It has been a challenging year for community banking companies, but most can take comfort at least in the fact that they have little or no exposure to subprime mortgages.
One of the exceptions is First Mariner Bancorp, which has been swamped by waves of delinquencies on high-loan-to-value loans originated by its mortgage unit.
Since early this year the $1.2 billion-asset Baltimore company has been forced to buy back scores of alternative-A loans it packaged and sold to the secondary markets after borrowers fell behind on their payments, and the damage has been significant.
In the first three quarters of the year First Mariner lost $7.3 million after earning $5.9 million in the same period last year. Its stock, which has dropped more than 64% this year, is hovering near a six-year low and trading below its book value.
In its third-quarter earnings report released last month, First Mariner focused on the positive, noting that it shuttered its warehouse mortgage lending unit in July and bought back "significantly" fewer alt-A loans in the third quarter than it did in the second quarter.
"We believe we are near, if not at the end, of our repurchase exposure for alt-A loans originated by our wholesale division," Edwin F. Hale Sr., First Mariner's chairman and chief executive officer, said in a press release. (He did not return calls for comment.)
Analysts, however, say they are concerned that the worst may not be over, since loans that are delinquent today could be chargeoffs tomorrow. First Mariner's third-quarter chargeoffs climbed 713% from a year earlier, to $3 million, and nonperforming assets rose 551%, to $36.4 million.
"Not only does First Mariner have to take the loan back and reverse the gain they recognized when they sold the loan, [but] they may now have to charge off the loan, because the borrower is not paying," said Avi J. Barak, an analyst with Sandler O'Neill & Partners LP.
First Mariner is not the only community banking company that has suffered subprime-related losses. OceanFirst Financial Corp. of Toms River, N.J., lost $5.4 million in the first quarter after it was forced to repurchase high-loan-to-value loans its Columbia Home Loans LLC began originating early last year. The $1.9 billion-asset OceanFirst closed the Valhalla, N.Y., mortgage unit last quarter but has retained its servicing portfolio.
By and large, community bankers' exposure to subprime mortgages has been minimal. Their earnings woes this year can be traced instead to competition, a relatively flat yield curve, and overbuilding that has swelled inventories and depressed real estate values in many markets.
Many of the loans First Mariner repurchased were originated last year and sold quickly to secondary buyers. Frequently, the sales contracts included "putback" provisions that allowed the secondary buyers to return the loans if the borrowers fell behind on payments within the first 90 days. In some cases, analysts said, the borrowers did not make the first payment.
Matthew C. Schultheis, an analyst with Ferris, Baker Watts Inc., said that First Mariner had been marketing alt-A loans aggressively, because borrowers were demanding them.
"You either provide the market the product the market is demanding, or you don't make loans, and they decided to make loans," he said. "In that decision, you're making a distinct business decision that you're willing to accept more risk."
Mr. Barak said that one of the problems with the loans was that they were made outside First Mariner's market area.
"It's OK if this stuff happens in your footprint, but the fact that they're headquartered in Baltimore and they're originating" in placed such as Florida and northern Virginia "bothers a lot of bank investors," he said.
Other analysts said it also originated loans in the Carolinas.
But Mr. Barak also said First Mariner is doing what it needs to "shore up" its operations. "They're buying the stuff back. They're putting money aside for reserves. There's not much more than they can do at this point. The damage is pretty much done."
David B. Scharf, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp., said that the company should consider selling itself.
"I think ultimately for shareholders to actually get any value out of the company, they're going to have to sell it," he said. "They do have a good deposit franchise, and that would be of value to someone … looking to get into Baltimore."
However, he and other analysts said a sale would be difficult without the blessing of Mr. Hale, who owns about 20% of First Mariner's shares.
"I view him as someone who's going to try to hold on to this as long as possible," Mr. Schultheis said. "He can dictate a lot of what happens, and I think overall you're not looking at a guy who's trying to sell the thing."
