Edwin F. Hale Sr. stood before a few dozen shareholders and board members of his First Mariner Bank at its annual meeting last week, biting his lip.
The brash former ironworker, who has enjoyed tweaking the city's elite in his rise from blue collar to boardroom, usually delights in the spotlight. But not on this occasion.
"We've taken our lumps," Hale acknowledged. "Hopefully, this will be the end of it."
It was a humbling moment for Hale. First Mariner, the base of his empire, is struggling after a series of bad loans, even as Hale looks to expand his proposed Canton real estate development into a city unto its own and to build a new arena for his Baltimore Blast pro soccer team.
First Mariner lost nearly $4 million in the fourth quarter and barely made money in the most recent quarter. Its stock has dropped more than 30 percent in the past six months.
Some of First Mariner's problems are the same faced by the banking industry in general amid a real estate crunch. Others have been of the bank's making.
Nonetheless, Hale dreams big. He is confident that 12-year-old First Mariner, the state's third-largest independent bank, is in solid financial shape, and he vows that it is not for sale.
"I'm not going to shy away from it," Hale said in an interview at the bank's headquarters the day after the annual meeting. "Did we have a tough year? Yes, and I'm going to talk about it. When we have a good year, I like to talk about that, too. I have a lot of pride in what we do, and the people here do, too."
"There were a lot of houses on the market, and people were making all kinds of crazy loans," he added. "I'm not saying we made crazy loans, but some people were unable to make payments."
Hale's fortunes are closely tied to the bank, and its future could determine his.
Hale owns one-fifth of First Mariner's stock, worth $18.3 million. The bank is one of the largest tenants in the first building erected in his mini-city called Canton Crossing, and it has extended a $363,000 letter of credit to his development company. The bank also sponsors the Blast and pays for the naming rights on the city-owned 1st Mariner Arena, where the team now plays.
For the record, Hale says he wasn't nervous in front of his shareholders. Biting his lip is a bad habit he picked up from his father, not a sign of worry, he says. But he allows that he might have appeared on edge because he was raring for a fight. A dissident shareholder had proposed that Hale limit his management role to either chairman or CEO to avoid conflicts of interest.
The proposal, on the ballot for the sixth year in a row, fell short of a majority, and no one brought it up when Hale opened the floor for questions. Hale won again.
Many banks have seen declining profits in recent quarters as the spread narrows between the money they make on loans and what they pay to get and keep deposits. As many housing markets slump, an increasing number of borrowers are defaulting on high-cost or adjustable-rate loans.
Industry-wide, during the final quarter of last year, the pace of loan-making was the slowest in five years and past-due loans had their biggest increase in six years, according to the Federal Deposit Insurance Corp.
At the end of March, First Mariner had $40 million in problem loans where borrowers are delinquent or in default. That is more than 4 percent of the loan portfolio, which compares with less than 1 percent for the industry.
"In two words: not good," said Matthew C. Schultheis, an analyst with Ferris Baker Watts who has a "neutral" rating on First Mariner's stock, meaning he's not telling investors to sell the stock, nor is he recommending they buy it. "The bank has a good deposit base in a good city with good demographics and reasonable growth rates," he said. "But with the credit problems and the morass that creates, I'm certainly apprehensive."
A few years ago, when the housing boom seemed unabated, Hale decided to get into a type of second mortgage that many borrowers take out when buying a home because they can't afford the standard 20 percent down payment. First Mariner would package those loans and sell them in bulk to Wall Street firms.
But the bank, unbeknownst to loan officers, was lending to investors looking to profit from rising home prices, according to Hale. Many apparently lied on their applications by saying the loan was for their primary residence to get a lower rate, he said.
When the housing market slowed, especially in Northern Virginia, borrowers began to miss payments. Investor borrowers defaulted because they couldn't sell the homes at a profit. That was a problem for First Mariner because their deals with Wall Street included "buyer's remorse" clauses that allowed the firms to send the loans back.
Hale says the bank is considering bringing cases alleging fraud against the investor borrowers.
