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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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Form 10-KSB/A
Amendment No. 2 to
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, 1997
/ / 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 0-21815
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FIRST MARINER BANCORP
(Name of small business issuer in its charter)
<TABLE>
<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)
</TABLE>
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)
------------------------
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 year were $16,669,689.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998 was $50,208,603.
The number of shares outstanding of the registrant's common stock, as of
March 20, 1998, was 2,869,063 shares.
DOCUMENTS INCORPORATED BY REFERENCE
First Mariner Bancorp's definitive Proxy Statement dated April 10, 1998 for the
1998 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, 1997
Table of Contents
PART I
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Page
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Item I Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Common Stock and Related Stockholder Matters
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7 Financial Statements
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
PART III
Item 9 Directors and Executive Officers of the Registrant
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and Management
Item 12 Certain Relationships and Related Transactions
Item 13 Exhibits, Lists and Reports on Form 8-K
</TABLE>
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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 16 full service branches and 28
Automated Teller Machines ("ATMs"). At December 31, 1997, the Company had total
assets of $256,984,306.
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 Marylands, 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
oommn 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 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 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 used to optimize the market
1
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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. During the year ended December 31, 1997, options and
warrants were exercised for an additional 14,300 shares increasing stockholders'
equity by $143,000.
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. The Bank plans to expand the business
into the Easton area in early 1998.
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 emphasis 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.
To implement the strategy to create nontraditional joint ventures with
retail establishment the Bank has opened 5 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 R. 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 and mid-sized 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.
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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's services 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, new and used boat loans, overdraft protection, unsecured personal credit
lines and the debit card.
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 sale on 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.
Lending Activities
Loan Portfolio Composition. At December 31, 1997, the Bank's loan portfolio
totaled $144,546,499 representing approximately 56.2% of its total assets of
$256,984,306. The following table sets forth the Bank's loans by major
categories as of December 31, 1997:
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Amount Percentage
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Commercial $ 24,118,724 16.7%
Real Estate Development and Construction 30,602,219 21.2%
Real Estate Mortgage:
Residential 34,396,190 23.8%
Commercial 50,437,255 34.8%
Consumer 4,992,111 3.5%
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Total Loans $ 144,546,499 100.0%
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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 form 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.
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Real Estate Development and Construction Loans. The real estate development
and construction loan portfolio consisted of the following as of December 31,
1997:
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<CAPTION>
Amount Percentage
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<S> <C> <C>
Residential Construction $ 7,826,072 25.6%
Commercial Construction 304,000 1.0%
Residential Land Development 21,900,003 71.6%
Residential Land Acquisition 257,144 0.8%
Commercial Land Acquisition 315,000 1.0%
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Total Real Estate - Development and Construction $ 30,602,219 100.0%
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</TABLE>
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 a large 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 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 borrowers 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 will place some of these loans into its portfolio.
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 term of 10 years. The interest rates on home equity loans are
adjustable.
4
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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 leading 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 $2,950,000.
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.
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 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 customers 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.
5
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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. 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 p
proposing to acquire control through direct or indirect ownership of 25% or more
of any voting securities of the Company is 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 and-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 km 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 km. 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.
6
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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 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 institution in meeting the credit needs of
their 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 minimum 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 BLF 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 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 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.
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This recapitalization is expected to significantly lower the semiannual
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
S.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 has decreased. The Bank has
an assessment rate of $.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. It
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 restriction 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 arrangement 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.
A banking organization's risk-based capital ratio 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
and 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, 1997, the Bank's ratio of Tier 1 to risk-weighted assets stood at
11.1% and its ratio of total capital to risk-weighted assets stood at 12.0%. 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, 1997,
the Bank's leverage capital ratio stood at 10.2%.
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 of 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.
8
<PAGE>
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.
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.
9
<PAGE>
Monetary Policy
The earnings of a bank holding company are affected by the policies of
regulatory authorities including the FRB, in connection with the FRBs 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 37,000 square feet of space leased
from Edwin F. Hale, Sr., Chairman and Chief Executive Officer of the Company.
Rental for this space is approximately $567,000 annually, of which $532,000 is
allocated for 35,830 square feet of office and $35,000 is allocated for 1,170
square feet of Bank branch space and drive-up banking and 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>
Lease Renewal
Location Square Annual Rent Expiration Options
Feet
<S> <C> <C> <C> <C>
1801 South Clinton Street
Baltimore City 1,170 $35,000 08/31/01 5 Years
115 East Joppa Road Owns building
Towson (Baltimore County) 2,750 (subject to $25 - -
ground rent)
8631 Loch Raven Boulevard Month-to-month
Towson (Baltimore County) 1,000 $14,100 -
9833 Liberty Road Owns building
Baltimore County 2,800 (subject to - -
$12,000 ground
rent)
12 A S. Bel Air Parkway Owns building
Bel Air (Harford County) 2,288 (subject to 06/30/17 -
$35,000 ground
rent)
16 South Calvert Street
Baltimore City 2,515 $26,595 05/14/01 -
2375 Rolling Road (Mars Store)
Woodlawn (Baltimore County) 667 $36,500 11/01/00 5 Years
Chesapeake Center Drive (Mars
Store) Glen Burnie (Anne Arundel 484 $36,500 05/01/00 5 Years
County)
1013 Reisterstown Town Road
Pikesville (Baltimore County) 4,156 Owns building - -
60 Painters Mill Road
Owings Mills (Baltimore County) 2,350 $70,000 10/31/05 5 Years
161 Jennifer Road
Annapolis (Anne Arundel County) 4,000 $85,446 06/30/01 5 Years
1401 Pulaski Highway (Mars Store)
Edgewood (Harford County) 484 $36,500 12/03/01 5 Years
1770 Merritt Blvd
Dundalk (Baltimore County) 1,770 $32,500 08/31/11 5 Years
1738 York Road
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Lutherville (Baltimore County) 1,200 $36,000 04/30/12 15 Years
1018 Beards Hill Rd (Mars Store)
Aberdeen (Harford County) 525 $36,500 05/20/02 5 Years
15 E. Padonia Road (Mars Store)
Timonium (Baltimore County) 276 $36,500 10/19/02 5 Years
</TABLE>
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
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY MATTERS
Market for Common Stock
Shares of First Mariner Bancorp trades on The Nasdaq Stock Market's National
Market under the trading symbol FMAR. For the period January 1, 1997 through
December 31, 1997 the high and low prices as quoted on The Nasdaq Stock Market
were $17.125 and $12.00, respectively. At December 31, 1997 the stock's
closing price was $16 per share.
As of December 31, 1997, First Mariner Bancorp, had approximately 2,397
shareholders of record. Since the inception of the Company no dividends have
been declared.
Recent Common Stock Prices
The Company's Common Stock is traded on the National Association of
Securities Dealers' Automated Quotation System ("Nasdaq") National Market
tier of the Nasdaq Stock Market under the symbol "FMAR".
The following table illustrates high and low sale prices of the
Company's Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Low High
----------- ------------
<S> <C> <C>
1997 QUARTER ENDED:
Fourth quarter $ 15.250 $ 17.000
Third quarter 12.375 17.125
Second quarter 12.000 13.125
First quarter 12.375 13.750
1995 QUARTER ENDED:
*
</TABLE>
* First Mariner Bancorp issued an initial stock offering in December 1996.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The principal objective of this financial review is to provide a discussion
and overview of the financial condition and results of operations of First
Mariner Bancorp and its subsidiaries for the years ended December 31, 1997 and
1996. This discussion should be read in conjunction with the accompanying
financial statements and related notes as well as statistical information
included in the report. Unless otherwise noted, the comparisons contained herein
are December 31, 1997 to December 31, 1996, or for the full year 1997 to 1996.
First Mariner Bancorp ("the Company"), through its wholly owned subsidiary,
First Mariner Bank ("the Bank"), offers consumer and commercial banking services
throughout central Maryland. The Bank provides residential mortgage lending
services through its wholly-owned subsidiary, First Mariner Mortgage Corporation
("FMMC").
OVERVIEW
The Company is a bank holding company incorporated under the laws of
Maryland and registered under the Bank Holding Company Act of 1956, as amended.
The Company was organized in 1994 and the name changed to First Mariner Bancorp
in May 1995 upon the change in control by new management. Since 1995, management
has 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 acquirers.
