably can finance it when it comes to home improvement," Ms. Kelly said.
EnerBank does not earn interest off the loans if they are repaid during the cash-only period, but it earn does fees from the contractors and loan program sponsors that facilitate the loans. Ms. Kelly would not give details about fees, saying she did not want to reveal them to competitors, but she said they are similar to merchant-discount fees that credit card companies charge. (Those are generally about 2%, according to Visa U.S.A. officials.)
The company also earns fees and interest on loans that are not paid in full by the end of the cash-only period.
At March 31, EnerBank had about $86 million of loans on its books, more than three times what it had two years earlier. Ms. Kelly gave much of the credit to a thriving home improvement industry that shows no signs of slowing down.
"We serve a $300 billion market," she said. "There's a tremendous demand for this product."
EnerBank's roots can be traced to the former Signet Banking Corp. in Richmond Va., where Ms. Kelly had worked since 1979.
In 1995 a large utility company asked Signet to create a short-term loan for customers undertaking home improvement projects. Ms. Kelly and several other Signet employees soon began running the unit.
But when First Union Corp. (now Wachovia Corp.) announced in July 1997 that it was buying Signet, Ms. Kelly resigned. She did not think the Charlotte banking company would continue the business line, she said.
Ms. Kelly and several other former Signet employees ended up at First Maryland Bancorp in Baltimore, where they started a home improvement lending division. But in 1998 First Maryland said it was discontinuing the business line, and gave Ms. Kelly and her team a year to find a buyer. (First Maryland was renamed Allfirst Financial Inc. in 1999 and sold to M&T Bank Corp. of Buffalo in 2002.)
CMS Energy Corp. in Jackson, Mich., bought the business line in 2000. CMS spokesman Don Bishop said in an interview this week that the utility company made the acquisition because "it was a good fit for us."
CMS Energy applied for an industrial loan charter in September 2001, and the bank opened about nine months later.
"The ILC gave us the ability to operate from a central location in Utah and make loans all across the country, and that's what was so appealing to us," Ms. Kelly said.
EnerBank struggled to get off the ground, losing $3 million in its first two and a half years. Ms. Kelly said it had the growing pains that many start-up banks go through.
Last year the company earned $244,000. And while banks across the country have complained about shrinking margins, EnerBank's net interest margin of 8.14% at March 31 was nearly twice that of other banks its size, according to FDIC data.
Credit quality is also improving. EnerBank's ratio of chargeoffs to total loans in the first quarter was 0.64%, versus 0.87% a year earlier and 1.26% in the first quarter of 2004.
Still, because it is exclusively a consumer lender, EnerBank's chargeoff-to-loan ratio is apt to be higher than its peers'. In the first quarter the average ratio for banks with less than $100 million of assets was 0.11%.
Also, because it funds its loans almost exclusively with brokered deposits, its funding costs are much higher than other banks'.
Mr. Bishop said CMS wants to sell EnerBank because it considers it a noncore asset that does not complement its "getting-back-to-basics" strategy. Ninety percent of CMS' assets are in the gas and electricity businesses, he said.
CMS and Home Depot began preliminary talks on a deal in the fall of 2005 and announced one in May of this year. The price was not disclosed.
Jim Stoddart, Home Depot's senior vice president for growth initiatives, said the Atlanta company likes that EnerBank has both an established business in an industry Home Depot understands and a strong management team.
Additionally, he said, EnerBank, by providing consumer financing, helps contractors generate more business. That means they will buy more goods from retailers like Home Depot.
"It's an opportunity to help businesses grow, and that's good for our business," Mr. Stoddart said.
