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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 333-16011
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FIRST MARINER BANCORP
(Name of small business issuer in its charter)
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<S> <C>
MARYLAND 52-1834860
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BALTIMORE, MARYLAND 21224
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number (410) 342-2600
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.05 PER SHARE
(Title of Class)
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Check whether the issuer(1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90 days. Yes
/X/ No / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were $7,810,388.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997 was $37,593,734.
The number of shares outstanding of the registrant's common stock, as of
March 1, 1997, was 2,837,263 shares.
DOCUMENTS INCORPORATED BY REFERENCE
First Mariner Bancorp's definitive Proxy Statement dated April 11, 1997 for the
1997 annual meeting of shareholders--Part III.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES / / NO /X/
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FIRST MARINER BANCORP
ANNUAL REPORT ON FORM 10-KSB
DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
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PAGE
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Item 1 Description of Business......................................................................... 1
Item 2 Description of Property......................................................................... 11
Item 3 Legal Proceedings............................................................................... 12
Item 4 Submission of Matters to a Vote of Security Holders............................................. 12
PART II
Item 5 Market for Common Stock and Related Stockholder Matters......................................... 13
Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
Item 7 Financial Statements............................................................................ 26
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 26
PART III
Item 9 Directors and Executive Officers of the Registrant.............................................. 48
Item 10 Executive Compensation.......................................................................... 48
Item 11 Security Ownership of Certain Beneficial Owners and Management.................................. 48
Item 12 Certain Relationships and Related Transactions.................................................. 48
Item 13 Exhibits, Lists and Reports on Form 8-K......................................................... 48
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FORWARD-LOOKING STATEMENTS
Part I and Part II of this Annual Report on Form 10-KSB contain
forward-looking statements, including statements of goals, intentions, and
expectations, regarding or based upon general economic conditions, interest
rates, developments in national and local markets, and other matters, and which,
by their nature, are subject to significant uncertainties. Because of these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report.
PART I
ITEM I BUSINESS
GENERAL
First Mariner Bancorp (the "Company") is a bank holding company formed in
Maryland in 1994 under the name MarylandsBank Corp. The business of the Company
is conducted through its wholly-owned subsidiary First Mariner Bank (the
"Bank"), whose deposits are insured by the Federal Deposit Insurance Corporation
("FDIC"). The Bank, which is headquartered in Baltimore City, serves the central
region of the State of Maryland through 12 full service branches and 21
Automated Teller Machines ("ATMs"). At December 31, 1996, the Company had total
assets of $132,561,546.
The Bank is an independent community bank engaged in the general commercial
banking business with particular emphasis on the needs of individuals and small
to mid-sized businesses. The Bank emphasizes personal attention and professional
service to its customers while delivering a range of traditional and
contemporary financial products and performing many of the essential banking
services offered by its larger competitors. The Bank offers its customers access
to local bank officers who are empowered to act with flexibility to meet
customers' needs in order to foster and develop long-term loan and deposit
relationships.
The Company's executive offices are located at 1801 South Clinton Street,
Baltimore, Maryland 21224 and its telephone number is (410) 342-2600.
BACKGROUND AND HISTORY
In early 1994, an investment group led by George H. Mantakos (the "Mantakos
Group"), the President of the Bank, acquired Farmers Bank, FSB, a federal
savings bank ("Farmers"), which operated two banks, one in Baltimore City and
one in Baltimore County. In July, 1994, the Mantakos Group also acquired a
controlling interest in Garibaldi Federal Savings Bank ("Garibaldi"), which
operated a thrift in nearby Baltimore County. In late 1994 Garibaldi changed its
name to MarylandsBank, FSB. In May, 1995, in a series of transactions, Farmers
and MarylandsBank, FSB were merged and became a wholly-owned subsidiary of the
Company, which changed its name to "First Mariner Bancorp."
In late 1994, the Company began negotiations with Edwin F. Hale, Sr. to
obtain an infusion of capital. These negotiations led to the transactions
described above and to the private offering by the Company of 500,000 shares of
its common stock at $10 per share, for an aggregate of $5,000,000. In connection
with that offering,the Company issued warrants to purchase in the aggregate an
additional 416,664 shares at an exercise price of $10 per share. In this
offering, Mr. Hale purchased 300,000 shares for $3,000,000 and received warrants
to purchase an additional 300,000 shares. Mr. Hale was then elected as Chairman
and Chief Executive Officer of the Company, and Mr. Mantakos continued as
President of the Bank.
In August 1995, the Company issued an additional 500,000 shares of its
common stock in another private placement at $10 per share for $5,000,000 in the
aggregate. In connection with that offering, the Company issued warrants to
purchase in the aggregate an additional 206,659 shares at $10 per share. In this
offering, Mr. Hale purchased 60,000 shares for $600,000 and received warrants to
purchase an
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additional 60,000 shares. Mr. Hale subsequently purchased an additional 31,687
shares and warrants to purchase an additional 21,672 shares in privately
negotiated transactions.
Following Mr. Hale's election as Chairman and Chief Executive Officer, the
Company assembled a Board of Directors of well-known business and civic leaders
who have strong ties to the Company's market area and are committed to the
growth and success of the Company. Mr. Hale also recruited members of management
from other successful local financial institutions with knowledge of the local
market and experience in extending credit to small to mid-sized businesses. The
Company then embarked upon a business strategy and capitalization plan to
provide management with the tools necessary to optimize the market opportunities
created as a result of the consolidation of the banking industry. In December,
1996, the Company sold 1,400,000 shares of common stock, raising its
stockholders' equity by $15,249,410. In January 1997, the Company sold an
additional 210,000 shares of common stock as a result of the over allotment of
shares in the initial public stock offering raising stockholders' equity an
additional $2,343,600.
MARKET AREA AND MARKET STRATEGY
The Bank's core market is central Maryland, which consists primarily of
Baltimore City, Baltimore County, Harford County and Anne Arundel County. This
area contains a high concentration of population and businesses, and the local
governments are committed to business development in the region. The Company
believes that its market area is economically stable and is largely middle-class
with a median family income of $44,000.
As an independent Maryland-based community bank, the Bank is engaged in the
general commercial banking business with particular emphasis on the needs of
individuals and small to mid-sized business. The Bank emphasizes personal
attention and professional service to its customers while delivering a range of
traditional and contemporary financial products and performing many of the
essential banking services offered by its larger competitors. The Bank offers
its customers access to local bank officers who are empowered to act with
flexibility to meet customers' needs in order to foster and develop long-term
loan and deposit relationships. The Company believes that individuals and
businesses in its market area are dissatisfied with the large out-of-state
banking institutions which have acquired local banks. Management believes that
the Bank has a window of opportunity to establish business ties with customers
who have been displaced by the consolidations and who are anxious to forge
banking relationships with locally-owned and managed institutions. These
consolidations also benefit the Bank by making available experienced and
entrepreneurial managers and acquisition opportunities from the remaining small
independent banks in the Company's market area.
GROWTH STRATEGIES
The Company's continuing strategy is to capture market share and build a
community franchise for its shareholders, customers and employees. To do so, the
Company intends to:
- Expand its existing network of traditional branches and ATMs to ultimately
operate a contiguous delivery system to accommodate customers' needs for a
continuum of essential banking services;
- Continue to attract highly experienced, entrepreneurial managers and staff
with in-depth knowledge of the Bank's customers and target market;
- Acquire financial institutions or branches which offer compatible
products, marketing opportunities, potential cost savings or economies of
scale;
- Establish nontraditional joint ventures with retail establishments such as
Mars Super Market and other retail entities that have high traffic
patterns; and
- Invest in new products and technology.
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To implement the strategy to create nontraditional joint ventures with
retail establishments, the Bank has opened 3 full service branches and installed
13 ATMs in Mars Super Markets, a local supermarket chain ("Mars"), and intends
to increase its presence in such stores in the future. Mars currently operates
16 markets, all of which are in the Bank's market area. Christopher P. D'Anna
and Dennis McCoy, vice president and former chief executive officer of Mars,
respectively, are directors of the Company.
The Company intends to expand its branch network through acquisitions
generally of small, local banks or bank branches that are strategically placed
within the market area. Management expects that future acquisitions will be able
to enhance profitability due to economies of scale or market synergies.
Potential candidates will be screened on the basis of compatibility, location
and size and quality of deposits and loans. Although the Company continues to
explore possible acquisitions, no targets have been identified at this time.
BANKING SERVICES
COMMERCIAL BANKING. The Bank focuses its commercial loan originations on
small and mid-sized business (generally up to $20 million in annual sales) and
such loans are usually accompanied by significant related deposits. Commercial
loan products include residential real estate construction loans; working
capital loans and lines of credit; demand, term and time loans; and equipment,
inventory and accounts receivable financing. The Bank offers a range of cash
management services and deposit products to its commercial customers.
Computerized banking is currently available to the Bank's commercial customers.
Additionally, the Bank is exploring the introduction of a business credit card
to commercial customers for use for corporate purchases in addition to the more
conventional uses for employee travel and entertainment.
RETAIL BANKING. The Bank's retail banking activities emphasize consumer
deposit and checking accounts. An extensive range of these services is offered
by the Bank to meet the varied needs of its customers from young persons to
senior citizens, including its recently developed and promoted "Absolutely Free
Checking." The Bank plans to expand these services to include alternatives to
bank accounts, such as mutual funds and annuities. Consumer loan products
offered by the Bank include home equity lines of credit, fixed rate second
mortgages, new and used auto loans, overdraft protection, and unsecured personal
credit lines. The Bank intends to introduce in the near future secured and
unsecured home improvement loans and new and used boat loans. Further expansion
of the Bank's retail product line will include the introduction of a credit card
and a debit card in 1997.
MORTGAGE BANKING. The Bank's mortgage banking business is structured to
provide a source of fee income largely from the process of originating product
for the secondary market. Mortgage banking capabilities include FHA/VA
origination; conventional and nonconforming mortgage underwriting; and
construction and permanent financing. The Bank intends to improve its
competitive position in this market by streamlining the mortgage underwriting
process through the introduction of advanced technology.
COMMUNITY REINVESTMENT ACT. The Bank has a strong commitment to its
responsibilities under the Community Reinvestment Act and actively searches for
opportunities to meet the development needs of all members of the community it
serves, including persons of low to moderate income in a manner consistent with
safe and sound banking practices. The Bank currently fulfills this commitment by
participating in loan programs sponsored or guaranteed by the SBA, FHA, VA,
Maryland Industrial Development Financing Authority, and the Settlement Expense
Loan Program.
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LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At December 31, 1996, the Bank's loan portfolio
totaled $95,763,637, representing approximately 72.2% of its total assets of
$132,561,546. The following table sets forth the Bank's loans by major
categories as of December 31, 1996:
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AMOUNT PERCENT
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Commercial........................................................... $ 17,096,663 17.8%
Real Estate Development and Construction............................. 24,875,932 26.0
Real Estate Mortgage:
Residential........................................................ 20,092,018 21.0
Commercial......................................................... 31,012,097 32.4
Consumer............................................................. 2,686,927 2.8
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Total Loans...................................................... $ 95,763,637 100.0%
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COMMERCIAL LOANS. The Bank originates secured and unsecured loans for
business purposes. Less than one percent of these loans are unsecured. Loans are
made to provide working capital to businesses in the forms of lines of credit
which may be secured by real estate, accounts receivable, inventory, equipment
or other assets. The financial condition and cash flow of commercial borrowers
are closely monitored by the submission of corporate financial statements,
personal financial statements and income tax returns. The frequency of
submissions of required financial information depends on the size and complexity
of the credit and the collateral which secures the loan. It is the Bank's
general policy to obtain personal guarantees from the principals of the
commercial loan borrowers.
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. The real estate development
and construction loan portfolio consisted of the following as of December 31,
1996:
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AMOUNT PERCENT
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Residential Construction............................................. $ 12,421,538 49.9%
Commercial Construction.............................................. 304,000 1.2
Residential Land Development......................................... 11,518,894 46.3
Residential Land Acquisition......................................... 316,500 1.3
Commercial Land Acquisition.......................................... 315,000 1.3
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Total Real Estate--Development and Construction.................. $ 24,875,932 100.0%
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The Bank provides interim residential real estate development and
construction loans to builders, developers, and persons who will ultimately
occupy the single family dwellings. Residential real estate construction and
development loans constitute the largest portion of the Bank's lending
activities. Residential real estate development and construction loans to
provide interim financing on the property are generally made for 80% or less of
the appraised value of the property. Residential real estate development and
construction loan funds are disbursed periodically at pre-specified stages of
completion. Interest rates on these loans are generally adjustable. The Bank
carefully monitors these loans with on-site inspections and control of
disbursements.
Loans to individuals for the construction of their primary residences are
typically secured by the property under construction, frequently include
additional collateral (such as second mortgage on the borrower's present home),
and commonly have maturities of nine to twelve months.
Loans to residential builders are for the construction of residential homes
for which a binding sales contract exists and the prospective buyers have been
pre-qualified for permanent mortgage financing. Development loans are made only
to developers with a proven track record. Generally, these loans are
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extended only when the borrower provides evidence that the lots under
development will be sold to builders satisfactory to the Bank.
Development and construction loans are secured by the properties under
development/construction and personal guarantees are typically obtained. Further
to assure that reliance is not placed solely in the value of the underlying
property, the Bank considers the financial condition and reputation of the
borrower and any guarantors, the amount of the borrower's equity in the project,
independent appraisals, costs estimates and pre-construction sale information.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. The Bank's wholly-owned subsidiary,
First Mariner Mortgage Corporation, originates adjustable and fixed-rate
residential mortgage loans. Such mortgage loans are generally originated under
terms, conditions and documentation acceptable to the secondary mortgage market.
The Bank does not generally maintain a portfolio of residential mortgage loans.
COMMERCIAL REAL ESTATE MORTGAGE LOANS. The Bank originates mortgage loans
secured by commercial real estate. Such loans are primarily secured by office
buildings, retail buildings, warehouses and general purpose business space.