First Mariner has since curtailed mortgage operations in Northern Virginia. It is also negotiating with Wall Street, trying to get firms to limit recourse provisions.
The bank has felt the ripple effects from the real estate downturn on the commercial side as well. In one of the largest defaults, an Ocean City condo developer couldn't keep up payments on a $10 million loan. Hale said First Mariner has taken the property and is selling the condos. He said the bank will get paid "in full" for many of the bad commercial loans because they were secured with property as collateral.
The bank also is wrestling with expenses, which Schultheis said "appeared to be growing unchecked." Part of the rise can be attributed to the higher rent First Mariner began paying to Hale when the bank moved its executive offices into the new, 17-story tower at Canton Crossing last year. That space costs about $30 a square foot, or roughly one-third more than the average rent on premier office space in Baltimore. Hale lives in the penthouse as the tower's only resident.
Glass Lewis & Co., an advisory firm on corporate governance matters, said in a recent report that Hale's personal business dealings with the bank could create conflicts.
"The company's decision regarding where to turn for the best business opportunities may be compromised when doing business with one of the company's directors," the report said.
Hale dismissed those concerns and said the inside deals have been disclosed for years and examined regularly by banking regulators. The bank moved because it needed room to grow, and the new tower is worth the rent, he said. Amenities include waterfront views, quick access to Interstate 95 and security.
"You walk out of the door and turn in the wrong direction, you get beat up, and that's just the pure fact of life," he said of downtown locales.
At 60 years old, Hale is trim and tough - he recently underwent shoulder surgery and to win a $1 bet from a friend attended a Lynyrd Skynyrd concert the next day. His offices offer an expansive view of Baltimore's skyline. Behind his desk: a framed photo of the self-proclaimed redneck comedian known as Larry the Cable Guy.
A prolific political donor, he spent the evening before his shareholders' meeting hanging out with Gov. Martin O'Malley at an Irish pub in Annapolis.
Once Canton Crossing is complete, Hale said it would be two to three times larger than the original blueprint he drew up more than five years ago. He plans to break ground soon on a 500-unit condominium complex and expand retail space. He said he met Thursday with a big-name retailer about moving into the complex, but he wouldn't give more details.
Hale also said he's begun talks to buy land near the development to build the new arena that he would own along with other public- and private-sector investors. The downtown arena was built in the 1960s and needs costly improvements to its electrical and plumbing systems.
Hale, a former owner of trucking and barge operations, got into banking when recruited by upset shareholders to take over the Bank of Baltimore in the early 1990s. When he started his own bank, he took on many loans rejected by big banks. First Mariner is still one of the largest urban lenders around, but Hale said he has become "a bit more conservative" about lending.
"It's very difficult when you're a Baltimore guy who was born, raised and lives here to turn somebody down for some project that they feel is the most wonderful thing, and you can't make the loan because it doesn't make business sense," he said.
This year, Hale received angry mail when First Mariner initiated foreclosure proceedings against the Senator Theatre.
But theater owner Thomas A. Kiefaber says Hale was misunderstood and that the bank was doing what it had to do. Kiefaber had missed several payments on the $1.2 million mortgage. The incident caused a furor among residents who feared a new owner would raze the historic theater. They raised more than $100,000 to restore the loan.
"There was the allusion to It's a Wonderful Life," Kiefaber said. "But if we were the Baileys, does that make Ed Hale Mr. Potter? No."
By some measures, First Mariner is expanding. Deposits are nearing $1 billion, and Hale has built a successful consumer finance division, a business few banks are willing to enter because it involves a high volume of small personal loans. The bank recently bought four branches of the People's Mortgage Corp. in Maryland, Massachusetts and Connecticut.
Corbyn Investment Management, a money manager in Lutherville, recently bought First Mariner stock. Michael J. Fusting, co-chief investment officer, said the bank is putting its loan problems behind it and has room for growth as other local institutions such as Mercantile Bank are sold to out-of-state acquirers.
"At this point, of course, you never know what the future holds," he said. "They've got more nonperforming loans than the average bank; we just don't think it's going to spin out of control."
laura.smitherman@baltsun.com