October 14, 2009|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com
In an effort to raise money to comply with the requirements of intense federal supervision, Baltimore's 1st Mariner Bank said Tuesday it sold 95 percent of its consumer finance unit to a private equity firm for $10.5 million.
The sale was the bank's "first and major step" in increasing its capital, Chairman and CEO Edwin F. Hale Sr. said in a statement. But the sale's proceeds are only about half of what the company has said it needs between now and July to meet targets established by regulators.
Last month, federal and state regulators ordered the bank to improve its capital and deal with problem loans. The "cease-and-desist" order sets deadlines and benchmarks on capital levels for the bank, which had been struggling to raise cash.
The bank, which is Baltimore's largest independent bank, must have a "Tier 1" leverage capital ratio of at least 7.5 percent and a total risk capital ratio of at least 11 percent by June 30, 2010.
The bank had a Tier 1 leverage capital ratio of 5.77 percent and a total risk capital ratio of 8.7 percent as of June 30, according to regulatory filings.
1st Mariner shares rose 4 cents to close at $1.26 Tuesday.
"The sale of Mariner Finance is one part of our comprehensive strategy to narrow our focus on 1st Mariner Bank's enormous opportunities as Baltimore's largest independent bank," Hale said, noting that the deal brings the bank's risk capital ratio close to 10 percent. The bank continues to pursue other ways to raise money through public and private markets, as well as balance sheet management, he added.
Anthony Polini, an analyst at Raymond James & Associates in New York, said the key for 1st Mariner will be whether it can reduce problem loans and improve credit quality, even as losses are expected for the next two or three quarters.
"If you have a couple of quarters where credit quality is starting to move into the right direction, it may be easier to raise money," he said, noting that he expects to see improvements. "It certainly buys them another two or three quarters without any regulatory intervention, so to speak."
Polini said the bank could consider several options to raise cash, including a private placement capital offering or turning to its insiders for money.
Under the sale transaction, 1st Mariner will transfer all of its equity interest in Mariner Finance LLC to MF Raven Holdings Inc., a joint venture between the bank and MF Holdco, a limited liability company sponsored by private equity firm Milestone Partners. In exchange, 1st Mariner will receive 5 percent of MF Raven's common stock, valued at $675,000, and $9.825 million in cash.
1st Mariner's consumer loan business generates $3 million to $4 million in pre-tax profit annually, according to Hale. He said in a previous interview that he wished he didn't have to sell what he called a "wonderful business."
But the $10.5 million price for the unit is about half of what banking analysts thought it was worth six months ago.
Operations at Mariner Finance will continue under its current name and no significant changes are expected in management, staff or products. It has branches in Maryland, New Jersey, Pennsylvania, Delaware, Tennessee and Virginia.
The deal is expected to close by Dec. 15 and requires certain approvals from Mariner Finance's lenders and some government agencies.
The bank said it expects to take a $10 million pretax loss on the sale in the quarter that the deal closes.
Separately from the bank's troubles, Hale is also trying to avoid foreclosure of the bank's headquarters, 1st Mariner Tower in Canton Crossing.
