The future of Ed Hale's 1st Mariner Bank is in doubt. But the 1st Mariner idea — a substantial, Baltimore-based bank — should live on, whether in 1st Mariner or some other banking company.
Baltimore needs a locally based bank with at least $1 billion in assets as much as ever.
Last week, 1st Mariner issued a report warning of "substantial doubt" about its ability to "continue as a going concern." While it's paying its bills and customers are covered by federal deposit insurance, the bank's capital levels are below what regulators would like.
If Hale can't raise capital or there isn't a major turnaround in 1st Mariner's profits, the bank is in danger of being seized by the government and forced to merge with another bank. The buyer could well be one of the "big, out-of-town banks" that Hale has railed against since founding 1st Mariner in the 1990s.
After the disappearance in the past two decades of Maryland National, Bank of Baltimore, Allfirst, Mercantile and most recently Provident, 1st Mariner was supposed to fill the void. It was supposed to prosper through promotion of its local management, through better service to retail customers and, above all, through knowing borrowers better than the banks based in Charlotte, N.C., or Buffalo, N.Y.
But 1st Mariner broke its own rule. It became the out-of-town bank when it started writing mortgages in Northern Virginia at the height of the housing bubble. In retrospect, it's obvious that 1st Mariner's foray across the Potomac epitomized housing craziness, but it wasn't obvious at the time.
Making loans in a market it didn't know, the bank immediately flipped them to Bear Stearns, which lovingly wrapped them into bundles of future toxic assets. In a feature Hale has said was unknown to him, Bear Stearns had an option to shove the loans back to 1st Mariner if they went bad within 90 days of issue. Which many did.
But Virginia was only the beginning of the problems for Hale, a former trucking executive from Highlandtown proud of his blue-collar roots. The bank's net losses have continued unabated since 2007, with a $27.2 million pretax loss on continuing operations for 2010. That's more than twice as much as 1st Mariner raised last year from a common stock offering in one of many efforts to raise capital.
The recent problems aren't mainly out of state, where management could blame a rogue branch office. They're in 1st Mariner's own territory, and they're not just related to residential mortgages. And they're not over. At the end of last year, 1st Mariner listed a painful $27 million in "nonperforming" commercial mortgage loans and an additional $8 million in commercial construction loans.
Like many banks, 1st Mariner is refinancing mortgages like crazy. It collected $17 million last year in mortgage-related fees. But it needs existing borrowers to stop missing their payments.
While the bank's capital ratios are technically "adequate" for regulatory purposes, it missed the June 2010 deadline for boosting them to levels agreed to in a deal with the Federal Deposit Insurance Corp.
Hale's best chance of getting capital is an infusion from a big, private-equity investor. He needs $37.6 million just to hit the regulatory targets and millions more to be safe.
"We are working to get this bank on proper capital footing by continuing to try to raise capital," he told The Baltimore Sun last week.
But he'll have a challenging time doing that until 1st Mariner can show it has stanched the losses. He'll also face a challenge in maintaining his status as Mr. Mariner if he is successful in getting investment. Shares issued to new investors would dilute present shareholders, including Hale.
It's hard to predict the fate of 1st Mariner's stock, but the outlook isn't positive. Last year, the company's shareholder equity declined from $27 million to $4 million. At Monday's closing price of 49 cents, people who bought last year's offering at $1.15 have lost half of their stake.
The new investors might want their own CEO and might bring their own philosophy. They might not have the same Baltimore focus as Hale.
That would be too bad. Whatever its execution, 1st Mariner's idea of a Baltimore bank bigger than the community banks and the thrifts but smaller than the giants was a good one.
Other Maryland banking companies — Columbia Bank, Sandy Spring Bank — are similar to 1st Mariner in size. But they're mainly doing the Baltimore-Washington corridor, suburban thing. 1st Mariner, on the other hand, has branches in Dundalk and Arbutus, as well as Cockeysville and Columbia.
Whatever comes of Hale's attempt to build the next major Baltimore bank, the opportunity is still there.