The Company had substantially improved operating results in 1997, recording
net income of $365,336. These results reflect a significant turnaround from the
loss of $2,173,319 recorded in 1996. The 1997 result continues to reflect the
cost of the Company's expansion strategy as the Bank has grown to sixteen retail
banking branches and two residential mortgage lending offices. Basic net income
per share for the year ended December 31, 1997 was $0.13 per share compared to a
net loss of $1.72 per share for the year ended December 31, 1996. Return on
average assets was 0.21% for 1997 as compared to (2.64)% for 1996. Average
equity to average assets for 1997 was 14.93%, compared to 12.18% for 1996.
NET INTEREST INCOME/MARGIN - 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 expense
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 $7,752,567 for 1997, a 113.62% increase
from the net interest income of $3,629,109 earned during the year ended December
31, 1996. Earning assets averaged $164,312,000 for 1997, a 120.6% increase as
compared to $74,470,000 for 1996. The increase in net interest income was due to
the growth in average earning assets, especially the loan portfolio and to a
lesser extent increases in yields on the loan portfolio. The success of the
Company's growth strategy is evidenced by the increase of average loans which
grew by 92.86% to $124,794,000 and average deposits which grew by 106.77% to
$141,362,000. The increase in loans reflects the Company's expansion of its
commercial and real estate lending activities among middle market borrowers in
the Baltimore-Washington area. The increase in deposits was due to the
aggressive expansion of the Company's retail banking network to sixteen branches
and the introduction of new checking and money market products. Interest income
on loans increased to $11,953,680 for 1997 which represents
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
a growth of $5,776,185 or 93.50% from $6,177,495 for 1996. Interest on deposits
increased to $6,142,487 for 1997, a growth of $3,143,385 or 104.81% from
$2,999,102 for 1996.
The key performance measures for net interest income are net interest margin
(net interest income divided by average earning assets) and net interest spread
(yield on earning assets minus the cost of interest-bearing liabilities). The
Company's net interest income margin and spread are affected by loan pricing,
mix of earning assets and the distribution and pricing of deposits and
borrowings. The Company's net interest margin and spread were 4.72% and 3.74%
for 1997, respectively, as compared to 4.87% and 4.08%, respectively, for 1996.
The net margin and spread decreased due to a decline in average loans as a
percentage of total average earning assets from 86.89% in 1996 to 75.95% in
1997. The decrease in the percentage of average loans to average earning assets
is not a reflection of slow loan growth but rather outstanding deposit
increases. While average loans increased by $60,088,000 or 92.86%, average
deposits increased by $72,995,000 or 106.77%. The excess in deposits over loans
were invested in lower yielding investments.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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.
TABLE 1: COMPARATIVE AVERAGE BALANCES (1) YIELDS AND RATES
<TABLE>
<CAPTION>
1997 1996
------------------------------- ---------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (net of unearned income) (2) $ 124,794 $ 11,954 9.58% $ 64,706 $ 6,177 9.55%
Mortgage-backed securities 7,527 521 6.92% - - -
Interest-bearing bank balances 21,137 1,212 5.73% 8,878 525 5.91%
Treasury notes and agencies 8,704 535 6.15% 88 5 5.68%
Other earning assets 2,150 96 4.47% 798 29 3.63%
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 164,312 14,318 8.71% 74,470 6,736 9.05%
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (1,441) (670)
Other assets 13,412 8,514
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 176,283 $ 82,314
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Deposits:
Savings 7,194 195 2.71% 4,635 139 3.00%
NOW/MMDA 35,242 1,311 3.72% 12,588 353 2.80%
Certificates of deposit 82,552 4,636 5.62% 43,391 2,507 5.78%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 124,988 6,142 4.91% 60,614 2,999 4.95%
Other borrowed funds 7,071 423 5.98% 1,950 108 5.54%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 132,059 6,565 4.97% 62,564 3,107 4.97%
Demand deposits 16,374 7,753
Other liabilities 1,533 1,967
Stockholders' equity 26,317 10,030
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 176,283 $ 82,314
- ----------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.74% 4.08%
(Average yield less average rate)
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,753 $ 3,629
(Interest income less interest expense)
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.72% 4.87%
(Net interest income/total earning assets)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances were calculated using month end (which approximates daily
averages) as daily averages were not available for all the periods
presented.
(2) Loans on non-accrual status are included in the calculation of average
balances.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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 optimize interest margins and to provide adequate
liquidity for anticipated needs.
TABLE 2: RATE/VOLUME ANALYSIS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
COMPARED TO
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
NET
AVERAGE AVERAGE INCREASE/
VOLUME RATE (DECREASE)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans (net of unearned income) $ 5,758 $ 19 $ 5,777
Mortgage-backed securities 521 - 521
Interest-bearing bank balances 703 (16) 687
Treasury notes and agencies 530 - 530
Other earnings assets 60 7 67
Total interest income (1) 8,141 (559) 7,582
Interest Expense:
Savings 69 (13) 56
NOW/MMDA 843 115 958
Certificates of deposit 2,199 (70) 2,129
Other borrowed funds 306 9 315
Total interest expense (1) 3,458 - 3,458
Change in net interest income (1) 4,683 (559) 4,124
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Volume and rate variances are not additive due to the change in product mix.
Changes due to product mix (i.e. combined rate/volume variances) are
reflected in the "Average Rate" column.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
NON-INTEREST INCOME - Non-interest income is principally derived from
mortgage banking activities, service fees on deposit accounts, ATM fees and
gains on sale of investment securities. Non-interest income for 1997 was
$2,351,688 as compared to $1,073,943 for 1996, an increase of $1,277,745 or
118.97%. This increase, to a large extent, was due to an increase in service
fees on deposits and ATM fees as a result of increased volume and changes in
pricing. Deposit services charges rose 156.80% over the prior year due to a
160.51% increase in demand deposits. This growth was the result of the expanded
branch network and continued promotion and sales efforts of new retail deposit
products. An increase in ATM fees resulting from higher volume and changes in
pricing account for the majority of the increase in other operating income. In
addition, an increase in mortgage production to $79,600,000 in 1997, more than
triple the $24,700,000 in loans closed in 1996, accounted for the increase in
gain on sale of loans.
In addition, a gain of $479,360 was realized on the sale of available for
sale securities in 1997.
TABLE 3: NON-INTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 PERCENT 1996
AMOUNT CHANGE AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of loans $ 430,353 41.87% $ 303,353
Service fees on deposits 864,533 156.80% 336,662
Other operating income 577,442 455.78% 103,898
Gain on sale of securities 479,360 45.25% 330,030
- -----------------------------------------------------------------------------------------------------
Total non-interest income $ 2,351,688 118.98% $ 1,073,943
- -----------------------------------------------------------------------------------------------------
Non-interest income as a percent of average total assets 1.33% 1.30%
- -----------------------------------------------------------------------------------------------------
</TABLE>
NON-INTEREST EXPENSE - Non-interest expense totaled $9,458,960 for 1997 as
compared to $5,836,735 for 1996, an increase of $3,622,225 or 62.06%. This
increase reflects management's continued emphasis on growth through branching as
well as significant increases in loans and deposits and the cost of originating
and servicing that growth.
Salaries and benefits increased $1,626,628 or 59.28%, as a result of
additional staffing in the retail branches and mortgage lending offices due to
the Bank's expansion programs. Also, additional employees were added to support
the loan and deposit growth. Occupancy costs grew $482,466 or 61.32% over last
year. This increase is due to the additional branches as well as additional
space requirements at the headquarters building. Advertising expense grew by
$194,742 or 51.31% because of management's decision to increase public awareness
through television, radio and the print media. The increase in other expenses is
primarily due to additional branch locations, expansion of the mortgage company
and higher volume of loans, deposits and transactions.