Although terms may vary, the Bank's commercial mortgages generally have
maturities of five years or less.
The Bank seeks to reduce the risks associated with commercial mortgage
lending by generally lending in its market area, using conservative
loan-to-value ratios and obtaining periodic financial statements and tax returns
from borrowers. It is also the Bank's general policy to obtain personal
guarantees from the principals of the borrowers and assignments of all leases
related to the collateral.
CONSUMER LOANS. The Bank offers a variety of consumer loans. These loans
are typically secured by residential real estate or personal property, including
automobiles. Home equity loans are typically made up to 80% of the appraised
value, less the amount of any existing prior liens on the property and generally
have maximum terms of 10 years. The interest rates on home equity loans are
generally adjustable.
CREDIT ADMINISTRATION
The Bank's lending activities are subject to written policies approved by
the Board of Directors to ensure proper management of credit risk. Loans are
subject to a well defined credit process that includes credit evaluation of
borrowers, risk-rating of credits, establishment of lending limits and
application of lending procedures, including the holding of adequate collateral
and the maintenance of compensating balances, as well as procedures for on-going
identification and management of credit deterioration. Regular portfolio reviews
are performed to identify potential under performing credits, estimate loss
exposure and to ascertain compliance with the Bank's policies. For significant
problem loans, management review consists of evaluation of the financial
strengths of the borrower and the guarantor, the related collateral, and the
effects of economic conditions.
The Bank's loan approval policy provides for various levels of individual
lending authority. The maximum lending authority granted by the Bank to any one
individual is $250,000. A combination of approvals from certain officers may be
used to lend up to an aggregate of $500,000. The Board's Loan Committee is
authorized to approve loans up to the Bank's legal lending limit, which
currently approximates $2,700,000.
The Bank generally does not make loans outside its market area unless the
borrower has an established relationship with the Bank and conducts its
principal business operations within the Bank's market area. Consequently the
Bank and its borrowers are affected by the economic conditions prevailing in its
market area.
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COMPETITION
The Company and the Bank operate in a competitive environment, competing for
deposits and loans with commercial banks, thrifts and other financial entities.
Principal competitors include other community commercial banks and larger
financial institutions with branches in the Bank's market area. Numerous mergers
and consolidations involving banks in the Bank's market area have occurred
recently, requiring the Bank to compete with banks with greater resources.
The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings associations, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. The Bank also competes
with money market mutual funds for deposits. Many of the financial institutions
operating in the Bank's market area offer certain services, such as trust,
investment and international banking, which the Bank does not offer, and possess
greater financial resources or have substantially higher lending limits than
does the Bank.
To compete with other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers, and specialized services
tailored to meet its customers' needs. In those instances where the Bank is
unable to accommodate a customer's needs, the Bank will arrange for those
services to be provided by other banks with which it has a relationship.
Recent changes in banking laws facilitate interstate branching and merger
activity among banks. Since September, 1995, certain bank holding companies are
authorized to acquire banks throughout the United States. In addition, on and
after June 1, 1997, certain banks will be permitted to merge with banks
organized under the laws of different states. Such changes will result in an
even greater degree of competition in the banking industry and the Company and
the Bank will be brought into competition with institutions with which it does
not presently compete. As a result, intense competition in the Bank's market
area may be expected to continue for the foreseeable future.
SUPERVISION AND REGULATIONS
The Company and the Bank are extensively regulated under federal and state
law. Generally, these laws and regulations are intended to protect depositors,
not stockholders. The following is a summary description of certain provisions
of certain laws which affect the regulation of bank holding companies and banks.
The discussion is qualified in its entirety by reference to applicable laws and
regulations. Changes in such laws and regulations may have a material effect on
the business and prospects of the Company and the Bank.
FEDERAL BANK HOLDING COMPANY REGULATION AND STRUCTURE. The Company is a
bank holding company within the meaning of the Bank Holding Company Act of 1956,
as amended, and as such, it is subject to regulation, supervision, and
examination by the Board of Governors of the Federal Reserve System ("FRB"). The
Company is required to file annual and quarterly reports with the FRB and to
provide the FRB with such additional information as the FRB may require. The FRB
may conduct examinations of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person
proposing to acquire control through direct or indirect ownership of 25% or more
of any voting securities of the Company is
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required to give 60 days' written notice of the acquisition to the FRB, which
may prohibit the transaction, and to publish notice to the public.
Generally, a bank holding company may not engage in any activities other
than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, the Company may acquire more than 5% of the assets or outstanding
shares of a company engaging in nonbank activities determined by the FRB to be
closely related to the business of banking or of managing or controlling banks.
In September, 1996, the FRB proposed expedited procedures for expansion into
approved categories of nonbank activities. It is impossible to predict whether
or when the proposal may become final.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, the Bank may not generally require a customer to
obtain other services from itself or the Company, and may not require that a
customer promise not to obtain other services from a competitor as a condition
to and extension of credit to the customer. In September, 1996, the FRB proposed
to end the anti-tying rules for bank holding companies and their banking
subsidiaries; they would be retained for banks. It is impossible to predict
whether or when the proposal may become final.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of, or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guaranty liabilities generally are
superior in priority to the obligations of the depository institution to its
shareholders due solely to their status as shareholders and obligations to other
affiliates.
STATE BANK HOLDING COMPANY REGULATION. As a Maryland bank holding company,
the Company is subject to various restrictions on its activities as set forth in
Maryland law, in addition to those restrictions set forth in federal law. Under
Maryland law, a bank holding company that desires to acquire a bank or bank
holding company that has its principal place of business in Maryland must obtain
approval from the Maryland Commissioner of Financial Regulation (the
"Commissioner"). Also, a bank holding company and its Maryland state-chartered
bank or trust company cannot directly or indirectly acquire banking or
nonbanking subsidiaries or affiliates until the bank or trust company receives
the approval of the Commissioner.
FEDERAL AND STATE BANK REGULATION. The Company's banking subsidiary is a
Maryland state-chartered trust company, with all the powers of a commercial
bank, regulated and examined by the Commissioner and the Federal Deposit
Insurance Corporation (the "FDIC"). The FDIC has extensive enforcement authority
over the institutions it regulates to prohibit or correct activities which
violate law, regulation or written agreement with the FDIC or which are deemed
to constitute unsafe or unsound practices. Enforcement actions may include the
appointment of a conservator or receiver, the issuance of a cease and desist
order, the termination of deposit insurance, the imposition of civil money
penalties on the
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institution, its directors, officers, employees and institution-affiliated
parties, the issuance of directives to increase capital, the issuance of formal
and informal agreements, the removal of or restrictions on directors, officers,
employees and institution-affiliated parties, and the enforcement of any such
mechanisms through restraining orders or other court actions.
In its lending activities, the maximum legal rate of interest, fees and
charges which a financial institution may charge on a particular loan depends on
a variety of factors such as the type of borrower, the purpose of the loan, the
amount of the loan and the date the loan is made. Other laws tie the maximum
amount which may be loaned to any one customer and its related interest to
capital levels. The Bank is also subject to certain restrictions on extensions
of credit to executive officers, directors, principal shareholders or any
related interest of such persons which generally require that such credit
extensions be made on substantially the same terms as are available to third
persons dealing with the Bank and not involve more than the normal risk of
repayment.
The Community Reinvestment Act ("CRA") requires that, in connection with the
examination of financial institutions within their jurisdictions the FDIC
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors are
also considered by all regulatory agencies in evaluating mergers, acquisitions
and applications to open a branch or facility. As of the date of its most recent
examination report, the Bank has a CRA rating of "Satisfactory."
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
noncapital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the FDIC, have adopted standards
covering internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. The Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
Before establishing new branch offices, the Bank must meet certain minimum
capital stock and surplus requirements. With each new branch located outside the
municipal area of the Bank's principal banking office, these minimal levels
increase by $120,000 to $900,000, based on the population size of the municipal
area in which the branch will be located. Prior to establishment of the branch,
the Bank must obtain Commissioner and FDIC approval. If establishment of the
branch involves the purchase of a bank building or furnishings, the total
investment in bank buildings and furnishings cannot exceed, with certain
exceptions, 50% of the Bank's unimpaired capital and surplus.
DEPOSIT INSURANCE
As a FDIC member institution, deposits of the Bank are currently insured to
a maximum of $100,000 per depositor through the Savings Association Insurance
Fund ("SAIF"), administered by the FDIC. Insured financial institutions are
members of either SAIF or the Bank Insurance Fund ("BIF"). SAIF members
generally are savings and loan associations or savings banks, including banks
and trust companies that have converted from a savings and loan association or
savings bank to a commercial bank or trust company. At this time, an insured
financial institution cannot convert from one insurance fund to another, but
mergers or transfers of assets between SAIF and BIF members generally are
permitted with the assuming or resulting depository institution making payments
of SAIF assessments on the portion of liabilities attributable to the
SAIF-insured institution.
The FDIC is required to establish the semi-annual assessments for BIF- and
SAIF-insured depository institutions at a rate determined to be appropriate to
maintain or increase the reserve ratio of the
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respective deposit insurance funds at or above 1.25 percent of estimated insured
deposits or at such higher percentage that the FDIC determines to be justified
for that year by circumstances raising significant risk of substantial future
losses to the fund. SAIF historically has not met the designated reserve ratio
for the fund. Accordingly, federal legislation that became effective September
30, 1996 assesses a one-time charge on deposits insured by SAIF. This one-time
charge for the Bank of approximately $154,000, was paid in 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
This recapitalization is expected to significantly lower the semi-annual
assessments paid by the Bank as a SAIF member. Assessments are made on a
risk-based premium system with nine risk classifications based on certain
capital and supervisory measures. Financial institutions with higher levels of
capital and involving a low degree of supervisory concern are assessed lower
premiums than financial institutions with lower levels of capital or involving a
higher degree of supervisory concern. Before the recapitalization, the rates
assessable on SAIF-insured deposits ranged from $.23 per $100 of domestic
deposits to $.31 per $100 of domestic deposits; the Bank's assessment stood at
$.23 per $100. Rates assessable to BIF members have been significantly lower at
a range of $.03 to $.27 per $100, with the highest rated BIF institutions paying
the statutory minimum of $2,000 per year. With recapitalization of SAIF, the
assessment ranges for both BIF and SAIF institutions will decrease. The Bank
expects an assessment rate to be $.06 per $100 starting on January 1, 1997.
Currently, federal law calls for merger of the SAIF and BIF funds by January 1,
1999 if no insured financial institution is a savings association on such date.
It is impossible to predict whether or when this will occur.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
The Company's current ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiary, the Bank. Both federal and
state laws impose restrictions on the ability of the Bank to pay dividends. The
FRB has issued a policy statement which provides that, as a general matter,
insured banks and bank holding companies may pay dividends only out of prior
operating earnings. For a Maryland state-chartered bank or trust company,
dividends may be paid out of undivided profits or, with the prior approval of
the Commissioner, from surplus in excess of 100% of required capital stock. If,
however, the surplus of a Maryland bank is less than 100% of its required
capital stock, cash dividends may not be paid in excess of 90% of net earnings.
In addition to these specific restrictions, bank regulatory agencies, in
general, also have the ability to prohibit proposed dividends by a financial
institution which would otherwise be permitted under applicable regulations if
the regulatory body determines that such distribution would constitute an unsafe
or unsound practice.
CAPITAL REQUIREMENTS
The FRB and FDIC have adopted certain risk-based capital guidelines to
assist in the assessment of the capital adequacy of a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans. For
bank holding companies with less than $150,000,000 in consolidated assets, such
as the Company, the guidelines are applied on a bank-only basis.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1", or core capital, includes common equity,
perpetual preferred stock (excluding auction rate issues) and minority interest
in equity accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions. "Tier 2", or supplementary capital,
includes, among other things, limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying
9
<PAGE>
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the risk-
based capital guidelines are required to maintain a ratio of Tier 1 capital to
risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. At
December 31, 1996, the Bank's ratio of Tier 1 to risk-weighted assets stood at
13.3% and its ratio of total capital to risk-weighted assets stood at 14.2%. In
addition to risk-based capital banks and bank holding companies are required to
maintain a minimum amount of Tier 1 capital to fourth quarter average assets,
referred to as the leverage capital ratio, of at least 4%. At December 31, 1996,
the Bank's leverage capital ratio stood at 14.7%.
In August, 1995 and May, 1996, the federal banking agencies adopted final
regulations specifying that the agencies will include, in their evaluations of a
bank's capital adequacy, an assessment of the Bank's interest rate risk ("IRR")
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization's interest rate risk management includes a measurement of
board of director and senior management oversight, and a determination of
whether a banking organization's procedures for comprehensive risk management
are appropriate to the circumstances of the specific banking organization. The
Bank has internal IRR models that are used to measure and monitor IRR.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, the Company does not expect the
addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the Company.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December, 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) publicly available annual financial
condition and management reports for financial institutions, including audits by
independent accountants, (ii) the establishment of uniform accounting standards
by federal banking agencies, (iii) the establishment of a "prompt corrective
action" system of regulatory supervision and intervention, based on
capitalization levels, with more scrutiny and restrictions placed on depository
institutions with lower levels of capital, (iv) additional grounds for the
appointment of a conservator or receiver, and (v) restrictions or prohibitions
on accepting brokered deposits, except for institutions which significantly
exceed minimum capital requirements. FDICIA also provides for increased funding
of the FDIC insurance funds and the implementation of risked-based premiums.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
10
<PAGE>
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically undercapitalized.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
INTERSTATE BANKING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. Among other things, the law eliminated
substantially all state law barriers to the acquisition of banks by out-of-state
bank holding companies as of September 29, 1995. The law will also permit
interstate branching by banks effective as of June 1, 1997, subject to the
ability of states to opt-out completely or to set an earlier effective date.
