Hale tries to weather real estate downturn

May 07, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

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.

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