While total non-interest expense increased $3,622,225, non-interest expense
as a percent of average total assets decreased from 1996 to 1997. Non-interest
expense as a percent of average total assets was 5.37% in 1997 as compared to
7.10% in 1996. This decrease is another indication of the successful expansion
and growth efforts of the Company in 1997.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 4: NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 PERCENT 1996
AMOUNT CHANGE AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 4,370,685 59.28% $ 2,744,057
Net occupancy 1,269,291 61.32% 786,825
Deposit insurance premiums 76,880 (66.47%) 229,293
Furniture, fixtures and equipment 360,407 42.23% 253,394
Professional services 380,124 179.89% 135,811
Advertising 574,308 51.31% 379,566
Data processing 533,244 17.95% 452,090
Other 1,894,021 121.34% 855,699
- -----------------------------------------------------------------------------------------------------
Total non-interest expense $ 9,458,960 62.06% $ 5,836,735
- -----------------------------------------------------------------------------------------------------
Non-interest expense as a percent of average total assets 5.37% 7.10%
- -----------------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
In assessing the realizability of the deferred tax asset, management has
determined that the evaluation allowance was not required for all of the
deferred tax asset at December 31, 1997. Management believes that a portion of
the deferred tax asset will be realized based on expected future taxable income
including the unrealized gain on available for sale securities which can be
achieved through the implementation of tax planning strategies.
The amount of the net operating loss carryforward for federal income tax
purposes at December 31, 1997 approximates $2,125,000. As a result of ownership
changes in 1997 and 1996, utilization of a portion of the net operating loss
carryforward is subject to an annual limitation.
FINANCIAL CONDITION
At December 31, 1997, the Company's total assets were $256,984,306 as
compared to $132,561,546 at December 31, 1996, an increase of 93.9%. This
increase was primarily due to the continuing growth in the branch network and
the successful marketing of deposit and loan products. The Bank's overall asset
size and customer base, both consumer and commercial, increased significantly
during 1996 and this growth continued through 1997.
Loans, net of the unearned loan fees and allowance for loan losses, at
December 31, 1997 were $142,458,340 as compared to $90,822,410 on December 31,
1996, which represents an increase of $51,635,930 or 56.85%.
Total deposits have increased to $197,269,328 at December 31, 1997 which is
an increase of 92.85% from $102,289,146 at December 31, 1996. To meet liquidity
needs the Bank has augmented its deposits with short-term collateral borrowings
from the Federal Home Loan Bank of Atlanta and repurchase agreements from
brokers and customers.
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 1997 average loans were $124,794,000 and constituted 75.95% of
earning assets and 70.79% of total average assets. This average loan balance
represents an increase of $60,088,000 or 92.86% over 1996.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
Significant growth was experienced in residential real estate which
increased $17,255,634 and commercial real estate and construction loans which
increased $25,151,445. At December 31, 1997 the loan to deposit ratio was 72.22%
as compared to 88.79% at December 31, 1996.
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, 1997 DECEMBER 31, 1996
------------------------ -----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Type of Loans
Commercial $ 24,118,724 16.69% $ 17,096,663 18.44%
Commercial real estate and construction (1) 81,039,474 56.06% 55,888,029 60.30%
Residential real estate 34,396,190 23.80% 17,140,556 18.49%
Consumer 4,992,111 3.45% 2,566,226 2.77%
- ----------------------------------------------------------------------------------------------------
Total loans 144,546,499 100.00% 92,691,474 100.00%
Add:
Unamortized loan premiums 139,564 205,311
Less:
Unearned loan fees, net 614,102 788,731
Unearned loan discounts 43,981
Allowance for loan losses 1,613,621 1,241,663
- ----------------------------------------------------------------------------------------------------
Net loans $ 142,458,340 $ 90,822,410
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of undisbursed principal
Approximately 60% of the Bank's loans have adjustable rates as of December
31, 1997 versus approximately 50% at December 31, 1996, the majority of which
are indexed 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
interest earned would decline, thus impacting the Bank's income. See also the
discussion under "Liquidity and Interest Rate Sensitivity" below. The table sets
forth the maturity distribution, classified according to sensitivity to changes
in interest rate, for the Bank's loan portfolio at December 31, 1997 and 1996.
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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 6: MATURITY SCHEDULE OF SELECTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------- ----------------------------------------------
UP TO MORE THAN 5 YEARS UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10 + ONE 1 YEAR TO 10 +
YEAR TO 5 YEARS 10 YEARS YEARS TOTAL YEAR TO 5 YEARS 10 YEARS YEARS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate $ 2,568 $ 2,008 $ 1,811 $ 28,009 $ 34,396 $ 1,810 $ 3,512 $ 2,475 $ 9,343
Commercial real
estate and
construction 41,499 25,658 12,628 1,254 81,039 21,240 26,446 6,176 2,026
Commercial 9,111 8,303 6,303 402 24,119 12,159 4,594 344 -
Consumer 696 970 3,254 72 4,992 21 2,482 63 -
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 53,874 $ 36,939 $ 23,996 $ 29,737 $ 144,546 $ 35,230 $ 37,034 $ 9,058 $ 11,369
- -------------------------------------------------------------------------------------------------------------------------------
Fixed interest rate $ 9,633 $ 26,984 $ 14,711 $ 11,942 $ 63,270 $ 9,070 $ 25,056 $ 3,835 $ 7,844
Variable interest
rate 44,241 9,955 9,285 17,795 81,276 26,160 11,978 5,223 3,525
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 53,874 $ 36,939 $ 23,996 $ 29,737 $ 144,546 $ 35,230 $ 37,034 $ 9,058 $ 11,369
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL
- --------------------
<S> <C>
Residential real
estate $ 17,140
Commercial real
estate and
construction 55,888
Commercial 17,097
Consumer 2,566
- --------------------
Total $ 92,691
- --------------------
Fixed interest rate $ 45,805
Variable interest
rate 46,886
- --------------------
Total $ 92,691
- --------------------
</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 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 loss 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, 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, 1997 the Company had approximately $1,550,000 in
non-accrual loans as compared with $1,574,000 at December 31, 1996. The Company
acquired real estate by foreclosure during 1997 amounting to $1,944,000. There
was no real estate acquired by foreclosure at December 31, 1996.
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 $471,959 for loan losses for the
year ended December 31, 1997, as compared to $1,039,636 for the year ended
December 31, 1996.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
As of December 31, 1997 the allowance for loan losses was $1,613,621, as
compared with the December 31, 1996 balance of $1,241,663, an increase of
$371,958. Net charge-offs of $100,001 were recognized for 1997. The growth in
the reserve was warranted by the growth in the loan portfolio. The allowance for
loan losses at December 31, 1997 represented 1.13% of outstanding loans as
compared with 1.37% as of December 31, 1996. The decrease in the percentage was
based on management's evaluation of the loan portfolio as of December 31, 1997
including the individual risk rating of all non consumer loans and the
disportionate increase in Residential Real Estate loans which traditionally
require a lower allowance for loan losses. Residential Real Estate loans
represented 23.28% of the loan portfolio at year end 1997 versus 18.36% in 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,
---------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses, beginning of year $ 1,241,663 $ 376,287
- ----------------------------------------------------------------------------------------------------
Loans charged off:
Commercial - (57,365)
Real estate (100,001) (148,680)
Consumer - (42,147)
- ----------------------------------------------------------------------------------------------------
Total loans charged off (100,001) (248,192)
- ----------------------------------------------------------------------------------------------------
Recoveries
Commercial - 63,000
Real estate - -
Consumer - 10,932
- ----------------------------------------------------------------------------------------------------
Total recoveries - 73,932
- ----------------------------------------------------------------------------------------------------
Net chargeoffs (100,001) (174,260)
- ----------------------------------------------------------------------------------------------------
Provision for loan losses 471,959 1,039,636
- ----------------------------------------------------------------------------------------------------
Allowance for loan losses, end of year $ 1,613,621 $ 1,241,663
- ----------------------------------------------------------------------------------------------------
Loans (net of premiums and discounts)
Period-end balance 142,458,340 90,822,410
Average balance during period 124,794,000 64,706,000
Allowance as percentage of period-end loan balance 1.13% 1.37%
Percent of average loans:
Provision for loan losses 0.38% 1.61%
Net chargeoffs 0.08% 0.27%
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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. 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 the allowance for loan losses
by loan type.
TABLE 8: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- -----------------------------------
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 $ 205,463 12.7% 16.7% $ 75,430 6.1% 19.4%
Real estate 918,226 56.9% 79.8% 793,014 63.9% 75.8%
Consumer 13,577 0.8% 3.5% 8,460 0.7% 4.8%
Unallocated 476,355 29.6% - 364,759 29.3% -
- ----------------------------------------------------------------------------------------------------------------
Total $ 1,613,621 100.0% 100.0% $ 1,241,663 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing assets are defined as non-accrual loans and real estate
acquired by foreclosure.
