First Mariner to defer payouts

Baltimore firm acts to conserve cash

December 30, 2008|By Andrea K. Walker | Andrea K. Walker,andrea.walker@baltsun.com

First Mariner Bancorp, which has been rapidly losing money because of bad mortgage loans and the economic downturn, is deferring millions of dollars in interest payments on some of its unsecured debt in an effort to preserve needed capital.

The Baltimore company, which owns 1st Mariner Bank, said in a filing with the Securities and Exchange Commission late on Christmas Eve that it is deferring interest payments on $73.7 million in debt issued by seven trust subsidiaries. First Mariner has paid $4.6 million in interest on the debt this year.

First Mariner is allowed to defer interest payments for up to 20 quarters under terms of the trust agreements, so it is not defaulting on a current debt. But analysts said the company's decision to exercise that option is a sign of how deeply it is hurting.

"This is a company that is in trouble," said Bert Ely, a banking analyst with Ely & Co. in Virginia. "What they are trying to do is to conserve cash."

First Mariner, with about $1.28 billion in assets, is the second-largest bank based in the Baltimore area after Provident Bankshares, which is being sold to M&T Bancorp. First Mariner's chairman and chief executive, Edwin F. Hale Sr., also is the developer of Canton Crossing, chairman of the Baltimore Area Convention and Visitors Association and owner of the Baltimore Blast professional soccer team.

In a statement, the company said it "has elected to pursue this course as a prudent response to uncertain and unprecedented conditions affecting the economy and the financial sector."

The decision to stop payments was made to conserve capital, the statement said. It noted that interest would continue to be paid on deposits at 1st Mariner Bank.

In good times, the holding company would use money from the banking operation to pay down its debt. But because the bank has been losing money, the holding company has been using money from its cash reserves to make the interest payments. The company will now conserve cash by not making the interest payments, said P. Bundy Carter, an analyst with Stifel Nicolaus.

First Mariner's stock fell more than 18 percent Friday and by 8 percent yesterday, closing at 56 cents.

Carter said he knew the market probably was not going to respond well to the interest deferral, but the company needed to do something to bolster its capital position. He predicted that the holding company would funnel some of the preserved cash to the banking operation.

"I think that it is a logical move," Carter said in a phone interview yesterday. "They need to be concerned about capital right now."

Carter warned in an analyst note in October about what he called the bank's declining capital ratios and lowered his share recommendation from "hold" to "sell." The company's second-quarter total risk-based capital ratio declined to 13.5 percent from 14.2 percent in the second quarter, according to the note. Carter said the company could sell Mariner Finance, the company's consumer finance arm, or other assets, or funnel some investments from the finance company to the bank.

First Mariner lost $2.28 million in the third quarter, more than four times the company's second-quarter loss of $469,000.

The company's nonperforming assets in the quarter rose to $55.7 million, up from $36.4 million a year earlier. Nonperforming assets accounted for 4.36 percent of total assets.

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