Maryland generally established an earlier effective date of September 29, 1995.
On December 13, 1995, Maryland, Delaware, Virginia and Pennsylvania signed a
supervisory pact establishing uniform rules for the supervision of
state-chartered banks and trust companies that operate branches across state
lines. Other states have expressed interest in eventually joining the compact.
Under the agreement, home-state regulators will have primary responsibility for
banks chartered in the home state, including those that branch into other
jurisdictions, although such branches may be subject to the other jurisdiction's
regulatory authorities in certain circumstances. The Company anticipates that
the effect of the new law and the supervisory compact may be to increase
competition within the markets in which the Company now operates, although the
Company cannot predict the extent to which competition will increase in such
markets or the timing of such increase.
MONETARY POLICY
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are open
market operations in United States Government securities, changes in the
discount rate on member bank borrowings and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The money policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
ITEM 2 PROPERTY
The principal executive offices of the Company and the main office of the
Bank are located at 1801 South Clinton Street, Baltimore, Maryland. The Company
and the Bank occupy approximately 8,000 square feet of space leased from Hale
Intermodal Transport Co., of which Edwin F. Hale, Sr., Chairman and Chief
Executive Officer of the Company, is the Chairman and Chief Executive Officer.
Rental for this space is approximately $212,700 annually, of which $177,700 is
allocated for 6,890 square feet of office space and $35,000 is allocated for
1,170 square feet of Bank branch space and drive-up banking and
11
<PAGE>
customer parking facilities. Management believes that such terms are at least as
favorable as those that could be obtained from an unaffiliated third party
lessor.
The Bank has branches at the following locations:
<TABLE>
<CAPTION>
SQUARE ANNUAL LEASE RENEWAL
LOCATION FEET RENTAL EXPIRATION OPTIONS (1)
- ------------------------------------------------------------ ----------- ------------------ --------------- -------------
<S> <C> <C> <C> <C>
1801 South Clinton Street................................... 1,170 $35,000 08/31/01 5 years
Baltimore City
115 East Joppa Road......................................... 2,750 Owns building -- --
Towson (Baltimore County) (subject to $25
annual ground
rent)
8631 Loch Raven Boulevard................................... 1,000 $14,100 Month-to-month --
Towson (Baltimore County)
9833 Liberty Road........................................... 2,800 Owns building -- --
Baltimore County (subject to
$12,000
annual ground
rent)
303 South Main Street....................................... 1,675 $25,000 05/01/00 5 years
Bel Air (Harford County)
16 South Calvert Street..................................... 2,515 $25,270 05/14/01 --
Baltimore City
2375 Rolling Road (Mars Store).............................. 667 $36,500 11/01/00 5 years
Woodlawn (Baltimore County)
Chesapeake Center Drive (Mars Store)........................ 484 $36,500 05/01/00 5 years
Glen Burnie (Anne Arundel County)
1013 Reisterstown Road...................................... 4,156 Owns building -- --
Pikesville (Baltimore County)
60 Painters Mill Road....................................... 2,350 $60,000 10/31/05 5 years
Owings Mills (Baltimore County)
161 Jennifer Road........................................... 4,000 $72,900 06/30/01 5 years
Annapolis (Anne Arundel County)
1401 Pulaski Highway (Mars Store) (2)....................... 484 $36,500 -- 5 years
Edgewood (Harford County)
</TABLE>
- ------------------------------
(1) All lease renewal options are for one term, with the exception of the lease
for 303 South Main Street which has three 5-year renewals.
(2) This branch opened in November, 1996.
ITEM 3 LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their property
the subject of, any material pending legal proceedings incidental to the
business of the Company other than those arising in the ordinary course of
business. In the opinion of management, no such proceeding will have a material
adverse effect on the financial position or results of operations of the
Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY MATTERS
MARKET FOR COMMON STOCK
Shares of First Mariner Bancorp commenced trading on The Nasdaq Stock
Market's National Market on December 20, 1996 under the trading symbol FMAR. For
the period December 20, 1996 through December 31, 1996 the high and low prices
as quoted on The Nasdaq Stock Market were $13.75 and $12.75, respectively.
As of December 31, 1996, First Mariner Bancorp, had approximately 2,950
shareholders of record. Since the inception of the Company no dividends have
been declared.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since assuming control of the Company in May, 1995, management implemented a
strategy of building a branch network in its core market area. This strategy is
intended to position the Bank to optimize the opportunities that management
believes have been created by dislocations caused by the widespread
consolidations among local banks with large out-of-state acquirors. Although
this strategy has resulted in losses through 1996, the Company anticipates that
this investment will ultimately be substantially less than the market premiums
required to purchase and improve existing bank or thrift franchises.
OVERVIEW
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Company's financial statements
and related notes and other statistical information included elsewhere herein.
Results reflect the operations of the Company and the Bank, for the years ended
December 31, 1996 and 1995.
The Company incurred a net loss for the year ended December 31, 1996 of
$2,173,319 compared to a net loss of $1,282,629 for the year ended December 31,
1995. These results reflect the costs of the Company's continuing expansion and
growth including substantially increased compensation, occupancy and promotional
expenses. Net loss per share for the year ended December 31, 1996 was $1.71 per
share compared to $1.88 per share for the year ended December 31, 1995. Return
on average assets was (2.64)% for the year ended December 31, 1996 as compared
to (3.45)% for 1995. Average equity to average assets for the year ended
December 31, 1996 was 12.18%, compared to 17.56% for 1995.
NET INTEREST INCOME/MARGINS
The primary source of earnings for the Company is net interest income, which
is the difference between income earned on interest-earning assets, such as
loans and investment securities, and interest incurred on the interest-bearing
sources of funds, such as deposits and borrowings. The level of net interest
income is determined primarily by the average balances ("volume") and the rate
spreads between the interest-earning assets and the Company's funding sources.
Net interest income increased to $3,629,109 for the year ended December 31,
1996, a 180.9% increase from the net interest income of $1,291,819 earned during
the year ended December 31, 1995. Earning assets averaged $74,470,306 for the
year ended December 31, 1996, a 129.7% increase as compared to $32,414,418 for
the year ended December 31, 1995. The increase in net interest income was due to
the growth of the loan portfolio and increases in yields on the loan portfolio.
Average loans as a percentage of total average earning assets increased to 86.9%
in 1996 as compared with 70.0% in 1995.
13
<PAGE>
Interest income on loans of $6,177,495 for the year ended December 31, 1996
increased by $4,195,907, or 211.7% from $1,981,588 for the year ended December
31, 1995, reflecting a significant increase in the average balance of loans
which totaled $64,706,203 for 1996 as compared to $22,698,742 for 1995.
Despite lower net interest spreads (which is the difference between the
yield on earning assets and the cost of interest-bearing liabilities) and net
interest margins for the Company, net interest income improved in 1995 due to
greater dollar volumes of higher yielding assets, as well as the overall
increase in average earning assets.
The key performance measure for net interest income is the "net interest
margin", or net interest income divided by average earning assets. The Company's
net interest margin is affected by loan pricing, mix of earning assets, and the
distribution and pricing of deposits and borrowings. The Company's net interest
margin was 4.87% for the year ended December 31, 1996 as compared to 3.99% for
the year ended December 31, 1995 which was achieved by adding higher yielding
loans in 1996.
Table 1: "Comparative Average Balances--Yields and Rates" below indicates
the Company's average volume of interest-earning assets and interest-bearing
liabilities and average yields and rates. Changes in net interest income from
period to period result from increases or decreases in the volume and mix of
interest-earning assets and interest-bearing liabilities, increases or decreases
in the average rates earned and paid on such assets and liabilities, and the
availability of particular sources of funds, such as non-interest bearing
deposits.
14
<PAGE>
TABLE 1: COMPARATIVE AVERAGE BALANCES (1)--YIELDS AND RATES
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ----------------------
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE YIELD/ RATE BALANCE EXPENSE
--------- ----------- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Loans (net of unearned income) (2)........................... $ 64,706 $ 6,177 9.55% $ 22,699 $ 1,982
Mortgage-backed securities held to maturity.................. -- -- -- 2,303 177
Federal funds sold........................................... -- -- -- 175 15
Interest-bearing bank balances............................... 8,966 530 5.91% 6,937 366
Other earning assets......................................... 798 29 3.63% 301 22
--------- ----------- --------- -----------
Total earning assets (3)................................. 74,470 6,736 9.05% 32,415 2,562
----------- -----------
Allowance for loan losses.................................... (670) (256)
Other assets................................................. 8,514 5,054
--------- ---------
Total assets............................................. $ 82,314 $ 37,213
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Passbook................................................... 4,635 139 3.00% 3,081 66
NOW/MMDA................................................... 12,588 353 2.80% 6,477 211
Certificates............................................... 43,391 2,507 5.78% 16,793 900
--------- ---------
Total interest-bearing deposits.......................... 60,614 2,999 4.95% 26,351 1,177
Other borrowed funds........................................... 1,950 108 5.54% 1,406 93
--------- ----------- --------- -----------
Total interest-bearing liabilities....................... 62,564 3,107 4.97% 27,757 1,270
----------- -----------
Demand deposits................................................ 7,753 984
Other liabilities.............................................. 1,967 1,938
Stockholders' equity........................................... 10,030 6,534
--------- ---------
Total liabilities and stockholders' equity............... $ 82,314 $ 37,213
--------- ---------
--------- ---------
Interest rate spread...........................................
(Average yield less average rate) 4.08%
Net interest income............................................
(Interest income less interest expense) $ 3,629 $ 1,292
----------- -----------
----------- -----------
Net interest margin............................................
(Net interest income/total earning assets) 4.87%
<CAPTION>
YIELD/ RATE
-----
<S> <C>
ASSETS:
Loans (net of unearned income) (2)........................... 8.73%
Mortgage-backed securities held to maturity.................. 7.69%
Federal funds sold........................................... 8.57%
Interest-bearing bank balances............................... 5.28%
Other earning assets......................................... 7.31%
Total earning assets (3)................................. 7.90%
Allowance for loan losses....................................
Other assets.................................................
Total assets.............................................
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Passbook................................................... 2.14%
NOW/MMDA................................................... 3.26%
Certificates............................................... 5.36%
Total interest-bearing deposits.......................... 4.47%
Other borrowed funds........................................... 6.61%
Total interest-bearing liabilities....................... 4.58%
Demand deposits................................................
Other liabilities..............................................
Stockholders' equity...........................................
Total liabilities and stockholders' equity...............
Interest rate spread...........................................
(Average yield less average rate) 3.32%
Net interest income............................................
(Interest income less interest expense)
Net interest margin............................................
(Net interest income/total earning assets) 3.99%
</TABLE>
- ------------------------
(1) Average balances were calculated using month end balances (which
approximates daily averages) as daily averages were not available for the
periods presented.
(2) Loans on non-accrual status are included in the calculation of average
balances.
(3) From inception through December 31, 1996, the Company made no loans or
investments that qualify for tax-exempt treatment and, accordingly, had no
tax-exempt income.
Table 2: "Rate/Volume Variance" below indicates the changes in the Company's
net interest income as a result of changes in volume and rates. Changes in
interest income and interest expense can result from variances in both volume
and rates. The Company has an asset and liability management policy designed to
provide a proper balance between rate sensitive assets and rate sensitive
liabilities, to attempt to maximize interest margins and to provide adequate
liquidity for anticipated needs.
15
<PAGE>
TABLE 2: RATE/VOLUME ANALYSIS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
COMPARED TO
YEAR ENDED DECEMBER 31, 1995
-------------------------------------
NET
INCREASE/
AVERAGE AVERAGE (DECREASE)
VOLUME RATE (1)
--------- ----------- -------------
<S> <C> <C> <C>
Interest Income:
Loans (net of unearned income).................................................. $ 3,995 $ 200 $ 4,195
Mortgage-backed securities held to maturity..................................... (177) -- (177)
Federal funds sold.............................................................. (15) -- (15)
Interest-bearing bank balances.................................................. 116 48 164
Other earning assets............................................................ 10 (3) 7
--------- ----- ------
Total interest income....................................................... 3,929 245 4,174
--------- ----- ------
Interest Expense:
Passbook........................................................................ 41 32 73
NOW/MMDA........................................................................ 165 (23) 142
Certificates.................................................................... 1,532 75 1,607
Other borrowed funds and escrow................................................. 28 (13) 15
--------- ----- ------
Total interest expense...................................................... 1,766 71 1,837
--------- ----- ------
Change in net interest income..................................................... $ 2,163 $ 174 $ 2,337
--------- ----- ------
--------- ----- ------
</TABLE>
- ------------------------
(1) The change in interest income and expense due to both rate and volume has
been allocated proportionally between volume and rate. Loan fees are
included in the interest income computation.
NON-INTEREST INCOME
Non-interest income consists of revenues generated from service fees on
deposit accounts, as well as loan fees, ATM fees, wire transfer fees, gains on
sales of investment securities, official check fees and collection fees.
Non-interest income for the year ended December 31, 1996 was $1,073,943 as
compared to $197,014 for the year ended December 31, 1995, an increase of
$876,929 or 445.1%. This increase, to a large extent, was due to a gain realized
on the sale of securities in 1996 of $330,030. Other significant increases were
experienced in service fees on loans which increased to $303,353 from $84,173 or
260.4% and service fees on deposits which increased to $336,662 from $94,918 or
254.7%. These increases were due to significantly increased activity in both
deposits and loans.