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
borrowers financial strength may be sufficient to provide for ultimate
repayment. Interest on non-accrual loans is recognized only when received.
TABLE 9: NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans on nonaccrual basis $ 1,550,000 $ 1,574,000
Real estate acquired by foreclosure 1,944,000 -
- -----------------------------------------------------------------------------------------------------
Total non-performing assets $ 3,494,000 $ 1,574,000
- -----------------------------------------------------------------------------------------------------
Loans past-due 90 days or more $ 276,000 (1)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) This information was not available for years prior to 1997.
At December 31, 1997, impaired loans which are included in nonaccrual loans
amounted to $1,057,000. These impaired loans are classified as collateral
dependent and, accordingly are recorded at the lower of cost or the fair value
of the collateral. The real estate acquired by foreclosure consists of a land
development project consisting of 229 residential building lots with a carrying
value of $1,054,000 and a 24-unit condominium building with a carrying value of
approximately $890,000. The land development project is being completed under
the direction of the Company. Currently, 107 lots are under contract, for
settlement through July 2000, and the remainder of the project is being marketed
for sale.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
CAPITAL RESOURCES
Stockholders' equity was $26,965,656 as of December 31, 1997 as compared to
$23,796,002 as of December 31, 1996. The increase of $3,169,594 was primarily
the result of the proceeds of the issuance of common stock in January, 1997 and
by the exercise of warrants and options during the year (6,000 and 8,300
respectively) and increased by the 1997 net income of $365,336. No dividends
have been declared by the Company since its inception.
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
"deemed" 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 10 "Capital Ratios", the Bank
exceeded its capital adequacy requirements as of December 31, 1997 and 1996 and
met the requirement for "well capitalized" under Federal Banking Regulations.
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 10: CAPITAL RATIOS
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
REQUIREMENTS CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
1997 1996 ADEQUACY PURPOSES ACTION PROVISION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital to risk weighted assets 12.0% 14.2% 8.0% 10.0%
Tier 1 capital to risk weighted assets 11.0% 13.3% 4.0% 6.0%
Tier 1 capital leverage ratio 10.2% 14.7% 4.0% 5.0%
</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 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 and the Board of Directors oversee the asset/liability
management function and meets periodically to monitor and manage 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
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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, 1997 is presented
in Table 11: "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, 1997, 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.
The assumption for savings and NOW accounts are based on management's
estimate of future rate sensitivity during periods of rate volatility. Savings
and NOW accounts are assumed to have an estimated average life of 4 years. The
gap distribution assumes 25% in first month and 37% spread evenly from month 2
to 60. The remaining 38% are included in the 5-10 year category. This is
consistent with but, more conservative than regional peers that completed core
deposit studies.
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, 1997 and 1996. 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 12: "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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 11: RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------
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>
Interest-earning assets:
Interest-bearing deposits $ 32,677 $ - $ - $ - $ - $ 32,677
Investment securities 7,947 3,476 19,139 5,602 5,289 41,453
Loans held for sale 16,895 - - - - 16,895
Loans 81,825 15,927 30,650 12,134 4,010 144,546
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earnings assets $ 139,344 $ 19,403 $ 49,789 $ 17,736 $ 9,299 $ 235,571
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings $ 2,254 $ 302 $ 2,422 $ 3,028 $ - $ 8,006
Interest-bearing demand deposits 3,964 532 4,259 5,324 - 14,079
Money market accounts 58,887 - - - - 58,887
Certificates 34,683 27,590 29,701 - - 91,974
Borrowings 30,331 - - - - 30,331
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 130,119 $ 28,424 $ 36,382 $ 8,352 $ - $ 203,277
- -------------------------------------------------------------------------------------------------------------------------
Interest rate sensitive gap $ 9,225 $ (9,021) $ 13,407 $ 9,384 $ 9,299 $ 32,294
- -------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate gap $ 9,225 $ 204 $ 13,611 $ 22,995 $ 32,294
- -------------------------------------------------------------------------------------------------------------------------
Ratio of rate sensitive assets to rate
sensitive liabilities 107% 68% 13.7% 212%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
The Bank uses deposits as the primary source of funding of its assets. The
following table describes the maturity of time deposits of $100,000 or more.
TABLE 12: MATURITY OF TIME DEPOSITS $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Under 3 months $ 6,773,625 $ 1,056,043
3 to 6 months 8,046,094 3,245,085
6 to 12 months 4,169,824 2,759,789
Over 12 months 3,117,059 4,266,016
- ----------------------------------------------------------------------------------------------------
Total $ 22,106,602 $ 11,326,933
- ----------------------------------------------------------------------------------------------------
</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 balance, the average rate paid
and the percentage of each category to total deposits for the years ended
December 31, 1997 and 1996.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 13: AVERAGE DEPOSIT COMPOSITION AND COST
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest-bearing demand deposits $ 16,374,000 - 11.6%
- ---------------------------------------------------------------------------------------------------------
NOW/MMDA 35,242,000 3.72% 24.9%
Savings 7,194,000 2.71% 5.1%
Certificate of deposit 82,552,000 5.62% 58.4%
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 124,988,000 4.91% 88.4%
- ---------------------------------------------------------------------------------------------------------
Total deposits $ 141,362,000 4.64% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest-bearing demand deposits $ 7,753,000 0.00% 11.3%
- ---------------------------------------------------------------------------------------------------------
NOW/MMDA 12,588,000 2.80% 18.4%
Savings 4,635,000 3.00% 6.8%
Certificates of deposit 43,391,000 5.78% 63.5%
- ---------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 60,614,000 4.95% 88.7%
- ---------------------------------------------------------------------------------------------------------
Total deposits $ 68,367,000 4.39% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Total deposits as of December 31, 1997 were $197,269,328 compared to
$102,289,146 as of December 31, 1996, an increase of $94,980,182. While the main
source of these increases was certificates of deposit and money market deposits,
all other types of deposits increased as well, including savings accounts,
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.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
INVESTMENT SECURITIES
The following table presents the composition of the Company's securities
portfolio as of December 31, 1997 and 1996.
TABLE 14: INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities - available for sale:
US Government Agency $ 6,432,635 $ -
Mortgage-backed securities 24,255,633 -
Equity securities 2,164,019 324,875
- -----------------------------------------------------------------------------------------------------
Total investment securities-available-for-sale 32,852,287 324,875
- -----------------------------------------------------------------------------------------------------
Investment securities-held to maturity:
U.S. Treasury 8,501,621 1,000,000
Certificate of deposit 99,000 99,000
- -----------------------------------------------------------------------------------------------------
Total investment securities-held to maturity 8,600,621 1,099,000
- -----------------------------------------------------------------------------------------------------
Total investment securities $ 41,452,908 $ 1,423,875
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the maturity distribution of debt securities as
of December 31, 1997:
TABLE 15: 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>
- --------------------------------------------------------------------------------------------------------
US Government Agency $ - $ 6,432,635 $ - $ 6,432,635
- --------------------------------------------------------------------------------------------------------
U.S. Treasury 4,501,621 4,000,000 - 8,501,621
Certificate of deposit 99,000 - - 99,000
- --------------------------------------------------------------------------------------------------------
Total investment securites - held to maturity 4,600,621 4,000,000 - 8,600,621
- --------------------------------------------------------------------------------------------------------
Total investment securities $ 4,600,621 $ 10,432,635 $ - $ 15,033,256
- --------------------------------------------------------------------------------------------------------
</TABLE>
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.
YEAR 2000 ACTION PLAN - In 1997, the Company adopted a Year 2000 Action Plan
(the "Plan"). The Plan identifies the process by which the Company will address
Year 2000 related issues. It also establishes a committee represented by all
departments of the Company, lead by senior management, assigned the
responsibility to complete Year 2000 preparations, with a targeted completed
date of
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
December 31, 1999. The Plan includes phases as follows: awareness; assessment;
renovation; validation; and implementation.
The Company relies heavily upon its third party service bureau to provide
its data processing services. The Company reviewed the Year 2000 plan
established by its data processing service bureau and regularly evaluates the
progress being made. In addition, the Company is working with other vendors to
ensure timely completion of the Year 2000 project.
