Ordered by regulators to improve capital ratios at its bank unit, First Mariner Bancorp of Baltimore is unloading a consumer finance arm for about half of what it thinks the business is worth.
The $1.5 billion-asset company said Tuesday that it had agreed to sell Mariner Finance LLC for $10.5 million to MF Holdco LLC, a venture controlled by Milestone Partners, a private-equity firm in St. Davids, Pa.
Nine consecutive quarterly net losses, driven by a souring portfolio of alternative-A mortgages, home equity lines and construction loans, have eroded First Mariner's capital base. The Mariner Finance deal, which is expected to close by Dec. 15, would replenish some of that cushion by removing $105 million of assets from the balance sheet.
However, the company said it would book a loss on the sale this quarter of $10 million — almost as much as the proceeds — to reflect the discount to book value.
"That could mean one of two things," said Terry Keating, a managing partner at Amherst Partners LLC, a Chicago investment bank that specializes in advising finance companies. "Either they are so desperate that they have to sell it dirt cheap or their valuation might be aggressive, which is not unheard of. Whatever the reason, for a consumer finance company to sell at that kind of a discount is a real eye-opener."
Dennis Finnegan, First Mariner's executive vice president of banking, said, "It is not the best time to be selling anything, but this is part of the prudent steps we are taking to meet our capital needs."
The company is engaged in a "multitiered chess game" to increase its capital, through outside raises and possibly through internal changes, Finnegan said.
"This is a major first step," he said. "We are also taking this as an opportunity to do a strategic look at our entire business. We want to position ourselves to come out of this not just recapitalized, but rejuvenated."
Despite the expected loss on the sale, analysts approved of the deal, given the company's need to boost capital.
"Their loan mix has left them particularly vulnerable in this economy," said Anthony J. Polini, an analyst with Raymond James & Associates. "This deal gives them two to three quarters to get their arms around everything and allow the bleeding to stop."
At the end of the second quarter, First Mariner's nonperforming assets totaled $62.5 million, or 4.28% of total assets. The nonperformers had increased 28% from a year earlier, though they were down $2.7 million from the first quarter. The resulting credit losses left First Mariner Bank merely adequately capitalized at the end of the second quarter, with a leverage ratio of 5.77% and a total risk-based capital ratio of 8.71%.
The company said the proceeds of the unit sale would go toward helping it comply with a cease-and-desist order issued last month by the Federal Deposit Insurance Corp. and the commissioner of financial regulation for the state of Maryland. Under that order, the bank unit has until June 30 of next year to increase its leverage ratio to 7.5% and its total risk-based capital ratio to 11%.
Edwin F. Hale Sr., First Mariner's chairman and chief executive, said in a press release that the sale would bring its total risk-based capital ratio "close to 10%." Additional capital could come through private or public raises or from the further reduction of assets, he said.
The company would get $8.775 million in cash from Milestone at the closing, along with a 5% share — valued at $675,000 — in the venture. The remaining $1.05 million would be put into an escrow account, with First Mariner receiving half of that after the final determination of the value of Mariner Finance's assets and the rest 18 months after the closing.
Observers said such a lagged payout is standard for a consumer finance transaction.
Keating said the sale is another example of banking companies getting out of ancillary businesses to raise capital.
"This really isn't a core business to them; it is an easy one to cut off," he said. "Banks have to deleverage, and this is just one way to do it."
Finnegan said the deal was "something we elected to do," but Keating said regulators may have encouraged it.
"I think banks are getting pressure to sell nonbank businesses," Keating said. "They are a great business if they are run properly, but generally the borrowers in consumer finance are those that can't get bank credit."