TABLE 3: NON-INTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996
----------------------- 1995
PERCENT ----------
AMOUNT CHANGE AMOUNT
------------ --------- ----------
<S> <C> <C> <C>
Gain on sale of securities............................................... $ 330,030 3,579.3% $ 8,970
Service fees on loans.................................................... 303,353 260.4 84,173
Service fees on deposits................................................. 336,662 254.7 94,918
Other operating income................................................... 103,898 1,060.5 8,953
------------ --------- ----------
Total non-interest income.......................................... $ 1,073,943 445.1% $ 197,014
------------ --------- ----------
------------ --------- ----------
Non-interest income as a percent of
average total assets................................................... 1.30% .53%
</TABLE>
16
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense totaled $5,836,679 for the year ended December 31, 1996
as compared to $2,581,411 for the year ended December 31, 1995, an increase of
$3,255,268 or 126.1%. This increase reflects increased administrative expenses
and management's continuing emphasis on growth through branching. Also included
in the operating expenses for 1996 was the accrual of a one-time federal
assessment of $154,000 to recapitalize the Savings Association Insurance Fund.
Non-interest expense as a percentage of average total assets increased to 7.1%
for the year ended December 31, 1996 as compared to 6.9% for the year ended
December 31, 1995. Salaries and employee benefits continued to account for the
largest component of non-interest expense, comprising 47.0% of total
non-interest expenses for 1996 and 46.1% for 1995. The increase was due to
increased staffing as a result of administrative personnel necessary to
effectively serve a significantly increased customer base. Occupancy expense
increased to $786,825 for 1996 as compared with $275,660 for 1995, an increase
of $511,165, or 185.4%, caused by the Company's continuing expansion into new
local markets. As a result of this growth, other major components of
non-interest expense increased as well.
TABLE 4: NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996
----------------------- 1995
PERCENT ------------
AMOUNT CHANGE AMOUNT
------------ --------- ------------
<S> <C> <C> <C>
Salaries and employee benefits............................................. $ 2,744,057 130.8% $ 1,189,172
Net occupancy.............................................................. 786,825 185.4 275,660
Insurance premiums......................................................... 229,293 187.4 79,783
Furniture, fixtures and equipment.......................................... 253,394 205.4 82,968
Professional services...................................................... 102,579 (56.1) 233,448
Advertising................................................................ 379,566 157.21 147,549
Data processing............................................................ 452,090 189.6 156,101
Office supplies............................................................ 278,249 129.5 121,250
Amortization of cost of intangible assets.................................. 74,927 16.2 64,463
Other...................................................................... 535,699 131.9 231,017
------------ ------------
Total non-interest expense........................................... $ 5,836,679 126.1% $ 2,581,411
------------ --------- ------------
------------ --------- ------------
Non-interest expense as a percent of average total assets.................. 7.1% 6.9%
</TABLE>
INCOME TAXES
The Company did not recognize any income tax benefit for the years ended
December 31, 1996 or 1995. As of December 31, 1996 and 1995, the entire net
deferred tax asset, consisting mainly of net operating losses carryforward, has
been offset by a valuation allowance. This valuation allowance has been
established because of the lack of sufficient profitable operating history of
the Company. Management will evaluate the need for this allowance in the future
and make adjustments as appropriate. The amount of the net operating loss
carryforward for federal income tax purposes at December 31, 1996 approximates
$2,790,000. As a result of ownership changes in 1996 and 1995, utilization of a
portion of the net operating loss carryforward is subject to annual limitations.
FINANCIAL CONDITION
At December 31, 1996, the Company's total assets were $132,561,546 as
compared to $52,798,345 at December 31, 1995, an increase of 151.1%. This
increase was primarily due to the continual growth in the branching network and
marketing of deposit and loan products. The Bank's overall asset size and
customer base, both individual and commercial, increased significantly during
1995 and this growth continued through 1996.
17
<PAGE>
Total loans, net of the allowance for loan losses, at December 31, 1996 were
$94,607,187 as compared to $29,760,313 on December 31, 1995, which represents an
increase of $64,846,874 or 217.9%. Significant growth was experienced in
commercial real estate and construction loans which increased $44,413,288 and
commercial loans which increased $16,227,022. At December 31,1996 the loan to
deposit ratio was 93.7% as compared to 72.6% at December 31, 1995. The Bank has
augmented its deposits with short-term collateralized borrowings from the
Federal Home Loan Bank of Atlanta to meet liquidity needs.
COMPOSITION OF LOAN PORTFOLIO
Because loans are expected to produce higher yields than investment
securities and other interest-earning assets, the absolute volume of loans and
the volume as a percentage of total earning assets is an important determinant
of net interest margin.
During the year ended December 31, 1996 average loans were $64,706,203 and
constituted 86.9% of earning assets and 78.6% of total assets for the same
period. This average loan balance represents an increase of $42,007,461 or
185.1% over the year ended December 31, 1995. At December 31, 1996 the loan to
deposit ratio was 93.7% compared to 72.6% as of December 31, 1995. During the
year ended December 31, 1995, average loans were $22,698,742 and constituted
70.0% of average earning assets and 61.0% of average total assets.
The increase in net loans from $29,760,313 at December 31, 1995 to
$94,607,187 at December 31, 1996 was funded primarily by an increase in deposits
of $60,802,505 and a $6,000,000 advance from the Federal Home Loan Bank of
Atlanta.
The Bank's loan portfolio composition as of December 31, 1996 reflects
greater concentrations of commercial real estate and construction loans. The
following table sets forth the composition of the Bank's loan portfolio and the
related percentage composition of total loans.
TABLE 5: LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
PERCENT PERCENT
TYPE OF LOANS AMOUNT OF TOTAL AMOUNT OF TOTAL
- ---------------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Commercial...................................................... $ 17,096,663 17.8% $ 869,641 2.9%
Commercial real estate and construction(1)...................... 55,888,029 58.4 11,474,741 38.3
Residential real estate......................................... 20,212,719 21.1 16,215,918 54.0
Consumer........................................................ 2,566,226 2.7 1,450,721 4.8
------------- ----- ------------- -----
Total loans................................................. 95,763,637 100.0% 30,011,021 100.0%
----- -----
----- -----
Add:
Unamortized loan premiums..................................... 205,311 283,926
Accrued interest receivable................................... 712,614 201,704
Less:
Unearned income............................................... 832,712 360,051
Allowance for loan losses..................................... 1,241,663 376,287
------------- -------------
Net loans................................................... $ 94,607,187 $ 29,760,313
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Less loans in process
Approximately 50% of the Bank's loans have adjustable rates as of December
31, 1996 and 1995, the majority of which are fixed to the prime rate. Interest
rates on variable rate loans adjust to the current interest rate environment,
whereas fixed rates do not allow this flexibility. If interest rates were to
increase in the future, the interest earned on the variable rate loans would
improve, and if rates were to fall, the
18
<PAGE>
interest earned would decline, thus impacting the Company's income. See also the
discussion under-- "Liquidity and Interest Rate Sensitivity" below. The
following table sets forth the maturity distribution, classified according to
sensitivity to changes in interest rate, for the Bank's loan portfolio at
December 31, 1996 and 1995. Some of the loans may be renewed or repaid prior to
maturity. Therefore, the following table should not be used as a forecast of
future cash collections.
TABLE 6: MATURITY SCHEDULE OF SELECTED LOANS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
---------------------------------------------------------
UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10+
YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Residential real estate.......... $ 1,810 $ 3,512 $ 2,475 $ 12,416 $ 20,213
Commercial real estate
and construction............... 21,240 26,446 6,176 2,026 55,888
Commercial....................... 12,159 4,594 344 -- 17,097
Consumer......................... 21 2,482 63 -- 2,566
--------- ----------- ----------- --------- ---------
Total.......................... $ 35,230 $ 37,034 $ 9,058 $ 14,442 $ 95,764
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Fixed interest rate.............. $ 9,070 $ 25,056 $ 3,835 $ 10,917 $ 48,878
Variable interest rate........... 26,160 11,978 5,223 3,525 46,886
--------- ----------- ----------- --------- ---------
Total.......................... $ 35,230 $ 37,034 $ 9,058 $ 14,442 $ 95,764
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
<CAPTION>
AS OF DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
------------------------------------------
UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10+
YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
------- ---------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Residential real estate..........$ 3,811 $ 3,449 $ 1,132 $7,824 $16,216
Commercial real estate
and construction............... 8,886 2,209 15 365 11,475
Commercial....................... 585 166 118 -- 869
Consumer......................... 399 795 24 233 1,451
------- ---------- --------- ------ ------
Total..........................$13,681 $ 6,619 $ 1,289 $8,422 $30,011
------- ---------- --------- ------ ------
------- ---------- --------- ------ ------
Fixed interest rate..............$ 6,567 $ 3,177 $ 619 $4,043 $14,406
Variable interest rate........... 7,114 3,442 670 4,379 15,605
------- ---------- --------- ------ ------
Total..........................$13,681 $ 6,619 $ 1,289 $8,422 $30,011
------- ---------- --------- ------ ------
------- ---------- --------- ------ ------
</TABLE>
The scheduled repayments as shown above are reported in the maturity
category in which the payment is due.
LOAN QUALITY
The Bank attempts to manage the risk characteristics of its loan portfolio
through various control processes, such as credit evaluation of borrowers,
establishment of lending limits and application of lending procedures, including
the holding of adequate collateral and the maintenance of compensating balances.
However, the Bank seeks to rely primarily on the cash flow of its borrowers' as
the principal source of repayment. Although credit policies are designed to
minimize risk, management recognizes that loan losses will occur and that the
amount of these losses will fluctuate depending on the risk characteristics of
the loan portfolio as well as general and regional economic conditions.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on non-accruing, past due and other loans that management believes
require special attention.
For significant problem loans, management's review consists of evaluation of
the financial strengths of the borrower and the guarantor, the related
collateral, and the effects of economic conditions. Specific reserves against
the remaining loan portfolio are based on analysis of historical loan loss
ratios, loan charge-offs, delinquency trends, and previous collection
experience, and the risk rating on each individual loan along with an assessment
of the effects of external economic conditions. Table 8: "Allowance for Loan
Loss Allocation," which is set forth below, indicates the specific reserves
allocated by loan type and also the general reserves included in the allowance
for loan losses.
As of December 31, 1996 the Company had approximately $1,574,000 in
non-accrual loans as compared with $633,000 at December 31, 1995. This
represents an increase of $941,000 or 148.7% in non-performing assets for the
year ended December 31, 1996.
19
<PAGE>
The provision for loan losses is a charge to earnings in the current period
to replenish the allowance and to maintain it at a level management has
determined to be adequate. The Company provided $1,039,636 for loan losses for
the year ended December 31, 1996, as compared to $190,051 for the year ended
December 31, 1995.
As of December 31, 1996 the allowance for loan losses was $1,241,663, as
compared with the December 31, 1995 balance of $376,287, an increase of
$865,376. Net charge-offs of $174,260 were recognized for 1996. The growth in
the reserve was warranted by the growth in the loan portfolio. The allowance for
loan losses at December 31, 1996 represented 1.30% of outstanding loans as
compared with 1.25% as of December 31, 1995. The increase in the percentage was
based on management's evaluation of the loan portfolio as of December 31, 1996.
The following Table 7: "Allowance for Loan Losses" summarizes the allowance
activities.
TABLE 7: ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Allowance for loan losses, beginning of year....................................... $ 376,287 $ 244,847
------------- -------------
Loans charged off:
Commercial....................................................................... (157,365) (8,595)
Real estate...................................................................... (48,680) (47,307)
Consumer......................................................................... (42,147) (3,959)
------------- -------------
Total loans charged off........................................................ (248,192) (59,861)
------------- -------------
Recoveries:
Commercial....................................................................... 63,000 --
Real estate...................................................................... -- --
Consumer......................................................................... 10,932 1,250
------------- -------------
Total recoveries............................................................... 73,932 1,250
------------- -------------
Net charge-offs................................................................ (174,260) (58,611)
------------- -------------
Provision for loan losses.......................................................... 1,039,636 190,051
------------- -------------
Allowance for loan losses, end of year............................................. $ 1,241,663 $ 376,287
------------- -------------
------------- -------------
Loans (net of premiums and discounts):
Period-end balance............................................................... $ 95,848,850 $ 30,136,600
Average balance during period.................................................... 64,706,203 22,698,742
Allowance as percentage of period-end loan balance................................. 1.30% 1.25%
Percent of average loans:
Provision for loan losses........................................................ 1.61% .84%
Net charge-offs.................................................................. .27% .26%
</TABLE>
Management's judgment as to the level of future losses on existing loans is
based on management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers, an evaluation of the existing relationships among loans,
potential loan losses, and the present level of the allowance for loan losses.
In determining the collectibility of certain loans, management also considers
the fair value of any underlying collateral. However, management's determination
of the appropriate allowance level is based upon a number of assumptions about
future events, which are believed to be reasonable, but which may or may not
prove valid. Thus, there can be no assurance that charge-offs in future period
will not exceed the allowance for loan losses or that additional increases in
the allowance for loan losses will not be required. The following table
summarizes the allocation of allowance by loan type.
20
<PAGE>
TABLE 8: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
PERCENT LOANS TO PERCENT LOANS TO
AMOUNT OF TOTAL TOTAL LOANS AMOUNT OF TOTAL TOTAL LOANS
------------ ----------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial................................ $ 75,430 6.1% 17.9% $ 43,879 11.7% 19.4%
Residential real estate and
construction............................ 793,014 63.9 79.4 92,449 24.5 75.8
Consumer.................................. 8,460 .7 2.7 28,229 7.5 4.8
Unallocated............................... 364,759 29.3 -- 211,730 56.3 --
------------ ----- ----- ---------- ----- -----
Total................................. $ 1,241,663 100.0% 100.0% $ 376,287 100.0% 100.0%
------------ ----- ----- ---------- ----- -----
------------ ----- ----- ---------- ----- -----
</TABLE>
Non-performing assets are defined as non-accrual loans and real estate
acquired by foreclosure. Non-performing assets as of December 31, 1996 and 1995
were comprised solely of loans and totaled approximately $1,574,000 and
$633,000, respectively. Table 9, "Non-Performing Assets," presents information
on these assets for the past two years, and Table 10, "Foregone Interest,"
illustrates the corresponding interest lost on non-performing assets.