Costs associated with the Year 2000 project will primarily include costs
incurred to upgrade existing software and hardware not currently Year 2000
compliant. The Company estimates that theses costs will be incurred in the
normal course of business as software and hardware is ordinarily upgraded to
keep pace with technological advances. Actual costs are not expected to exceed
$500,000 over a period of eighteen months.
RECENT ACCOUNTING DEVELOPMENTS - In June 1997, The Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. It requires all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed in equal prominence with other financial
statements. It requires that an enterprise display an amount representing total
comprehensive income for each period. It does not require per share amounts of
comprehensive income to be disclosed. SFAS No. 130 is effective for both interim
and annual periods beginning after December 15, 1997.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997.
26
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,240,476 $ 5,323,984
Interest-bearing deposits 32,676,735 27,186,076
Available-for-sale securities, at fair value (note 3) 32,852,287 324,875
Investment securities, fair value of $8,642,595 and $1,097,438,
respectively (note 3) 8,600,621 1,099,000
Loans held for sale 16,895,062 3,072,163
Loans receivable, net (notes 4 and 8) 142,458,340 90,822,410
Other real estate owned (note 5) 1,944,236 -
Federal Home Loan Bank of Atlanta stock, at cost (note 8) 1,399,300 480,800
Property and equipment, net (note 6) 4,775,512 2,671,018
Accrued interest receivable 1,433,529 712,614
Prepaid expenses and other assets 708,208 868,606
- ----------------------------------------------------------------------------------------------------
Total assets $ 256,984,306 $ 132,561,546
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7) $ 197,269,328 $ 102,289,146
Short-term borrowings (note 8) 30,330,935 6,000,000
Accrued expenses and other liabilities 2,418,387 476,398
- ----------------------------------------------------------------------------------------------------
Total liabilities 230,018,650 108,765,544
- ----------------------------------------------------------------------------------------------------
Stockholders' equity (notes 9, 12 and 13):
Common stock, $.05 par value; 20,000,000 shares authorized; 2,851,563
and 2,627,263 shares issued and outstanding, respectively 142,578 131,363
Additional paid-in capital 29,825,503 27,350,118
Accumulated deficit (3,331,568) (3,696,904)
Unrealized gain on available-for-sale securities, net of taxes 329,143 11,425
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 26,965,656 23,796,002
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 4 and 6)
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 256,984,306 $ 132,561,546
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $ 11,953,680 $ 6,177,495
Investments 1,839,664 558,950
Mortgage-backed securities 524,657 -
- -----------------------------------------------------------------------------------------------------
Total interest income 14,318,001 6,736,445
- -----------------------------------------------------------------------------------------------------
Interest expense:
Deposits 6,142,487 2,999,102
Borrowed funds and other (note 8) 422,947 108,234
- -----------------------------------------------------------------------------------------------------
Total interest expense 6,565,434 3,107,336
- -----------------------------------------------------------------------------------------------------
Net interest income 7,752,567 3,629,109
Provision for loan losses (note 4) 471,959 1,039,636
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,280,608 2,589,473
- -----------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of loans 430,353 303,353
Service fees on deposits 864,533 336,662
Other operating income 577,442 103,898
Gain on sale of securities 479,360 330,030
- -----------------------------------------------------------------------------------------------------
Total noninterest income 2,351,688 1,073,943
- -----------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 4,370,685 2,744,057
Net occupancy 1,269,291 786,825
Deposit insurance premiums 76,880 229,293
Furniture, fixtures and equipment 360,407 253,394
Professional services 380,124 135,811
Advertising 574,308 379,566
Data processing 533,244 452,090
Other (note 11) 1,894,021 855,699
- -----------------------------------------------------------------------------------------------------
Total noninterest expenses 9,458,960 5,836,735
- -----------------------------------------------------------------------------------------------------
Income (loss) before income tax benefit 173,336 (2,173,319)
Income tax benefit (note 10) (192,000) -
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 365,336 $ (2,173,319)
- -----------------------------------------------------------------------------------------------------
Net income (loss) per common share (note 1):
Basic $ 0.13 $ (1.72)
Diluted 0.12 (1.72)
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED
NUMBER OF HOLDING GAINS
SHARES OF ADDITIONAL ON AVAILABLE- NET
COMMON COMMON PAID-IN ACCUMULATED FOR-SALE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT SECURITIES EQUITY
- -------------------------------------------------------------------------------------------------------------
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
Common stock issued, net of
costs of issuance, and
exercise of stock options
and warrants 224,300 11,215 2,475,385 - - 2,486,600
Net income - - - 365,336 - 365,336
Unrealized holding gain - - - - 317,718 317,718
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,851,563 $ 142,578 29,825,503 (3,331,568) 329,143 26,965,656
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 365,336 $ (2,173,319)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Amortization of premiums and discounts on mortgage-backed
securities, net 172 -
Amortization of unearned loan fees, net (174,629) (587,549)
Amortization of premiums on deposits (24,186) (28,033)
Amortization of premiums on loans 21,766 78,615
Depreciation and amortization 541,911 417,760
Gain on sale of securities (479,360) (330,030)
Increase in accrued interest receivable (720,915) (510,910)
Provision for loan losses 471,959 1,039,636
Net increase in mortgage loans held for sale (13,822,899) (3,072,163)
Net increase (decrease) in accrued expenses and other liabilities 1,734,895 (133,320)
Increase in prepaids and other assets 160,398 (94,204)
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (11,925,552) (5,393,517)
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loan disbursements, net of principal repayments (53,553,970) (61,794,502)
Purchase of property and equipment (2,646,405) (1,216,889)
Purchase of Federal Home Loan Bank of Atlanta stock (918,500) (179,800)
Sales of available-for-sale securities 5,043,851 -
Purchase of available-for-sale securities (43,383,388) (2,153,787)
Purchase of investment securities (7,491,719) (1,000,000)
Maturities of investment securities 6,000,000 2,170,367
Proceeds from securities sold - 2,337,625
Construction disbursements-other real estate owned (345,292) -
Principal repayments on mortgage backed securities 806,223 -
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (96,489,200) (61,836,986)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 95,004,368 60,830,538
Net increase in other borrowings 15,330,935 -
Proceeds from advances from Federal Home Loan Bank of Atlanta 9,000,000 6,000,000
Proceeds of stock options and warrants 143,000 -
Proceeds from stock issuance, net 2,343,600 15,255,910
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 121,821,903 82,086,448
- ----------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 13,407,151 14,855,945
Cash and cash equivalents at beginning of year 32,510,060 17,654,115
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 45,917,211 $ 32,510,060
- ----------------------------------------------------------------------------------------------------
Supplemental information:
Interest paid on deposits and borrowed funds $ 6,440,215 $ 2,938,407
Real estate acquired in satisfaction of loans 1,598,944 -
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION - First Mariner Bancorp (the
"Company") is a bank holding company incorporated under the laws of Maryland and
registered under the Bank Holding Company Act of 1956, as amended. The Company
was organized as "MarylandsBank Corp." in May 1994, and the Company's name was
changed to "First Mariner Bancorp" in May 1995. The Company owns 100% of common
stock of First Mariner Bank (the "Bank").
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
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 allowance for losses on loans is 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' allowance for losses on loans. Such agencies may
require the Banks to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
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 current investor yield requirements. Gains and losses on loan sales are
determined using the specific identification method.
INVESTMENT SECURITIES - Debt securities that the Company 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 Company 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
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
1. CONTINUED
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. Gains or losses on the sales of
investments is calculated using a specific identification basis and is
determined on a trade-date basis. Premiums and discounts on investment and
mortgage-backed securities are amortized over the term of the security using
methods that approximate the interest method.
OTHER REAL ESTATE OWED - Other real estate owned is recorded at the lower of
cost or estimated fair value on their acquisition dates and at the lower of such
initial amount or estimated fair value less selling costs thereafter. Subsequent
write-downs are included in noninterest expense, along with operating income net
of related expenses of such properties and gains or losses realized upon
disposition.
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 earlier 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 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.
The Company 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. The Company does not apply these provisions 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.
