Hale can bank on facing tough questions at his first stockholders meeting Hoped-for changes haven't come at Baltimore Bancorp

THE BALTIMORE SUN

On Wednesday, when Edwin F. Hale Sr. presides over his first annual stockholders meeting as chairman of Baltimore Bancorp, the self-admitted tough-guy owner of shipping interests and the Baltimore Blast is likely to face some difficult questions.

Why does the $3.2 billion Baltimore Bancorp, Maryland's fifth-largest banking company, continue to underperform other banks of its size? Why have several directors resigned from the board in recent months? Why is the company suing its former attorneys? And can the company shrink its large portfolio of problem assets?

Tough questions, perhaps. But the company's primary concern is more basic: raising its proportion of capital to assets. By the end of this year, Baltimore Bancorp must raise a key capital ratio by almost 25 percent, either by raising new capital or reducing assets -- or both. The alternative is possible action by federal regulators, including perhaps a forced downsizing that could require the sale of profitable assets.

Mr. Hale and his advisers say they didn't know when they took over the company in September was how weak the assets were. In the third quarter last year, non-performing assets -- which include loans that are not being repaid and foreclosed properties -- more than tripled from the previous quarter as the new management came in and attempted to wipe the books clean of troubling loans.

Harry L. Robinson, the former chairman who was ousted in June, has another view of recent events. "You do make loans, but you have to manage them as well. That's the key," he said in an interview Friday. "I had been there for 44 years and the bank was profitable in every one of those 44 years."

Still, the new management increased the level of assets considered non-performing by almost $155 million in the third quarter, to $222.1 million. Largely because of reserves set aside for the problem loans, Baltimore Bancorp wound up reporting a $101.5 million loss for 1991. And that figure was boosted by 25 percent in March when the Federal Deposit Insurance Corp. ordered that more loans be written off and more reserves set aside to cover future losses.

At the end of last year, the amount of non-performing loans was equal to 8.2 percent of Baltimore Bancorp's total loans. That was almost twice the average level of all banks in Maryland, Virginia and Washington at that time, and more than two times the national average of 3.69 percent, according to Sheshunoff Information Services Inc. of Austin, Texas.

"It was a little bit worse than we expected it to be," said chief financial officer Joseph A. Cicero, who joined the company in January from Washington's Perpetual Savings Bank. "And it got geometrically worse as things continued."

The stock price has also suffered. After peaking at above $11 a share between the time Mr. Robinson resigned and Mr. Hale replaced him last year, the stock declined to half that amount. It rebounded somewhat earlier this year and closed Friday at $5.875 a share.

Some analysts are still concerned about the amount of reserves that have been set aside to cover losses from loans. Reserves are less than half the value of loans classified as non-performing, contrasted with about 75 percent for MNC Financial Inc. and its subsidiary banks, Maryland National and American Security. "And people question whether MNC is adequately reserved," said David Penn, banking analyst for Legg Mason Inc.

Lisa Todaro, an analyst at SNL Securities in Richmond, noted that Baltimore Bancorp's ratio of reserves to non-performing assets was little more than half the national average at the end of the year.

But John Bailey, a Ferris, Baker Watts analyst in Washington, pointed out that company managers say all previously identified problem loans have been written off the books, which, he said, "makes their reserve level seem a little bit stronger than it would otherwise appear."

Mr. Bailey said one thing investors will want to see is whether the company can begin to diminish its level of non-performing assets, either by renegotiating loans or selling foreclosed properties. "They need to show themselves to be capable workout people as well," he said.

To reduce the amount of troubled assets, unchanged on March 31 from the year-end level of about $237 million, the company has created two sets of workout teams: a four-person squad working on the $68 million of foreclosed real estate -- most of it office buildings, hotels and shopping centers in the Baltimore-Washington area -- and an eight-person staff to handle the soured loans.

Once a month a five-member "watch list committee," meets for )) three days with most of the company's top managers to go over every troubled asset on the books, according to Charles H. "Buck" Whittum Jr., a retired executive vice president from Signet Banking Corp. whom Mr. Hale enlisted in the proxy fight. He said he's involved with the negotiations over every loan restructuring, a process that takes about a third of his time.

The rest is devoted to determining assets to be sold, searching for ways to cut expenses, and looking for new areas of profitability. The first, and easiest, way to produce profits is to improve net interest margins, Mr. Cicero pointed out.

Baltimore Bancorp has about $450 million of high-cost brokered deposits that pay about 8 percent a year, on average, to help fund the company's growth in the late 1980s decade. The company will pay them off as they mature this year by liquidating the $270 million in short-term investments it holds, and applying the proceeds of selected asset sales.

While most of the former executive officers have been fired, the rest of the company's more than 1,200 employees have been spared, according to Mr. Whittum. If the profitability analysis targets some branches or departments as money losers, however, that record may not last. Finally, Mr. Whittum said, the company expects to earn money by lending at least $750 million in home mortgages this year, compared with about $360 million last year. He said the company isn't lowering rates to attract the mortgages, but that the mortgage production staff has been expanded to attract new customers.

Shifting assets off the balance sheet and raising home mortgage money is fine for the short term, Mr. Bailey at Ferris, Baker Watts noted, and it probably will allow the company to meet its capital requirements absent another sharp downturn in the real estate market. But at some point, Baltimore Bancorp, with 51 Bank of Baltimore branches, must make more of a splash in commercial banking, he said, if it ever hopes to leave behind the lackluster image (and profits) of a savings and loan in bank's clothing.

At the end of March, only 10 percent of the company's loan portfolio was devoted to commercial lending. A whopping 40 percent of the loans were for commercial mortgages and real estate construction, both commercial and residential. Residential mortgage loans made up 27.5 percent of the portfolio and consumer loans accounted for the rest.

Baltimore Bancorp officers are less precise about how they plan to win over the region's small businesses. The bank is targeting companies of $50 million or less in sales, who need loans of about $500,000 to $2 million.

One factor in whether Baltimore Bancorp will be able to compete effectively as a commercial lender is the confidence it can generate in the business community. Mr. Cicero said he believes another two or three profitable quarters will be enough to dismiss any fears.

Any recent good news, however, has been clouded by a lawsuit Mr. Hale filed against his former attorneys last month, and by the messy resignations of five of the directors who had helped oust Mr. Robinson. Three of them said in public filings they were forced out by the rest of the board.

And according to the resignation letter of J. Richard Leon, one of the five former directors, Mr. Hale was surrounding himself with a board "which routinely approves management decisions without the necessary information to exercise an independent and informed judgment."

The new controversies worry some of the shareholders, who said they plan to meet with management Wednesday morning before the annual meeting.

"I have alerted them to the fact that on May 20 we are going to ask some very pointed, direct questions about this shake-up," namely why the directors left and whether their complaints held any water," said Ina M. McGuiness, a staffer with the Investor Responsibility Research Center in Washington who chairs the stockholders' advisory committee.

Looking ahead, Mr. Hale repeats past statements that he didn't wage the bruising takeover battle to turn around and sell the company but would entertain any reasonable purchase offers. However, he said he hasn't received a single call and doesn't expect one for many months -- not until the problem loans go away and the capital ratios improve.

But if the stock were to double to about $11 over coming months and if someone were to offer, say, $17 a share, would he turn them down?

Not a chance, he said, not after witnessing the fate of his predecessor. "I got religion. You kiddin' me?"

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