As a result of management's ongoing review of the loan portfolio, loans are
classified as non-accrual, even though the presence of collateral or the
borrower's financial strength may be sufficient to provide for ultimate
repayment. Interest on non-accrual loans is recognized only when received. Table
10, "Foregone Interest," indicates the amount of interest that would have been
recorded had all loans classified as non-accrual been current in accordance with
their original terms compared to the amount of interest income actually
recognized.
TABLE 9: NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
------------ ----------
Loans on nonaccrual basis............................................................... $ 1,574,000 $ 633,000
Renegotiated or restructured loans...................................................... -- --
Real estate acquired by foreclosure..................................................... -- --
------------ ----------
Total non-performing assets......................................................... $ 1,574,000 $ 633,000
------------ ----------
------------ ----------
</TABLE>
At December 31, 1996, impaired loans which are included in nonaccrual loans,
amounted to $849,856. These impaired loans are classified as collateral
dependent and, accordingly are recorded at the lower of cost or the fair value
of the collateral. During 1996, the average recorded investment in impaired
loans was approximately $257,000 and no income has been accrued or collected on
these loans while they have been classified impaired. There were no impaired
loans at December 31, 1996 with an allocated valuation allowance and there were
no impaired loans as of or for the year ended December 31, 1995.
In March, 1997 management anticipates placing on non-accrual status one real
estate development loan of approximately $960,000.
21
<PAGE>
TABLE 10: FOREGONE INTEREST
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Interest income that would have been accrued at original terms.............................. $ 31,896 $ 65,000
Interest recognized......................................................................... -- --
</TABLE>
CAPITAL RESOURCES
Stockholders' equity was $23,796,002 as of December 31, 1996 as compared to
$10,701,986 as of December 31, 1995. The increase of $13,094,016 was primarily
the result of the proceeds of the stock sale in December, 1996 of $15,249,410
reduced by the 1996 loss of $2,173,319. No dividends have been declared by the
Company since its inception. In January, 1997, the Company sold an additional
210,000 shares of common stock as a result of the over allotment of shares in
the initial public stock offering, raising stockholders' equity an additional
$2,343,600.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks and bank holding companies are required to maintain capital levels based
on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
To date, the Company has provided its capital requirements mainly through
the funds received for its stock offerings. In the future, the Company may
consider raising capital from time to time through an offering of common stock
or other securities. As reflected in Table 11 "Capital Ratios", the Bank
exceeded its capital adequacy requirements as of December 31, 1996 and 1995. The
Company continually monitors its capital adequacy ratios to assure that the Bank
exceeds regulatory capital requirements.
Capital is classified as Tier 1 (common stockholders' equity less certain
intangible assets) and Total Capital (Tier 1 plus the allowance for loan
losses). Minimum required levels must at least equal 4% for Tier 1 capital and
8% for Total Capital. In addition, institutions must maintain a minimum of 4%
leverage capital ratio (Tier 1 capital to average total assets for the previous
quarter).
The Bank's capital position is presented in the following Table:
TABLE 11: CAPITAL RATIOS
<TABLE>
<CAPTION>
1996 1995 REQUIREMENT
--------- --------- -----------------
<S> <C> <C> <C>
Tier 1 capital to risk weighted assets........................................... 13.3% 30.9% 4.0%
Total capital to risk weighted assets............................................ 14.2% 32.1% 8.0%
Tier 1 capital leverage ratio.................................................... 14.7% 25.4% 4.0%
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary objective of asset/liability management is to ensure the steady
growth of the Company's primary earnings component, net interest income. Net
interest income can fluctuate with significant interest rate movements. To
lessen the impact of these rate swings, management endeavors to structure the
balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
The measurement of the Company's interest rate sensitivity, or "gap," is one
of the principal techniques used in asset/liability management. Interest
sensitive gap is the dollar difference between assets
22
<PAGE>
and liabilities which are subject to interest-rate pricing within a given time
period, including both floating rate or adjustable rate instruments and
instruments which are approaching maturity.
Bank management oversees the asset/liability management function and meets
periodically to monitor and manage the structure of the balance sheet, control
interest rate exposure, and evaluate pricing strategies for the Bank. The asset
mix of the balance sheet is continually evaluated in terms of several variables;
yield, credit quality, appropriate funding sources and liquidity. Management of
the liability mix of the balance sheet focuses on expanding the various funding
sources.
In theory, interest rate risk can be diminished by maintaining a nominal
level of interest rate sensitivity. In practice, this is made difficult by a
number of factors, including cyclical variation in loan demand, different
impacts on interest-sensitive assets and liabilities when interest rates change,
and the availability of funding sources. Accordingly, the Company undertakes to
manage the interest-rate sensitivity gap by adjusting the maturity of and
establishing rates on the earning asset portfolio and certain interest-bearing
liabilities commensurate with management's expectations relative to market
interest rates. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Bank.
The interest rate sensitivity position as of December 31, 1996 is presented
in Table 12: "Rate Sensitivity Analysis." The difference between rate-sensitive
assets and rate-sensitive liabilities, or the interest rate sensitivity gap, is
shown at the bottom of the table. At December 31, 1996, the Bank had an asset
sensitive gap (more assets than liabilities subject to repricing within the
stated time frame) over a 180-day period. The Bank would benefit from increasing
market rates of interest when it is asset sensitive and would benefit from
decreasing market rates of interest when it is liability sensitive. This
suggests that if interest rates should increase over this period, the net
interest margin would improve; and if interest rates should decrease, the net
interest margin would decline. Since all interest rates and yields do not adjust
at the same velocity, the gap is only a general indicator of interest rate
sensitivity. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration the
fact that changes in interest rates do not affect all assets and liabilities
equally. Net interest income may be impacted by other significant factors in a
given interest rate environment, including changes in the volume and mix of
earning assets and interest-bearing liabilities.
Cash flows from financing activities, which included funds received from new
and existing depositors, provided a large source of liquidity for the years
ended December 31, 1996 and 1995. The Bank seeks to rely primarily on core
deposits from customers to provide stable and cost-effective sources of funding
to support asset growth. The Bank also seeks to augment such deposits with
longer term and higher yielding certificates of deposit. CD's of $100,000 or
more are summarized by maturity in Table 13: "Maturity of Time Deposits $100,000
or More". Other sources of funds available to the Bank include short-term
borrowings, primarily in the form of Federal Home Loan Bank collateralized
borrowings.
23
<PAGE>
TABLE 12: RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------------------------------------
LONGER THAN
10 YEARS
180 DAYS 181 DAYS- ONE-FIVE FIVE-TEN OR NON-
OR LESS ONE YEAR YEARS YEARS SENSITIVE TOTAL
--------- ----------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNINGS ASSETS:
Interest-bearing deposits...................... $ 27,186 $ -- $ -- $ -- $ -- $ 27,186
Investment securities.......................... -- -- 1,099 -- 806 1,905
Loans.......................................... 48,252 7,902 27,540 4,190 7,880 95,764
--------- ----------- ---------- --------- ------------ ----------
Total interest-earnings assets............. $ 75,438 $ 7,902 $ 28,639 $ 4,190 $ 8,686 $ 124,855
--------- ----------- ---------- --------- ------------ ----------
--------- ----------- ---------- --------- ------------ ----------
INTEREST-BEARING LIABILITIES:
Savings........................................ $ 5,574 $ -- $ -- $ -- $ -- $ 5,574
NOW accounts................................... 3,974 -- -- -- -- 3,974
Money market accounts.......................... 15,165 -- -- -- -- 15,165
CDs & IRAs..................................... 10,892 12,505 38,356 -- -- 61,753
Federal Home Loan Bank advances................ 6,000 -- -- -- -- 6,000
--------- ----------- ---------- --------- ------------ ----------
Total interest-bearing liabilities......... $ 41,605 $ 12,505 $ 38,356 $ -- $ -- $ 92,466
--------- ----------- ---------- --------- ------------ ----------
--------- ----------- ---------- --------- ------------ ----------
Interest rate sensitive gap........................ $ 33,833 $ (4,603) $ (9,717) $ 4,190 $ 8,686 $ 32,389
--------- ----------- ---------- --------- ------------ ----------
--------- ----------- ---------- --------- ------------ ----------
Cumulative interest rate gap....................... $ 33,833 $ 29,230 $ 19,513 $ 23,703 $ 32,389
--------- ----------- ---------- --------- ------------
--------- ----------- ---------- --------- ------------
Ratio of rate sensitive assets to rate sensitive
liabilities...................................... 181% 63% 75% --
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
</TABLE>
DEPOSITS
The Bank uses deposits as the primary source of funding of its assets. The
Bank has experienced significant growth in its deposits, especially in CD's. The
following table describes the maturity of time deposits of $100,000 or more.
TABLE 13: MATURITY OF TIME DEPOSITS $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1996 1995
------------- ------------
Under 3 months....................................................................... $ 1,056,043 $ 947,201
3 to 6 months........................................................................ 3,245,085 470,056
6 to 12 months....................................................................... 2,759,789 521,703
Over 12 months....................................................................... 4,266,016 706,687
------------- ------------
Total............................................................................ $ 11,326,933 $ 2,645,647
------------- ------------
------------- ------------
</TABLE>
The Bank offers individuals and businesses a wide variety of accounts. These
accounts include checking, savings, money market and CD's and are obtained
primarily from communities which the Bank serves. The Bank holds no brokered
deposits. The following table details the average amount, the average rate paid
on, and the total of, the following primary deposit categories for the years
ended December 31, 1996 and 1995.
24
<PAGE>
TABLE 14: AVERAGE DEPOSIT COMPOSITION AND COST
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
Non-interest-bearing demand deposits........................................... $ 7,753,271 -- 11.4%
------------- ---------
NOW & money market savings deposits............................................ 12,588,387 2.80% 18.4
Regular savings deposits....................................................... 4,634,702 3.00% 6.8
Time deposits.................................................................. 43,390,771 5.78% 63.4
------------- ---------
Total interest-bearing deposits............................................ 60,613,860 4.95% 88.6
------------- ---------
-------------
Total deposits............................................................. $ 68,367,131 4.39% 100.0%
------------- --- ---------
------------- --- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
<S> <C> <C> <C>
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
------------- ----------- -----------
Noninterest-bearing demand deposits............................................. $ 984,578 -- 3.6%
------------- -----
NOW & money market savings deposits............................................. 6,477,267 3.26% 23.7
Regular savings deposits........................................................ 3,080,912 2.14% 11.3
Time deposits................................................................... 16,793,114 5.36% 61.4
-----
Total interest-bearing deposits............................................. 26,351,293 4.47% 96.4
------------- -----
Total deposits.............................................................. $ 27,335,871 4.30% 100.0%
------------- --- -----
------------- --- -----
</TABLE>
Total deposits as of December 31, 1996 were $102,289,146 compared to
$41,486,641 as of December 31, 1995, an increase of $60,802,505. While the main
source of these increases was certificates of deposit, all other types of
deposits increased as well, including savings accounts, money market savings
deposits, interest bearing demand deposits, and non-interest bearing demand
deposits. These increases reflect management's growth strategy which includes
significant marketing and promotion and the development of a branching network.
INVESTMENT SECURITIES
The following table presents the composition of the Company's securities
portfolio as of December 31, 1996 and 1995.
TABLE 15: INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
------------ ----------
Investment securities--available-for-sale:
Investment in Federal Home Loan Bank stock, at cost................................... $ 480,800 $ 301,000
Other equity securities............................................................... 324,875 --
------------ ----------
Total investment securities--available-for-sale..................................... 805,675 301,000
------------ ----------
Investment securities--held to maturity:
U.S. Treasury securities.............................................................. 1,000,000 --
Mortgage-backed securities............................................................ -- --
Other securities...................................................................... 99,000 99,000
------------ ----------
Total investment securities--held to maturity....................................... 1,099,000 --
------------ ----------
Total investment securities......................................................... $ 1,904,675 $ 400,000
------------ ----------
------------ ----------
</TABLE>
25
<PAGE>
The following table presents the maturity distribution of debt securities as
of December 31, 1996:
TABLE 16: MATURITIES OF DEBT INVESTMENT SECURITIES
<TABLE>
<CAPTION>
UP TO 1 YEAR OVER
ONE YEAR TO 5 YEARS 5 YEARS TOTAL
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.......................................... $ -- $ 1,000,000 $ -- $ 1,000,000
Other securities.................................................. -- 99,000 -- 99,000
----- ------------ ----- ------------
Total......................................................... $ -- $ 1,099,000 $ -- $ 1,099,000
----- ------------ ----- ------------
----- ------------ ----- ------------
</TABLE>
In December 1995, management utilized the one-time option allowed by the
Financial Accounting Standards Board and designated its mortgage-backed
securities portfolio as available for sale. Management sold its portfolio in
late 1995, providing liquidity for loan fundings.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
NEW ACCOUNTING STANDARDS
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. In June 1996 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, Accounting For Transfers
And Servicing Of Financial Assets And Extinguishments Of Liabilities ("SFAS No.
125"). SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996 and is to
be applied prospectively. This statement will require, among other things, that
the Company record at fair value assets and liabilities resulting from a
transfer of financial assets. The Company adopted the provisions of SFAS No. 125
on January 1, 1997 and the adoption of this statement is not anticipated to have
a material effect on the Company's financial position or results of operations.