A loan is determined to be impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
1. CONTINUED
terms of the loan agreement. A loan is not considered impaired during a period
of delay in payment if the Company expects to collect all amounts due, including
interest past-due. The Company 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 no longer exists, cash receipts are applied under the contractual
terms of the loan agreements.
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 - The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
NET INCOME (LOSS) PER SHARE - The Company adopted Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE in 1997 and, as required by the
Statement, earnings per share (EPS) data presented for prior periods have been
restated to conform to the new standard.
In accordance with the provisions of the Statement, basic EPS is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding. Diluted EPS is computed after adjusting the
numerator and denominator of the basic EPS computation for the effects of all
dilutive potential common shares outstanding during the period. The dilutive
effects of options, warrants and their equivalents are computed using the
"treasury stock" method.
Information relating to the calculations of earnings per common share is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
<S> <C> <C> <C> <C>
1997 1996
----------------------- ----------------------
<CAPTION>
BASIC DILUTED BASIC DILUTED
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) used in EPS computation $ 365,336 365,336 (2,173,319) (2,173,319)
- ---------------------------------------------------------------------------------------------------
Weighted-average shares outstanding 2,864,677 2,864,677 1,264,868 1,264,868
Dilutive securities - stock options and warrants - 272,851 - -
- ---------------------------------------------------------------------------------------------------
Adjusted weighted-average shares used in
EPS computation 2,864,677 3,137,528 1,264,868 1,264,868
- ---------------------------------------------------------------------------------------------------
</TABLE>
STOCK-BASED COMPENSATION - The Company 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
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
1. CONTINUED
acquire the stock. Information concerning the pro forma effects of using an
optional fair value-based method to account for stock-based employee
compensation plans is provided in note 9.
RECLASSIFICATIONS - Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 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 both December 31,
1997 and 1996, the required reserve balances were $375,000.
3. INVESTMENTS
Investments are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997
---------------------------------------------------
<S> <C> <C> <C> <C>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<CAPTION>
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Government Agency due after one year
through five years $ 6,500,000 - 67,365 6,432,635
Mortgage-backed securities 24,122,529 133,104 - 24,255,633
Equity securities 1,693,521 470,498 - 2,164,019
- -----------------------------------------------------------------------------------------------------
Total available for sale securities $ 32,316,050 603,602 67,365 32,852,287
- -----------------------------------------------------------------------------------------------------
Investment securities -held to maturity:
U.S. Treasury:
Due in one year or less $ 4,501,621 41,974 - 4,543,595
Due after one year through five years 4,000,000 - - 4,000,000
Certificate of deposit--
due in one year or less 99,000 - - 99,000
- -----------------------------------------------------------------------------------------------------
Total held to maturity investment securities $ 8,600,621 41,974 - 8,642,595
- -----------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
3. CONTINUED
<TABLE>
<CAPTION>
1996
---------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale equity securities $ 313,450 11,425 - 324,875
- -------------------------------------------------------------------------------------------------------
Investment securities - held to maturity:
U.S. Treasury:
Due after one year through five years 1,000,000 - 1,562 998,438
Certificate of deposit -
due after one year through five years 99,000 - - 99,000
- -------------------------------------------------------------------------------------------------------
Total held to maturity investment securities $ 1,099,000 - 1,562 1,097,438
- -------------------------------------------------------------------------------------------------------
</TABLE>
4. LOANS RECEIVABLE
Approximately 70% of the Company'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 Company 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 Company 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 Company'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 are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
Loans secured by first mortgages on real estate:
Residential $ 33,648,445 17,019,855
Commercial 50,437,255 31,012,097
Construction, net of undisbursed principal 30,602,219 24,875,932
- ----------------------------------------------------------------------------------------------------
Total first mortgage loans 114,687,919 72,907,884
Commercial 24,118,724 17,096,663
Loans secured by second mortgages on real estate 747,745 120,701
Consumer loans 4,783,977 2,442,888
Loans secured by deposits and other 208,134 123,338
- ----------------------------------------------------------------------------------------------------
Total loans receivable 144,546,499 92,691,474
- ----------------------------------------------------------------------------------------------------
Unamortized loan premiums 139,564 205,311
Unearned loan fees, net (614,102) (788,731)
Unearned loan discounts - (43,981)
Allowance for losses on loans (1,613,621) (1,241,663)
- ----------------------------------------------------------------------------------------------------
Loans receivable, net $ 142,458,340 90,822,410
- ----------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
4. CONTINUED
Loans past due 90 days or more and still accruing totaled approximately
$276,000 at December 31, 1997.
Nonaccrual loans totaled approximately $1,550,000 and $1,574,000 at December
31, 1997 and 1996, respectively.
The interest income which would have been recorded in 1997 and 1996 under
the original terms of loans while in nonaccrual status at December 31, 1997 and
1996, respectively, was approximately $85,000 and $32,000, respectively. The
actual interest income recorded on these loans while in nonaccrual status in
1997 and 1996 was approximately $0 and $0, respectively.
Impaired loans totaled $1,057,000 and $850,000 at December 31, 1997 and
1996, respectively, and were all collateral dependent loans. Collateral
dependent loans are measured based on fair value of the collateral. There were
no impaired loans at December 31, 1997 and 1996 with an allocated valuation
allowance.
The average recorded investment in impaired loans was approximately $589,000
and $257,000 at December 31, 1997 and 1996, respectively, and no income has been
accrued or collected on these loans while they have been classified as impaired.
Changes in the allowance for losses on loans are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Balance at beginning of year $ 1,241,663 $ 376,287
Provisions for loan losses 471,959 1,039,636
Charge-offs, net of recoveries (100,001) (174,260)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 1,613,621 $ 1,241,663
- -----------------------------------------------------------------------------------------------------
</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, 1997 and 1996, the Company had commitments to originate first
mortgage loans on real estate of approximately $2,890,000 and $2,000,000,
respectively, all of which were committed for sale in the secondary market.
At December 31, 1997 and 1996, the Company also had commitments to loan
funds under unused home-equity lines of credit aggregating approximately
$1,716,000 and $158,000, respectively, and unused commercial lines of credit
aggregating approximately $46,458,000 and $34,000,000, 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 Company's outstanding commitments at December 31,
1997 and 1996, are for loans which would be secured by real estate with
appraised values in excess of the commitment amounts. The Company'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.
During the ordinary course of business, the Company makes loans to its
directors and their affiliates and several policy making officers on
substantially the same terms, including interest rates and collateral, as those
prevailing for comparable transactions with other customers. Loans outstanding,
both direct and indirect, to directors, their affiliates, and policy making
officers totaled $5,208,000 and $1,276,000 at December 31, 1997 and 1996,
respectively. During 1997, $4,458,000 of new loans
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
4. CONTINUED
were made and repayments totaled $526,000. In 1996, $683,000 of new loans were
made and repayments totaled $25,000.
5. OTHER REAL ESTATE OWNED
At December 31,1997, other real estate owned included a land development
project consisting of 229 residential building lots with a carrying value of
approximately $1,054,000 and a 24-unit condominium building with a carrying
value of approximately $890,000. The land development project is being completed
under the direction of the Company. Currently, 107 lots are under contract, for
settlement through July 2000, and the remainder of the project is being marketed
for sale.
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1997 1996 LIVES
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 391,540 391,540 -
Buildings and improvements 1,791,245 924,685 10-39 years
Leasehold improvements 1,216,242 585,816 10-33 years
Furniture, fixtures and equipment 2,576,477 1,427,058 5-7 years
- ----------------------------------------------------------------------------------------------------
Total property and equipment at cost 5,975,504 3,329,099
Less accumulated depreciation and amortization 1,199,992 658,081
- ----------------------------------------------------------------------------------------------------
Property and equipment, net $ 4,775,512 2,671,018
- ----------------------------------------------------------------------------------------------------
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was
approximately $771,000 and $423,000, respectively.
The Company and the Bank occupy space leased from the Chairman and CEO of
the Company. The Company pays $566,988 annually for this 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 five 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
Company and the Bank.
