Please ensure Javascript is enabled for purposes of website accessibility

1st Mariner hurt by dependence on mortgage loans

Recent developments show that 1st Mariner Bank’s years-old challenges have not disappeared, and people who watch the mortgage lending industry closely say current trends in their market do not bode well for banks with too many eggs in that basket.

The bank reported a third-quarter loss this month of $7.4 million, contributing to $11.2 million lost in the first three quarters of 2013. It will close two branches in January, after closing three earlier this year.

First Mariner TowerAnd it continues to operate under a cease and desist order from the Federal Deposit Insurance Corp., issued in September 2009 to address the bank’s low capital levels.

In order to be deemed adequately capitalized, a bank must meet three basic requirements. Based on 1st Mariner’s third-quarter report, it meets only one of them and is undercapitalized in the other two. A bank’s ratio of capital to risk-weighted assets must be at least 8 percent; 1st Mariner’s was 7.2 percent. And unless it’s classed as a very strong bank, its leverage ratio must be 4 percent or higher. 1st Mariner’s was 3.6 percent. The leverage ratio, which compares core assets to total assets, is a tool to help determine the strength of a bank’s capital base.

The bank has struggled for years, as the 2009 order indicates. Much of its business comes from mortgage loans, which, in turn, rely on a favorable housing market and Treasury bond rates.

When long-term Treasury yields increase, investors are attracted to this safest of options. When this happens, mortgage interest rates must increase as well, so this market can compete for investors.

Following the recent financial crisis, the Federal Reserve took measures to lower Treasury bonds’ interest rates. That meant low rates for a time, but when Treasury yields began to increase, mortgage interest rates followed suit — attractive for investors, but not for potential borrowers.

“That [mortgage] market has now turned, and we’re not going to see the same kinds of non-interest income that we saw in the past,” said banking consultant Anita Newcomb, of Columbia-based A.G. Newcomb & Co. “Refinance activity has pretty much dried up.”

For 1st Mariner, an increase in such activity in 2012 was followed by a sharp decrease in 2013, leading to a stark year-over-year income comparison. Gross mortgage banking revenue went from $15.4 million in the third quarter of 2012 to only $548,000 one year later.

1st Mariner CEO Mark A. Keidel noted this cause in the explanation of the company’s third-quarter results.

“A lot of it depends on how big a role mortgage happens to play,” said Dennis Finnegan, 1st Mariner’s vice president of retail banking. “You basically deal with it just like newspapers deal with online readers versus hard copy readers. It’s a long-term strategy.”

The bank could not comment further on its strategy for the future. It attributed its decision to close its branches in Easton and Arbutus to the increased popularity of online banking.

While struggles in the mortgage market are not unique to 1st Mariner, the bank’s business structure and recent losses create an additional impediment, said Bert Ely of Virginia-based Ely & Company Inc., an expert in deposit insurance and banking structures who watches the bank.

“It’s a situation that’s been dragging on for years now,” said Ely. “What are the regulators going to do? How much longer are they going to let this drag on?”

Although the company’s capital ratios remain above the “significantly undercapitalized” levels, the FDIC ordered “adequate” levels in the cease and desist four years ago. 1st Mariner has experienced increased insurance premium costs from the FDIC — $3.35 million in the first three quarters of 2013, compared to $3.13 million in the first three quarters of 2012. In the first three quarters of 2008, the company paid $563,000 in insurance premiums.

Keidel addressed the order in the third-quarter release, saying that the company is exploring ways to grow capital. In the third quarter of 2013, it put $656,000 into professional services related to regulatory compliance, loan workouts and increasing capital, compared to $973,000 in third quarter 2012.

And recent losses may further impede those money-raising efforts, said Ely.

“They have not been able to create and execute a viable business model that is not heavily dependent on mortgage banking income,” he said. “The tide’s gone out, and we see that they’re kind of naked.”