ITEM 7 FINANCIAL STATEMENTS
The report of independent accountants and the financial information called
for by this item are contained on pages 27 through 47 of this document.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Mariner Bancorp:
We have audited the accompanying consolidated statements of financial
condition of First Mariner Bancorp and subsidiary (the Corporation) as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Mariner Bancorp and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, MD
March 26, 1997
27
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Cash on hand and in banks.......................................................... $ 5,323,984 3,435,126
Interest-bearing deposits.......................................................... 27,186,076 14,218,989
Securities sold (note 1)........................................................... -- 2,337,625
Available-for-sale securities, at fair value....................................... 324,875 --
Investment securities, fair value of $1,097,438 and $99,000, respectively (note
3)............................................................................... 1,099,000 99,000
Loans receivable, net (notes 4 and 7).............................................. 94,607,187 29,760,313
Federal Home Loan Bank of Atlanta stock, at cost (notes 7 and 10).................. 480,800 301,000
Property and equipment, net (note 5)............................................... 2,671,018 1,796,963
Prepaid expenses and other assets.................................................. 868,606 849,329
-------------- ------------
$ 132,561,546 52,798,345
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6)................................................................ $ 102,289,146 41,486,641
Federal Home Loan Bank advances (note 7)......................................... 6,000,000 --
Accrued expenses and other liabilities........................................... 476,398 609,718
-------------- ------------
Total liabilities.................................................................. 108,765,544 42,096,359
-------------- ------------
Stockholders' equity (notes 9, 10, 12 and 14):
Common stock, $.05 par value; 5,000,000 shares authorized; 2,627,263 and
1,226,613 shares issued and outstanding, respectively.......................... 131,363 61,331
Additional paid-in capital....................................................... 27,350,118 12,164,240
Accumulated deficit.............................................................. (3,696,904) (1,523,585)
Unrealized gain on available-for-sale securities................................. 11,425 --
-------------- ------------
Net stockholders' equity........................................................... 23,796,002 10,701,986
-------------- ------------
Commitments and contingencies (notes 4, 5 and 7)
-------------- ------------
$ 132,561,546 52,798,345
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Interest income:
Loans.............................................................................. $ 6,177,495 1,981,588
Investments........................................................................ 558,950 403,201
Mortgage-backed securities......................................................... -- 176,650
------------- -----------
Total interest income................................................................ 6,736,445 2,561,439
------------- -----------
Interest expense:
Deposits (note 6).................................................................. 2,999,102 1,176,436
Borrowed funds and other (note 7).................................................. 108,234 93,184
------------- -----------
Total interest expense............................................................... 3,107,336 1,269,620
------------- -----------
Net interest income before provision for loan losses................................. 3,629,109 1,291,819
Provision for loan losses (note 4)................................................... 1,039,636 190,051
------------- -----------
Net interest income after provision for loan losses.................................. 2,589,473 1,101,768
------------- -----------
Noninterest income:
Service fees on loans.............................................................. 303,353 84,173
Service fees on deposits........................................................... 336,662 94,918
Gain on sale of securities......................................................... 330,030 8,970
Other.............................................................................. 103,898 8,953
------------- -----------
Total noninterest income............................................................. 1,073,943 197,014
------------- -----------
Noninterest expenses:
Salaries and employee benefits..................................................... 2,744,057 1,189,172
Net occupancy...................................................................... 786,825 275,660
Insurance premiums................................................................. 229,293 79,783
Furniture, fixtures and equipment.................................................. 253,394 82,968
Professional services.............................................................. 102,579 233,448
Advertising........................................................................ 379,566 147,549
Data processing.................................................................... 452,090 156,101
Office supplies.................................................................... 278,249 121,250
Amortization of cost of intangible assets.......................................... 74,927 64,463
Other.............................................................................. 535,699 231,017
------------- -----------
Total noninterest expenses........................................................... 5,836,679 2,581,411
------------- -----------
Loss before income tax benefit....................................................... (2,173,319) (1,282,629)
Income taxes (note 8)................................................................ -- --
------------- -----------
Net loss............................................................................. $ (2,173,319) (1,282,629)
------------- -----------
------------- -----------
Net loss per common share (note 1)................................................... $ (1.71) (1.88)
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
NUMBER OF UNREALIZED GAIN
SHARES OF ADDITIONAL ON AVAILABLE- NET
COMMON COMMON PAID-IN ACCUMULATED FOR-SALE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT SECURITIES EQUITY
---------- ---------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994................... 225,813 $ 11,291 2,206,280 (240,956) -- 1,976,615
Common stock issued................. 1,000,800 50,040 9,957,960 -- -- 10,008,000
Net loss............................ -- -- -- (1,282,629) -- (1,282,629)
---------- ---------- ------------ ------------ ------ ------------
Balance at
December 31, 1995................... 1,226,613 61,331 12,164,240 (1,523,585) -- 10,701,986
Common stock issued,
net of costs of issuance.......... 1,400,650 70,032 15,185,878 -- -- 15,255,910
Net loss............................ -- -- -- (2,173,319) -- (2,173,319)
Unrealized holding gain............. -- -- -- -- 11,425 11,425
---------- ---------- ------------ ------------ ------ ------------
Balance at
December 31, 1996................... 2,627,263 $ 131,363 27,350,118 (3,696,904) 11,425 23,796,002
---------- ---------- ------------ ------------ ------ ------------
---------- ---------- ------------ ------------ ------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (2,173,319) (1,282,629)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of unearned loan fees, net........................................ (587,549) (139,713)
Amortization of premiums on deposits........................................... (28,033) (74,632)
Amortization of premiums on loans.............................................. 78,615 83,973
Depreciation and amortization.................................................. 417,760 189,755
Provision for loan losses...................................................... 1,039,636 190,051
Net increase (decrease) in accrued expenses and other liabilities.............. (133,320) 479,629
Amortization of premiums and discounts on mortgage-backed securities, net...... -- (16,778)
Increase in prepaids and other assets.......................................... (94,204) (518,461)
Gain on sale of securities..................................................... (330,030) (8,970)
-------------- -------------
Net cash used in operating activities.............................................. (1,810,444) (1,097,775)
-------------- -------------
Cash flows from investing activities:
Loan disbursements, net of principal repayments.................................. (65,377,575) (10,198,765)
Purchases of property and equipment.............................................. (1,216,889) (904,637)
Purchases of Federal Home Loan Bank of Atlanta stock............................. (179,800) --
Proceeds from securities sold.................................................... 2,337,625 --
Purchase of available-for-sale securities........................................ (2,153,787) --
Sale of investment available-for-sale securities................................. 2,170,367 --
Purchase of investment securities................................................ (1,000,000) --
Principal repayments on mortgage-backed securities............................... -- 294,273
Sales of loans................................................................... -- 2,630,929
Purchases of loans............................................................... -- (2,339,505)
Maturities of investments in certificates of deposit............................. -- 491,000
-------------- -------------
Net cash used in investing activities.............................................. (65,420,059) (10,026,705)
-------------- -------------
Cash flows from financing activities:
Net increase in deposits......................................................... 60,830,538 20,461,329
Proceeds from advances from Federal Home Loan Bank of Atlanta.................... 6,000,000 --
Repayment of advances from Federal Home Loan Bank of Atlanta..................... -- (3,150,000)
Proceeds from stock issuance, net................................................ 15,255,910 10,008,000
-------------- -------------
Net cash provided by financing activities.......................................... 82,086,448 27,319,329
-------------- -------------
Increase in cash and cash equivalents.............................................. 14,855,945 16,194,849
Cash and cash equivalents at beginning of year..................................... 17,654,115 1,459,266
-------------- -------------
Cash and cash equivalents at end of year........................................... $ 32,510,060 17,654,115
-------------- -------------
-------------- -------------
Supplemental information:
Interest paid on deposits and borrowed funds..................................... $ 2,938,407 1,216,424
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
First Mariner Bancorp (the "Corporation") is a bank holding company
incorporated under the laws of Maryland and registered under the Bank Holding
Company Act of 1956, as amended. The Corporation was organized as "MarylandsBank
Corp." in May 1994, and the Corporation's name was changed to "First Mariner
Bancorp" in May 1995. The Corporation owns 100% of common stock of First Mariner
Bank (the "Bank").
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses.
In connection with these determinations, management evaluates historical trends
and ratios and where appropriate obtains independent appraisals for significant
properties and prepares fair value analyses as appropriate.
Management believes that the allowances for losses on loans are adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the State of Maryland. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowances for losses on loans. Such agencies may
require the Banks to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
SECURITIES SOLD
Securities sold represents net sales proceeds due from brokers for sales
transactions executed prior to December 31, 1995 but not settling until after
December 31, 1995.
LOAN FEES
Origination and commitment fees and direct origination costs on loans held
for investment are deferred and amortized to income over the contractual lives
of the related loans using the interest method. Under certain circumstances,
commitment fees are recognized over the commitment period or upon expiration of
the commitment. Unamortized loan fees are recognized in income when the related
loans are sold or prepaid.
SALES OF MORTGAGE LOANS
Loans originated for sale are carried at the lower of aggregate cost or
market value. Market value is determined based on outstanding investor
commitments or, in the absence of such commitments, based on
32
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
current investor yield requirements. Gains and losses on loan sales are
determined using the specific identification method.
INVESTMENT SECURITIES
Debt securities that an entity has the positive intent and ability to hold
to maturity are classified as held to maturity and recorded at amortized cost.
Debt and equity securities are classified as trading securities if bought and
held principally for the purpose of selling them in the near term. Trading
securities are reported at fair value, with unrealized gains and losses included
in earnings. Debt securities not classified as held to maturity and debt and
equity securities not classified as trading securities are considered available
for sale and are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of tax effects.
The Corporation designates securities into one of the three categories at
the time of purchase. If a decline in value of an individual security classified
as held to maturity or available for sale is judged to be other than temporary,
the cost basis of that security is reduced to its fair value and the amount of
the write-down is reflected in earnings. Fair value is determined based on bid
prices published in financial newspapers or bid quotations received from
securities dealers. For purposes of computing realized gains or losses on the
sales of investments, cost is determined using the specific identification
method. Premiums and discounts on investment and mortgage-backed securities are
amortized over the term of the security using methods that approximate the
interest method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are accumulated using straight-line
and accelerated methods over the estimated useful lives of the assets. Additions
and betterments are capitalized and charges for repairs and maintenance are
expensed when incurred. The cost and accumulated depreciation or amortization
are eliminated from the accounts when an asset is sold or retired and the
resultant gain or loss is credited or charged to income.
INTANGIBLE ASSETS ACQUIRED
Intangible assets acquired in connection with certain acquisitions are
amortized using the straight-line method over the estimated useful lives of the
assets of ten years. Organization costs are being amortized over five years.
These amounts are included in prepaid expenses and other assets.
NONACCRUAL AND IMPAIRED LOANS
The allowance for losses on loans is determined based on management's review
of the loan portfolio and analysis of the borrowers' ability to repay, past
collection experience, risk characteristics of individual loans or groups of
similar loans and underlying collateral, current and prospective economic
conditions and status of nonperforming loans.
Loans are placed in nonaccrual status when they are past-due 90 days as to
either principal or interest, unless the loan is well secured and in the process
of collection or when in the opinion of management, the collection of principal
and interest is in doubt. A loan remains in nonaccrual status until the loan is
current
33
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
as to payment of both principal and interest and the borrower demonstrates the
ability to pay and remain current. Loans are charged-off when a loan or a
portion thereof is considered uncollectible.
In accordance with SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN and SFAS No. 118, ACCOUNTING FOR CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME
RECOGNITION DISCLOSURES, the Corporation identifies impaired loans and measures
impairment (i) at the present value of expected cash flows discounted at the
loan's effective interest rate; (ii) at the observable market price, or (iii) at
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
an impairment is recognized through a valuation allowance and corresponding
charge to provision for loan losses.
A loan is determined to be impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A loan is
not considered impaired during a period of delay in payment if the Corporation
expects to collect all amounts due, including interest past-due. The Corporation
generally considers a period of delay in payment to include delinquency up to 90
days.
When the ultimate collectibility of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent any interest has been foregone, and
then they are recorded as recoveries of any amounts previously charged off. When
this doubt does not exist, cash receipts are applied under the contractual terms
of the loan agreements.
SFAS No. 114 does not apply to larger groups of smaller-balance homogeneous
loans such as consumer installment, residential first and second mortgage loans
and credit card loans. These loans are collectively evaluated for impairment.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the tax bases of
assets and liabilities. Deferred income taxes are provided on income and expense
items when they are reported for financial statement purposes in periods
different from the periods in which these items are recognized in the income tax
returns. Deferred tax assets are recognized only to the extent that it is more
likely than not that such amounts will be realized based upon consideration of
available evidence, including tax planning strategies and other factors.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Corporation
considers all highly liquid investments with maturities at date of purchase of
three months or less to be cash equivalents.
LOSS PER SHARE
The loss per share computation is based on the weighted average number of
shares outstanding during the years ended December 31, 1996 and 1995. The number
of shares used in the computation was 1,272,962 and 681,893 shares,
respectively.
34
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net loss per common share on a proforma basis would have been $.49 for the
year ended December 31, 1996, assuming the common stock had been issued on
January 1, 1996 and assuming the proceeds were invested in investment securities
at a rate of 6.0%.
The common stock equivalents, disclosed in note 12, were antidilutive for
all periods presented, and were thus excluded from the computation of net loss
per common share.
STOCK-BASED COMPENSATION
The Corporation uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is recognized
for awards of shares of common stock to employees only if the quoted market
price of the stock at the grant date (or other measurement date, if later) is
greater than the amount the employee must pay to acquire the stock.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123). SFAS No. 123
permits companies to adopt a new fair value-based method to account for
stock-based employee compensation plans or to continue using the intrinsic value
method. Information required by SFAS No. 123 concerning the Corporation's
stock-based compensation plan is provided in note 12.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
(2) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required by the Federal Reserve System to maintain certain cash
reserve balances based principally on deposit liabilities. At December 31, 1996
and 1995, the required reserve balances were $375,000 and $75,000, respectively.
(3) INVESTMENTS
Investments are comprised of the following at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ --------------- ----------- ----------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Treasury securities, due in one year or less.......... $ 1,000,000 -- (1,562) 998,438
Certificate of deposit, due after one through five years... 99,000 -- -- 99,000
--
------------ ----------- ----------
$ 1,099,000 -- (1,562) 1,097,438
--
--
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
At December 31, 1996, available-for-sale securities consisted of equity
securities with a cost basis of $313,450 and which had gross unrealized gains
totaling $11,425.