Minimum lease payments due for all locations for each of the next five years
are as follows:
<TABLE>
<S> <C>
1998 $1,021,000
1999 1,021,000
2000 1,001,000
2001 903,000
2002 779,000
- ------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
7. DEPOSITS
Deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EFFECTIVE EFFECTIVE
AMOUNT RATE AMOUNT RATE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noncertificate:
Savings $ 8,005,604 2.75% $ 5,574,090 2.75%
Interest-bearing demand deposits 14,078,998 0.90% 3,974,082 1.35%
Money market accounts 58,887,042 4.93% 15,165,312 3.51%
Non-interest bearing demand deposits 24,006,079 - 15,583,651 -
- ----------------------------------------------------------------------------------------------------
Total noncertificate deposits 104,977,723 40,297,135
- ----------------------------------------------------------------------------------------------------
Certificates of deposit:
Original maturities:
Under 12 months 6,460,689 5.16% 3,997,620 5.42%
12 to 60 months 78,345,018 5.85% 53,028,947 5.87%
IRA and KEOGH 7,168,789 5.97% 4,725,944 5.70%
- ----------------------------------------------------------------------------------------------------
Total certificates of deposit 91,974,496 61,752,511
Accrued interest payable 306,460 204,665
Unamortized premium 10,649 34,835
- ----------------------------------------------------------------------------------------------------
Total deposits $ 197,269,328 $ 102,289,146
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Scheduled certificate of deposit
maturities: % of total % of total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 6 months $ 37,717,676 41.01% $ 10,891,971 17.64%
6 months to 12 months 26,298,612 28.59% 12,504,458 20.25%
12 months to 24 months 21,602,451 23.49% 35,915,826 58.16%
24 months to 36 months 5,097,825 5.54% 826,104 1.34%
36 months to 48 months 312,798 0.34% 1,614,152 2.61%
Over 48 months 945,134 1.03% - -
- -------------------------------------------------------------------------------------------
Total certificates of deposit $ 91,974,496 100.00% $ 61,752,511 100.00%
- -------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit of $100,000 or more totaled approximately
$22,107,000 and $11,327,000 at December 31, 1997 and 1996, respectively.
8. SHORT-TERM BORROWINGS
Short-term borrowings consist of Federal Home Loan Bank at Atlanta (FHLB)
advances and short-term promissory notes. The FHLB advances are available under
a specific collateral pledge and security agreement, which allows the Company to
borrow up to $20,000,000 and requires the Company to maintain collateral for all
of its borrowings in the form of specific first mortgage loans with outstanding
principal equal to 154% of the advances. At December 31, 1997, the Company had
approximately $23,100,000 of first mortgage loans pledged as collateral, in
addition to the balance of FHLB stock.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
8. CONTINUED
Certain information regarding borrowings are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Amount outstanding at year-end:
FHLB advances $ 15,000,000 6,000,000
Short-term promissory notes 15,330,935 -
Weighted average interest rate at year-end:
FHLB advances 6.50% 6.95%
Short-term promissory notes 4.83% -
Maximum outstanding at any month-end:
FHLB advances $ 15,000,000 6,000,000
Short-term promissory notes 15,460,935 -
Average outstanding:
FHLB advances $ 1,904,000 1,950,000
Short-term promissory notes 4,128,000 -
Weighted average interest rate during the year:
FHLB advances 6.05% 5.50%
Short-term promissory notes 5.47% -
- -----------------------------------------------------------------------------------------------------
</TABLE>
9. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN - The Company established a defined contribution plan in
1997, covering employees meeting certain age and service eligibility
requirements. The Plan provides for cash deferrals qualifying under Section
401(k). Matching contributions made by the Company totaled $40,107 in 1997.
STOCK OPTIONS - The Company 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 to 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.
Information with respect to stock options is as follows for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 180,600 $ 10.00 15,000 $ 10.00
Granted - - 166,300 10.00
Exercised (3,800) 10.00 - -
Forfeited (1,500) 10.00 (700) 10.00
- --------------------------------------------------------------------------------------------------------
Outstanding at end of year 175,300 $ 10.00 180,600 $ 10.00
- --------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average remaining life of options outstanding at December
31,1997 was 8.6 years.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
9. CONTINUED
The option price was equal to the market price of the common stock at the
date of grant for all options granted in 1996 and, accordingly, no compensation
expense related to options was recognized. If the Company had applied a fair
value-based method to recognize compensation cost for the options granted, net
income and net income per share would have been changed to the following pro
forma amounts for the year ended December 31, 1996:
<TABLE>
<S> <C> <C>
Net loss As reported $2,173,319
Pro forma 2,908,319
Net loss per share-basic As reported 1.72
Pro forma 2.30
- ------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair values of options granted during 1996 were
$735,000, 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: risk-free interest rate of 6.01%; no expected
votality; and expected lives of ten years. The valuation per share weighted
average fair value of options granted during 1996 was $4.30.
WARRANTS - Warrants to acquire 807,823 and 818,323 shares of common stock of
$10.00 per share were outstanding and exercisable at December 31, 1997 and 1996,
respectively.
10. INCOME TAXES
Income taxes benefit consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ - -
Deferred (192,000) -
- ----------------------------------------------------------------------------------------------------
$ (192,000) -
- ----------------------------------------------------------------------------------------------------
</TABLE>
Income taxes (benefit) 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>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Income tax expense (benefit) at federal corporate rate $ 59,000 (739,000)
Nondeductible expenses 12,000 (9,000)
Change in valuation allowance (216,000) 776,000
Other (47,000) (28,000)
- ----------------------------------------------------------------------------------------------------
$ (192,000) -
- ----------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
10. 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>
1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans $ 518,000 $ 300,000
Excess of fair value of liabilities acquired over cost - 13,000
Net operating loss carryforwards 821,000 1,076,000
Interest and fees on loans 59,000 43,000
- -----------------------------------------------------------------------------------------------------
Total gross deferred assets 1,398,000 1,432,000
Less valuation allowance (918,000) (1,341,000)
- -----------------------------------------------------------------------------------------------------
Net deferred tax assets 480,000 91,000
Deferred tax liabilities:
Depreciation 15,000 -
Unrealized gain on investments available-for-sale 207,000 -
Federal Home Loan Bank stock dividends 12,000 12,000
Excess of fair value of assets acquired over cost 54,000 79,000
- -----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 288,000 91,000
- -----------------------------------------------------------------------------------------------------
Net deferred tax asset $ 192,000 $ -
- -----------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,125,000 which are available to
offset future federal taxable income, if any, through 2010. As a result of
ownership changes, utilization of a portion of the net operating loss
carryforward is subject to annual limitations.
A valuation allowance is required to reduce the net deferred tax asset to an
amount that is likely to be realized. Because of uncertainty regarding future
profitability, due to expenses related to branch network expansion, a valuation
allowance has been established for a significant portion of the net deferred tax
asset. During 1997, the Company reduced the valuation allowance by $423,000, of
which $216,000 was attributable to 1997 taxable income, with the remainder being
attributable to the unrealized gains on securities available for sale.
Management will continue to assess the required valuation allowance on an
ongoing basis.
11. OTHER EXPENSES
Other expense is comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Service and maintenance $ 190,194 $ 122,080
Office supplies 148,624 148,400
Amortization of cost of intangible assets 74,927 74,927
Cost of ATM network 240,637 145,207
Printing 192,057 129,849
Corporate insurance 153,535 53,058
Other (a) 894,047 182,178
- ----------------------------------------------------------------------------------------------------
Total other expenses $ 1,894,021 $ 855,699
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) No single item included in this category exceeded one percent of total
income.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
12. DIVIDENDS
As a depository institution whose deposits are insured by the Federal
Deposit Insurance Corporation (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 Company and the Bank, in declaring and paying dividends, are also
limited insofar as minimum capital requirements authorities must be maintained.
The Company and the Bank comply with such capital requirements.
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.
