Baltimore-based First Mariner cuts 2Q loss, but analysts still

First Mariner Bancorp whittled its net loss to less than $1 million for the second quarter, but analysts said Wednesday they were concerned about an increase in nonperforming loans.

The Baltimore-based parent of First Mariner Bank reported a net loss of $469,000, or 7 cents per share, compared to a net loss of $3.9 million, or 60 cents per share, in last year's second quarter. Still, the bank has reported losses for five consecutive quarters, and nonperforming loans ballooned 53 percent over the corresponding quarter in 2007.

"We're very concerned about [nonperforming loans] and we have been for a couple years," said Edwin F. Hale Sr., the bank's chairman and CEO, in a telephone interview Wednesday.

"We're also concerned about the delinquencies mounting up because of the economy, and we're trying to deal with it," he said. "Given our numbers for this quarter, we think that we're dealing with it."

Problems with residential mortgages and construction loans caused the bank's nonperforming loans to mushroom to $48.7 million from $31.9 million in the second quarter of 2007.

"It's much larger than their allowance for loan losses," said Jim Sinegal, an analyst with Morningstar Inc.

The bank's provisions for loan losses remained at $2.5 million, even with the uptick in nonperforming loans. That allowance for loan losses would only cover 30 percent of nonperforming loans, Sinegal said.

"If a lot of those loans turn into losses, they could run into trouble," he said. "For them to be having so many nonperforming loans already, it's definitely going to be tough for them over the next few quarters."

David Scharf, an analyst with FTN Mid West Securities, suggested that the bank might need to turn to outside help in order to cover the balance of loans unaccounted for in its provisions.

"They're going to have to raise some sort of capital in one way or another sometime before the third quarter," he said. "The portfolio deterioration is really going to dictate how much capital they need to raise."

Also at issue for First Mariner is its efficiency ratio, measured by taking the bank's expenditures and dividing by its revenue. Even a decreased efficiency ratio of 98 percent, down from 121 percent in the quarter ended June 30, 2007, reflects a spending problem.

"It's far above what you would expect of a high-quality bank," Sinegal said. "For this bank, any improvement would be good. For a typical bank, under 60 percent is good. Near 100 percent is really high."

Hale said First Mariner has to factor different parts of the company into its efficiency ratio.

"The efficiency ratio is affected by the size of our mortgage company and our finance company, so we're unlike any of our peers," he said. "It's not OK, but it's getting better."

First Mariner will dump two branch locations in Towson and Ocean City in September, and may have plans to axe more this year, but Scharf said the cuts were not deep enough.

"In this kind of economy, you have to take a scalpel out and right-size the franchise," he said. "They just need to find a way to be more efficient."

In a news release, Hale credited the company's diminished net loss to increased revenue and declining losses in the bank's Alt-A loan portfolio. First Mariner has taken a hit on Alt-A residential mortgages, loans given to borrowers with good credit but no documentation of their ability to repay them.

The bank sold the mortgages off for a profit, but had to buy them back when customers defaulted. Losses on the loans dropped to $1.8 million in the second quarter, compared to $2.6 million in the first quarter and $5 million in the fourth quarter of 2007.

First Mariner "took a pretty steep haircut" on the Alt-A loans, which have been written down to about 60 percent of their original value, Scharf said.

"The more concerning thing is the weakness in the other portfolios, which we're experiencing industry-wide; they just seem to be getting hit really hard," he added.

The share price of First Mariner's stock dipped 5.2 percent Wednesday, down 13 cents to $2.36 on the New York Stock Exchange.

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