35
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(3) INVESTMENTS (CONTINUED)
At December 31, 1996 and 1995, the Corporation held a certificate of
deposit, totaling $99,000 with a scheduled maturity in 1998.
(4) LOANS RECEIVABLE
Substantially all of the Corporation's loans receivable are mortgage loans
secured by residential and commercial real estate properties located in the
State of Maryland. Loans are extended only after evaluation by management of
customers' creditworthiness and other relevant factors on a case-by-case basis.
The Corporation generally does not lend more than 90% of the appraised value of
a property and requires private mortgage insurance on residential mortgages with
loan-to-value ratios in excess of 80%. In addition, the Corporation generally
obtains personal guarantees of repayment from borrowers and/or others for
construction, commercial and multi-family residential loans and disburses the
proceeds of construction and similar loans only as work progresses on the
related projects.
Residential lending is generally considered to involve less risk than other
forms of lending, although payment experience on these loans is dependent to
some extent on economic and market conditions in the Corporation's primary
lending area. Commercial and construction loan repayments are generally
dependent on the operations of the related properties or the financial condition
of its borrower or guarantor. Accordingly, repayment of such loans can be more
susceptible to adverse conditions in the real estate market and the regional
economy.
Loans receivable and accrued interest thereon are summarized as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Loans secured by first mortgages on real estate:
Residential...................................................... $ 20,092,018 15,634,976
Commercial....................................................... 31,012,097 4,938,948
Construction, net of loans is process............................ 24,875,932 6,535,793
------------- ------------
75,980,047 27,109,717
Commercial....................................................... 17,096,663 869,641
Loans secured by second mortgages on real estate................. 120,701 580,942
Consumer loans................................................... 2,442,888 1,263,563
Loans secured by deposits and other.............................. 123,338 187,158
------------- ------------
Total loans...................................................... 95,763,637 30,011,021
------------- ------------
Unamortized loan premiums........................................ 205,311 283,926
Accrued interest receivable...................................... 712,614 201,704
Unearned loan fees, net.......................................... (788,731) (308,220)
Unearned loan discounts.......................................... (43,981) (51,831)
Allowance for losses............................................. (1,241,663) (376,287)
------------- ------------
(1,156,450) (250,708)
------------- ------------
$ 94,607,187 29,760,313
------------- ------------
------------- ------------
</TABLE>
Nonaccrual loans totaled approximately $1,574,000 and $633,000 at December
31, 1996 and 1995, respectively. Interest income which would have been
recognized had the loans been performing in
36
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(4) LOANS RECEIVABLE (CONTINUED)
accordance with the terms of these loans for would have been approximately
$32,000 and $65,000 respectively, for the years ended December 31, 1996 and
1995. No income was recognized on these loans in either year.
At December 31, 1996, impaired loans, which are included in nonaccrual
loans, amounted to $849,856. These impaired loans are classified as collateral
dependent and accordingly, are recorded at the lower of cost or the fair value
of the collateral. During 1996, the average recorded investment in impaired
loans was approximately $257,000 and no income has been accrued or collected on
these loans while they have been classified impaired.
There were no impaired loans at December 31, 1996 with an allocated
valuation allowance and there were no impaired loans as of or for the year ended
December 31, 1995.
Changes in the allowance for losses on loans are summarized as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ---------
<S> <C> <C>
Balance at beginning of year......................................... $ 376,287 244,847
Provisions for loan losses........................................... 1,039,636 190,051
Charge-offs, net of recoveries....................................... (174,260) (58,611)
------------ ---------
Balance at end of year............................................... $ 1,241,663 376,287
------------ ---------
------------ ---------
</TABLE>
Commitments to extend credit are agreements to lend to customers, provided
that terms and conditions established in the related contracts are met. At
December 31, 1996 and 1995, the Corporation had commitments to originate first
mortgage loans on real estate of approximately $2,000,000 and $1,495,000,
respectively, all of which were committed for sale in the secondary market.
At December 31, 1996 and 1995 the Corporation also had commitments to loan
funds under unused home-equity lines of credit aggregating approximately
$158,000 and $615,000, respectively, and unused commercial lines of credit
aggregating approximately $34,000,000 and $3,987,000, respectively. Such
commitments carry a floating rate of interest.
Commitments for mortgage loans generally expire within sixty days and are
normally funded with loan principal repayments, excess liquidity and savings
deposits. Since certain of the commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
Substantially all of the Corporation's outstanding commitments at December
31, 1996 and 1995 are for loans which would be secured by real estate with
appraised values in excess of the commitment amounts. The Corporation's exposure
to credit loss under these contracts in the event of non-performance by the
other parties, assuming that the collateral proves to be of no value, is
represented by the commitment amounts.
37
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(5) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIVES
------------ ---------- -------------
<S> <C> <C> <C>
Land.................................................................. $ 391,540 391,540 --
Buildings and improvements............................................ 924,685 885,986 10-39 years
Leasehold improvements................................................ 585,816 255,258 10-33 years
Furniture, fixtures and equipment..................................... 1,427,058 581,799 5-7 years
Automobiles........................................................... -- 9,544 5 years
------------ ----------
Total at cost......................................................... 3,329,099 2,124,127
Less accumulated depreciation and amortization........................ 658,081 327,164
------------ ----------
$ 2,671,018 1,796,963
------------ ----------
------------ ----------
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 was
approximately $423,000 and $118,000, respectively.
The Corporation and the Bank occupy space leased from a company, of which
the Chairman and CEO of the Corporation, is an officer, director and
shareholder. This company is paid $212,700 annually for office and branch space.
The term of the lease is five years. Management believes that such terms are at
least as favorable as those that could be obtained from a third party lessor.
The Bank has opened a full-service branch in three of Mars Super Markets,
Inc. stores and has installed ATMs in thirteen (13) of the markets. The Bank
intends to open additional branches in Mars Super Markets in the future. The
Bank pays rent of $36,500 per year for approximately 500 square feet of branch
space in each store. There is no charge to the Bank for the operation of ATMs in
each store. Mars Super Markets is represented on the Board of Directors of the
Corporation and the Bank.
Minimum lease payments due for each of the next five years are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 563,870
1998.............................................. 576,870
1999.............................................. 576,870
2000.............................................. 539,787
2001.............................................. 365,018
</TABLE>
38
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(6) DEPOSITS
Deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT EFFECTIVE AMOUNT EFFECTIVE
MATURING RATE MATURING RATE
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Noncertificate:
Passbook and other................................. $ 5,574,090 2.75% $ 3,646,609 2.80%
Checking accounts.................................. 3,974,082 1.35% 2,138,552 2.38%
Money fund accounts................................ 15,165,312 3.51% 5,601,546 3.21%
Non-interest bearing demand........................ 15,583,651 -- 3,073,860 --
-------------- ------ -------------- ------
40,297,135 14,460,567
Certificates:
Original maturities:
Under 12 months.................................. 3,997,620 5.42% 3,775,761 5.33%
12 to 60 months.................................. 53,028,947 5.87% 19,086,432 6.73%
IRA and KEOGH...................................... 4,725,944 5.70% 4,038,335 6.24%
-------------- ------ -------------- ------
61,752,511 26,900,528
Accrued interest payable............................. 204,665 62,678
Unamortized premium.................................. 34,835 62,868
-------------- ------ -------------- ------
$ 102,289,146 $ 41,486,641
-------------- --------------
-------------- --------------
<CAPTION>
% OF TOTAL % OF TOTAL
------------- -------------
<S> <C> <C> <C> <C>
Scheduled certificate maturities:
Under 6 months..................................... $ 10,891,971 17.64% $ 5,946,824 22.11%
6 months to 12 months.............................. 12,504,458 20.25% 11,599,052 43.12%
12 months to 24 months............................. 35,915,826 58.16% 5,741,082 1.34%
24 months to 36 months............................. 826,104 1.34% 1,550,118 5.76%
36 months to 48 months............................. 1,614,152 2.61% 649,275 2.41%
Over 48 months..................................... -- -- 1,414,177 5.26%
-------------- ------ -------------- ------
$ 61,752,511 100.00% $ 26,900,528 100.00%
-------------- --------------
-------------- --------------
</TABLE>
Certificates of deposit of $100,000 or more totaled approximately
$11,327,000 and $2,646,000 at December 31, 1996 and 1995, respectively.
(7) FEDERAL HOME LOAN BANK ADVANCES
Under a specific collateral pledge and security agreement with the Federal
Home Loan Bank at Atlanta (FHLB), the Corporation is required to maintain as
collateral for all of its borrowings specific first mortgage loans in an amount
equal to 154% of the advances. At December 31, 1996, the Corporation had
approximately $9,300,000 of first mortgage loans pledged as collateral, in
addition to the balance of FHLB stock. At December 31, 1996 outstanding advances
are due in 1997, reprice daily, and the Corporation had no additional credit
available under the blanket floating lien agreement with the FHLB. In February
1997, the FHLB approved a $20 million line of credit for the Corporation.
39
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(7) FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)
Certain information regarding FHLB advances are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
------------ ----------
Amount outstanding at year-end..................................... $ 6,000,000 --
Weighted average interest rate at year-end......................... 6.95% --
Maximum outstanding at any month-end............................... $ 6,000,000 3,150,000
Average outstanding................................................ $ 1,950,000 1,406,000
Weighted average interest rate during the year..................... 5.5% 6.6%
</TABLE>
(8) INCOME TAXES
Income taxes consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current............................................................... $ -- --
Deferred.............................................................. -- --
---------- ----------
$ -- --
---------- ----------
---------- ----------
</TABLE>
Income taxes are reconciled to the amount computed by applying the federal
corporate tax rate of 34% to income before taxes as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Income tax benefit at federal corporate rate.......................... $ 739,000 436,000
Nondeductible expenses................................................ 9,000 --
Change in valuation allowance......................................... (776,000) (433,000)
Other................................................................. 28,000 (3,000)
---------- ----------
$ -- --
---------- ----------
---------- ----------
</TABLE>
40
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities relate to the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans........................................................ $ 300,000 107,000
Excess of fair value of liabilities acquired over cost............................... 13,000 25,000
Net operating loss carryforwards..................................................... 1,076,000 407,000
Interest and fees on loans........................................................... 43,000 119,000
Other................................................................................ -- 3,000
------------- ----------
Total gross deferred assets............................................................ 1,432,000 661,000
Less valuation allowance............................................................... (1,341,000) (565,000)
------------- ----------
Net deferred tax assets................................................................ 91,000 96,000
------------- ----------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends............................................... 12,000 12,000
Excess of fair value of assets acquired over cost.................................... 79,000 84,000
------------- ----------
Total gross deferred tax liabilities................................................... 91,000 96,000
------------- ----------
Net deferred tax asset............................................................... $ -- --
------------- ----------
------------- ----------
</TABLE>
At December 31, 1996, the Corporation has net operating loss carryforwards
for federal income tax purposes of approximately $2,790,000 which are available
to offset future federal taxable income, if any, through 2010. As a result of
ownership changes in 1996, utilization of a portion of the net operating loss
carryforward is subject to annual limitations. In addition, approximately
$76,000 of the valuation allowance at December 31, 1995 was established in
connection with the certain acquisitions and will be credited to intangible
assets as realized.
(9) DIVIDENDS
As a depository institution whose deposits are insured by the FDIC, the Bank
may not pay dividends or distribute any of its capital assets while it remains
in default on any assessment due the FDIC. The Bank currently is not in default
under any of its obligations to the FDIC. As a commercial bank under the
Maryland Financial Institution Law, the Bank may declare cash dividends from
undivided profits or, with the prior approval of the Commissioner of Financial
Regulation, out of surplus in excess of 100% of its required capital stock, and
after providing for due or accrued expenses, losses, interest and taxes.
The Corporation and the Bank, in declaring and paying dividends, are also
limited insofar as minimum capital requirements authorities must be maintained.
The Corporation and the Bank comply with such capital requirements.
(10) REGULATORY MATTERS
The Corporation and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory
41
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(10) REGULATORY MATTERS (CONTINUED)
and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 1996 the Bank
was "well capitalized" under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that
management believes would change the Bank's category.
Regulatory capital amounts and ratios for the Corporation and the Bank as of
December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO
------------- ----- ------------ -----
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk weighted assets):
Consolidated.................................... $ 24,752,739 18.8% 10,532,145 8.0%
The Bank........................................ 19,050,803 14.2% 10,710,877 8.0%
Tier 1 capital (to risk weighted assets):
Consolidated.................................... 23,511,076 17.9% 5,266,072 4.0%
The Bank........................................ 17,809,140 13.3% 5,355,439 4.0%
Tier 1 capital (to average assets):
Consolidated.................................... 23,511,076 19.5% 4,832,127 4.0%
The Bank........................................ 17,809,140 14.7% 4,834,224 4.0%
As of December 31, 1995
Total capital (to risk weighted assets):
Consolidated.................................... 10,733,927 35.1% 2,446,742 8.0%
The Bank........................................ 9,820,888 32.1% 2,446,742 8.0%
Tier 1 capital (to risk weighted assets):
Consolidated.................................... 10,357,624 33.9% 1,223,371 4.0%
The Bank........................................ 9,444,585 30.9% 1,223,371 4.0%
Tier 1 capital (to average assets):
Consolidated.................................... 10,357,624 27.8% 1,488,716 4.0%
The Bank........................................ 9,444,585 25.4% 1,488,716 4.0%
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISION
------------------
AMOUNT RATIO
--------- --------
<S> <C> <C>
As of December 31, 1996:
Total capital (to risk weighted assets):
Consolidated....................................13,165,181 10.0%
The Bank........................................13,388,597 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated....................................7,899,108 6.0%
The Bank........................................8,033,158 6.0%
Tier 1 capital (to average assets):
Consolidated....................................6,040,159 5.0%
The Bank........................................6,042,781 5.0%
As of December 31, 1995
Total capital (to risk weighted assets):
Consolidated....................................3,058,427 10.0%
The Bank........................................3,058,427 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated....................................1,835,056 6.0%
The Bank........................................1,835,056 6.0%
Tier 1 capital (to average assets):
Consolidated....................................1,860,895 5.0%
The Bank........................................1,860,895 5.0%
</TABLE>
The Federal Deposit Insurance Corporation (FDIC), through the Savings
Association Insurance Fund (SAIF), insures deposits of accountholders up to
$100,000. The Bank pays an annual premium to provide
42
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(10) REGULATORY MATTERS (CONTINUED)
for this insurance. The Bank is a member of the Federal Home Loan Bank System
and is required to maintain an investment in the stock of the FHLB equal to at
least 1% of the unpaid principal balances of their residential mortgage loans,
.3% of their total assets or 5% of their outstanding advances from the bank,
whichever is greater. Purchases and sales of stock are made directly with the
bank at par value.
(11) FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of First Mariner Bancorp (parent
company only):
BALANCE SHEET
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Assets:
Cash.......................................................... $ 6,027,542 782,395
Available-for-sale securities................................. 324,875 --
Investment in subsidiary...................................... 18,163,028 9,935,567
Other assets.................................................. 18,812 26,055
------------- -------------
$ 24,545,682 10,744,017
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity:
Other liabilities............................................. $ 738,255 42,031
Stockholders' equity.......................................... 23,796,002 10,701,986
------------- -------------
$ 24,545,682 10,744,017
------------- -------------
------------- -------------
</TABLE>
INCOME STATEMENT
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Income:
Interest income................................................ $ 42,689 40,537
Gain on sale of stock.......................................... 330,030 --
Other income................................................... -- 241
------------- -----------
372,719 40,778
------------- -----------
Expenses:
Salaries and employee expenses................................. 239,950 215,000
Amortization................................................... 7,263 7,272
Interest expense on short-term borrowings...................... -- 241
Professional expenses.......................................... -- 56,414
Other expenses................................................. 15,116 12,191
------------- -----------
262,329 291,118
------------- -----------
Income (loss) before equity in undistributed net loss of the
Bank........................................................... 110,390 (250,340)
Equity in undistributed net loss of the Bank..................... (2,283,709) (1,032,289)
------------- -----------
Net loss......................................................... $ (2,173,319) (1,282,629)
------------- -----------
------------- -----------
</TABLE>
43
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(11) FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ 110,390 (250,340)
Depreciation and amortization.................................. 7,263 7,272
Increase in accrued expenses and other liabilities............. 696,224 42,031
Increase in prepaid expenses and other assets.................. (7,243) (26,055)
Gain on sale of securities..................................... (330,030) --
Other.......................................................... (3,947) (8,997)
------------- -----------
Net cash used in operating activities............................ 472,657 (236,089)
------------- -----------
Net cash flows from investing activities:
Investment in subsidiaries..................................... (10,500,000) (8,989,516)
Purchase of available for sale securities...................... (2,153,787) --
Sale of available for sale securities.......................... 2,170,367 --
------------- -----------
Net cash flows from investing activities......................... (10,483,420) (8,989,516)
------------- -----------
Net cash provided by financing activities -- proceeds from stock
issuance, net.................................................. 15,255,910 10,008,000
------------- -----------
15,255,910 10,008,000
------------- -----------
Net increase in cash and temporary investments................... 5,245,147 782,395
Cash and temporary investments at beginning of year.............. 782,395 --
------------- -----------
Cash and temporary investments at end of year.................... $ 6,027,542 782,395
------------- -----------
------------- -----------
</TABLE>
(12) STOCK BASED COMPENSATION
STOCK OPTIONS
The Corporation has stock option award arrangements which provide for the
granting of options to acquire common stock to directors and key employees.
Option prices are equal or greater than the estimated fair market value of the
common stock at the date of the grant. Options are exercisable immediately after
the date of grant and expire ten years after the date of grant.
44
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(12) STOCK BASED COMPENSATION (CONTINUED)
Information with respect to stock options is as follows for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
Outstanding at beginning of year........................................ 15,000 $ 10.00 -- $ 10.00
Granted................................................................. 166,300 10.00 15,000 10.00
Forfeited............................................................... (700) -- -- --
--------- ----------- --------- -----------
Outstanding at end of year.............................................. 180,600 $ 10.00 15,000 $ 10.00
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The weighted average remaining life of options outstanding at December 31,
1996 was 9.6 years.
The Corporation applies the intrinsic value method in accounting for its
stock options and, accordingly, no compensation cost has been recognized for its
options in the financial statements. Had the Corporation determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Corporation's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net loss
As reported......................................................................... $ 2,173,319 1,282,629
Pro forma........................................................................... 2,908,319 1,348,629
Primary loss per share
As reported......................................................................... 1.71 1.88
Pro forma........................................................................... 2.29 1.98
</TABLE>
The weighted average fair values of options granted during 1996 and 1995
were $735,000 and $66,000, respectively, on the dates of grant. The fair values
of options granted were calculated using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1996 and
1995: risk-free interest rate of 6.01% in both years; no expected votality in
both years; and expected lives of ten years.
WARRANTS
Warrants to acquire 818,323 and 195,000 shares of common stock at $10.00 per
share were outstanding and exercisable at December 31, 1996 and 1995,
respectively. During all periods presented no warrants to acquire shares of
common stock were exercised.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (SFAS 107) requires the Corporation to disclose
estimated fair values for certain on- and off-balance sheet financial
instruments. Fair value estimates, methods, and assumptions are set forth below
for the Corporation's financial instruments as of December 31, 1996 and 1995.
45
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH ON HAND AND IN BANKS
The carrying amount for cash on hand and in banks approximates fair value
due to the short maturity of these instruments.
FEDERAL FUNDS SOLD
The carrying amount for federal funds sold approximates fair value due to
the overnight maturity of these instruments.
INVESTMENT SECURITIES
The fair value of investment securities is based on bid prices received from
an external pricing service or bid quotations received from securities dealers.
LOANS
Loans were segmented into portfolios with similar financial characteristics.
Loans were also segmented by type such as residential, multifamily and
nonresidential, construction and land, second mortgage loans, commercial, and
consumer. Each loan category was further segmented by fixed and adjustable rate
interest terms and performing and nonperforming categories.
The fair value of residential loans was calculated by discounting
anticipated cash flows based on weighted-average contractual maturity,
weighted-average coupon, prepayment assumptions and discount rate.
The fair value for nonperforming loans was determined by reducing the
carrying value of nonperforming loans by the Corporation's historical loss
percentage for each specific loan category.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable approximates its fair
value.
DEPOSITS
Under SFAS 107, the fair value of deposits with no stated maturity, such as
noninterest bearing deposits, interest bearing now accounts, money market and
statement savings accounts, is equal to the carrying amounts. The fair value of
certificates of deposit was based on the discounted value of contractual cash
flows. The discount rate for certificates of deposit was estimated using the
rate currently offered for deposits of similar remaining maturities.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable approximates its fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Corporation's adjustable rate commitments to extend credit move with
market rates and are not subject to interest rate risk. The rates and terms of
the Corporation's fixed rate commitments to extend
46
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
credit are competitive with others in the various markets in which the
Corporation operates. The carrying amounts are reasonable estimates of the fair
value of these instruments.
The disclosure of fair value amounts does not include the fair values of any
intangibles, including core deposit intangibles. Core deposit intangibles
represent the value attributable to total deposits based on an expected duration
of customer relationships.
The carrying value and estimated fair value of financial instruments is
summarized as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing deposits................................ $ 32,510 32,510 17,654 17,654
Investment securities............................................. 1,424 1,422 2,738 2,738
Loans receivable, net of unearned income.......................... 95,849 30,137
Less allowance for losses on loans................................ (1,242) (376)
---------- -----------
Loans, net........................................................ 94,607 94,718 29,761 30,329
Liabilities:
Deposit accounts.................................................. 102,289 102,629 41,487 41,953
FHLB Advances..................................................... 6,000 6,000 -- --
</TABLE>
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about financial instruments. These estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Corporation's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect estimates.
(14) SUBSEQUENT EVENT
In January 1997, an additional 210,000 shares of common stock were issued at
$12 per share and net proceeds to the Corporation were approximately $2,344,000.
47
<PAGE>
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 13,
1997, which proxy statement will be filed with the Securities nd Exchange
Commission not later than 120 days after the close of the fiscal year.
ITEM 10 EXECUTIVE COMPENSATION
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 13,
1997, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the fiscal year.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 13,
1997, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the fiscal year.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information relating to directors and executive officers of the
Company, executive compensation, security ownership of certain beneficial owners
and management, and certain relationships and related transactions is
incorporated by reference herein from the Company's definitive proxy statement
in connection with its Annual Meeting of Shareholders to be held on May 13,
1997, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the fiscal year.
ITEM 13 EXHIBITS, LISTS AND REPORTS ON FORM 8-K
The exhibits filed as a part of this Registration Statement are as follows:
(a) LIST OF EXHIBITS
3.1 Amended and Restated Articles of Incorporation of First Mariner
Bancorp (previously filed as an exhibit to the November 13, 1996
SB-2)
3.2 Amended and Restated Bylaws of First Mariner Bancorp (previously
filed as an exhibit to the November 13, 1996 SB-2)
4.1 Form of Warrant (previously filed as an exhibit to the November
13, 1996 SB-2)
4.2 Form of Common Stock Certificate (previously filed as an exhibit
to the November 13, 1996 SB-2)
48
<PAGE>
10.1 1996 Stock Option Plan of First Mariner Bancorp (previously filed
as an exhibit to the November 13, 1996 SB-2)
10.2 Employment Agreement dated May 1, 1995 between First Mariner
Bancorp and First Mariner Bank and George H. Mantakos (previously
filed as an exhibit to the November 13, 1996 SB-2)
10.3 Lease Agreement dated September 1, 1996 between Hale Intermodal
Transport Co. and First Mariner Bancorp (previously filed as an
exhibit to the November 13, 1996 SB-2)
10.4 Lease Agreement dated March 1, 1996 between First Mariner Bancorp
and Mars Super Markets, Inc. (previously filed as an exhibit to
the November 13, 1996 SB-2)
21. Subsidiaries of First Mariner Bancorp
(b) REPORTS ON FORM 8-K
None
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
FIRST MARINER BANCORP
By:
------------------------------------------
Edwin F. Hale, Sr.
Chairman and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chairman and Chief
Executive Officer
- ------------------------------ (Principal Executive , 1996
Edwin F. Hale, Sr. Officer)
- ------------------------------ Director, President and , 1996
Joseph A. Cicero Chief Operating Officer
- ------------------------------ Director , 1996
George H. Mantakos
- ------------------------------ Controller (Principal , 1996
Kevin M. Healey Financial Officer)
- ------------------------------ Director , 1996
Barry B. Bondroff
- ------------------------------ Director , 1996
Rose M. Cernak
- ------------------------------ Director , 1996
Christopher P. D'anna
- ------------------------------ Director , 1996
Dennis M. Doyle
- ------------------------------ Director , 1996
Elayne Hettleman
- ------------------------------ Director , 1996
Bruce H. Hoffman
- ------------------------------ Director , 1996
Melvin S. Kabik
- ------------------------------ Director , 1996
R. Andrew Larkin
- ------------------------------ Director , 1996
John J. Matricciani
- ------------------------------ Director , 1996
Dennis C. McCoy
50
<PAGE>
<TABLE>
<C> <S> <C>
- ------------------------------ Director , 1996
Margaret D. McManus
- ------------------------------ Director , 1996
Walter L. McManus, Jr.
- ------------------------------ Director , 1996
John J. Mitcherling
- ------------------------------ Director , 1996
James P. O'Conor
- ------------------------------ Director , 1996
Kevin B. O'Connor
- ------------------------------
Governor William Donald Director , 1996
Schaefer
- ------------------------------ Director , 1996
Hanan Y. Sibel
- ------------------------------ Director , 1996
Leonard Stoler
</TABLE>
51
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Subsidiaries of the Registrant
First Mariner Bank is a wholly owned subsidiary of First Mariner Bancorp.
First Mariner Mortgage Corporation is a wholly owned subsidiary of First
Mariner Bank.
Compass Properties, Inc. is a wholly owned subsidiary of First Mariner Bank.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
MARINER BANCORP DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,323,984
<INT-BEARING-DEPOSITS> 27,186,076
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 324875
<INVESTMENTS-CARRYING> 1,099,000
<INVESTMENTS-MARKET> 1,097,438
<LOANS> 95,763,637
<ALLOWANCE> (1,241,663)
<TOTAL-ASSETS> 132,561,546
<DEPOSITS> 102,289,146
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 476,398
<LONG-TERM> 0
0
0
<COMMON> 131,363
<OTHER-SE> 23,664,639
<TOTAL-LIABILITIES-AND-EQUITY> 132,561,546
<INTEREST-LOAN> 6,177,495
<INTEREST-INVEST> 558,950
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,736,445
<INTEREST-DEPOSIT> 2,999,102
<INTEREST-EXPENSE> 3,107,336
<INTEREST-INCOME-NET> 3,629,109
<LOAN-LOSSES> 1,039,636
<SECURITIES-GAINS> 330,030
<EXPENSE-OTHER> 5,836,679
<INCOME-PRETAX> (2,173,319)
<INCOME-PRE-EXTRAORDINARY> (2,173,319)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,173,319)
<EPS-PRIMARY> (1.71)
<EPS-DILUTED> (1.71)
<YIELD-ACTUAL> 9.05
<LOANS-NON> 1,574,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 960,000
<ALLOWANCE-OPEN> 376,287
<CHARGE-OFFS> 248,192
<RECOVERIES> 73932
<ALLOWANCE-CLOSE> 1,241,663
<ALLOWANCE-DOMESTIC> 876,904
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 364,759
</TABLE>