13. REGULATORY MATTERS
The Company 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 and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company'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, 1997, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 1997 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.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
13. CONTINUED
Regulatory capital amounts and ratios for the Company and the Bank as of
December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM REQUIREMENTS CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
----------------------- ------------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total capital (to risk weighted assets):
Consolidated $ 28,040,136 18.2% 12,299,264 8.0% 15,374,080 10.0%
The Bank 19,442,427 12.0% 12,988,640 8.0% 16,235,800 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated 26,426,515 17.2% 6,149,632 4.0% 9,224,448 6.0%
The Bank 17,828,806 11.0% 6,494,324 4.0% 9,741,486 6.0%
Tier 1 capital (to average assets):
Consolidated 26,424,515 15.0% 7,051,320 4.0% 8,814,150 5.0%
The Bank 17,828,806 10.2% 6,986,280 4.0% 8,732,850 5.0%
AS OF DECEMBER 31, 1996
Total capital (to risk weighted assets):
Consolidated 24,752,739 18.8% 10,532,145 8.0% 13,165,181 10.0%
The Bank 19,050,803 14.2% 10,710,877 8.0% 13,388,597 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated 23,511,076 17.9% 5,266,072 4.0% 7,899,108 6.0%
The Bank 17,809,140 13.3% 5,355,439 4.0% 8,033,158 6.0%
Tier 1 capital (to average assets):
Consolidated 23,511,076 19.5% 4,832,127 4.0% 6,040,159 5.0%
The Bank 17,809,140 14.7% 4,834,224 4.0% 6,042,781 5.0%
</TABLE>
The FDIC, through the Savings Association Insurance Fund (SAIF), insures
deposits of accountholders up to $100,000. The Bank pays an annual premium to
provide 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.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments as of December 31, 1997 and 1996.
The carrying value and estimated fair value of financial instruments is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing deposits $ 45,917 45,917 32,510 32,510
Investment securities 41,453 41,495 1,424 1,422
Accrued interest receivable 1,434 1,434 713 713
Loans receivable 142,458 143,322 90,822 90,933
Loans held for sale 16,895 16,895 3,072 3,072
Liabilities:
Deposit accounts 197,269 197,754 102,289 102,629
FHLB advances 15,000 15,000 6,000 6,000
Other borrowings 15,331 15,331 - -
Off balance sheet instruments:
Commitments to extend credit - - - -
Loans sold with recourse - - - -
Unused lines of credit - - - -
- ---------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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 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 fixed rate loans was calculated by discounting anticipated
cash flows based on weighted-average contractual maturity, weighted-average
coupon, and discount rate. Variable rate loans were assumed to be at market
value.
The fair value for nonperforming loans was determined by reducing the
carrying value of nonperforming loans by the Company's historical loss
percentage for each specific loan category.
ACCRUED INTEREST RECEIVABLE - The carrying amount of accrued interest
receivable approximates its fair value.
DEPOSITS - The fair value of deposits with no stated maturity, such as
noninterest bearing demand deposits, interest bearing demand deposit, money
market and 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 rates and terms of the
Company's fixed rate commitments to extend credit are competitive with others in
the various markets in which the Company operates. It is impractical to assign
fair values to 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.
LIMITATIONS - Fair value estimates are made at a specific point in time,
based on relevant market and financial instrument information. These estimates
also include judgments regarding future economic conditions, expected loss and
risk assessments. Not included was any estimate of a premium or discount that
could result from offering for sale at one time the company's entire holdings of
a financial instrument. 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.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
15. FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of First Mariner Bancorp (parent
company only):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
STATEMENTS OF FINANCIAL CONDITION 1997 1996
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Assets:
Cash $ 7,166,876 6,027,542
Available-for-sale securities 2,164,019 324,875
Investment in subsidiary 18,165,407 18,163,028
Other assets 38,806 18,812
- -----------------------------------------------------------------------------------------------------
Total Assets $ 27,535,108 24,534,257
- -----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Other liabilities $ 569,452 738,255
Stockholders' equity 26,965,656 23,796,002
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 27,535,108 24,534,257
- -----------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENTS OF OPERATIONS 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Interest income $ 294,488 42,689
Gain on sale of securities 455,279 330,030
Other income 20,158 -
- -----------------------------------------------------------------------------------------------------
Total income 769,925 372,719
- -----------------------------------------------------------------------------------------------------
Expenses:
Salaries and employee benefits 523,616 239,950
Amortization of intangibles 7,272 7,263
Professional services 52,134 -
Other expenses 15,946 15,116
- -----------------------------------------------------------------------------------------------------
Total expenses 598,968 262,329
- -----------------------------------------------------------------------------------------------------
Income before income tax benefit 170,957 110,390
Income tax benefit (192,000) -
- -----------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of the Bank 362,957 110,390
Equity in undistributed net income (loss) in the Bank 2,379 (2,283,709)
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 365,336 (2,173,319)
- -----------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
15. CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
STATEMENTS OF CASH FLOWS 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Income before equity in undistributed net income of the Bank $ 362,957 110,390
Depreciation and amortization 7,272 7,263
Increase (Decrease) in accrued expenses and other liabilities (168,803) 696,224
Increase in prepaids and other assets (27,266) (7,243)
Gain on sale of securities (455,279) (330,030)
Other (90) (3,947)
- -----------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (281,209) 472,657
- -----------------------------------------------------------------------------------------------------
Net cash flows from investing activities:
Investment in subsidiaries - (10,500,000)
Purchase of available for sale securities (1,561,865) (2,153,787)
Sale of available for sale securities 495,718 2,170,367
- -----------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (1,066,147) (10,483,420)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities - proceeds from stock issuance,
options and warrants exercised net 2,486,600 15,255,910
- -----------------------------------------------------------------------------------------------------
Net increase in cash and temporary investments 1,139,244 5,245,147
Cash and temporary investments at beginning of year 6,027,542 782,395
- -----------------------------------------------------------------------------------------------------
Cash and temporary investments at end of year $ 7,166,786 6,027,542
- -----------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
The Board of Directors
First Mariner Bancorp:
We have audited the accompanying consolidated statements of financial
condition of First Mariner Bancorp and subsidiary (the Company) as of December
31, 1997 and 1996 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 Company'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 audit 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 the
Company as of December 31, 1997 and 1996, 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
February 27, 1998
Baltimore, MD
48
<PAGE>
DIRECTORS AND OFFICERS
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
BOARD OF DIRECTORS
Edwin F. Hale, Sr.
CHAIRMAN OF THE BOARD &
CHIEF EXECUTIVE OFFICER
FIRST MARINER BANCORP
FIRST MARINER BANK
Joseph A. Cicero
PRESIDENT AND CHIEF OPERATING OFFICER
FIRST MARINER BANCORP
CHIEF OPERATING OFFICER
FIRST MARINER BANK
George H. Mantakos
EXECUTIVE VICE PRESIDENT
FIRST MARINER BANCORP
PRESIDENT
FIRST MARINER BANK
Barry B. Bondroff
MANAGING DIRECTOR
GRABUSH, NEWMAN & CO., P.A.
Rose M. Cernak
PRESIDENT
OBRYCKI'S CRAB HOUSE, INC.
Christopher P. D'Anna
VICE PRESIDENT
MARS SUPER MARKETS, INC.
Bruce H. Hoffman
EXECUTIVE DIRECTOR
MARYLAND STADIUM AUTHORITY
Melvin S. Kabik
COMMERCIAL REAL ESTATE INVESTOR
R. Andrew Larkin
PRESIDENT
MARYLAND REALTY INVESTMENTS CORP.
John J. Matricciani
PRESIDENT
THE MATRICCIANI COMPANY
Dennis C. McCoy
GOVERNMENTAL AFFAIRS--MARYLAND, INC.
Walter L. McManus, Jr.
PRESIDENT
CASTLEWOOD REALTY COMPANY, INC.
John Oliver
CEO AND PUBLISHER
AFRO-AMERICAN PUBLISHING CO.
James P. O'Conor
CHAIRMAN & CHIEF EXECUTIVE OFFICER
O'CONOR, PIPER & FLYNN
Governor William Donald Schaefer
OF COUNSEL
GORDON, FEINBLATT, ROTHMAN
HOFFBERGER AND HOLLANDER, LLC DIRECTOR EMERITUS
Hanan Y. Sibel
CHAIRMAN & CHIEF EXECUTIVE OFFICER
CHAIMSON BROKERAGE CO., INC.
Leonard Stoler
OWNER & PRESIDENT
LEN STOLER INC.
FIRST MARINER BANCORP
SENIOR OFFICERS
Edwin F. Hale, Sr.
CHAIRMAN & CHIEF EXECUTIVE OFFICER
Joseph A. Cicero
PRESIDENT & CHIEF OPERATING OFFICER
George H. Mantakos
EXECUTIVE VICE PRESIDENT
Kevin M. Healey
SENIOR VICE PRESIDENT
CONTROLLER
Eugene A. Friedman
VICE PRESIDENT
CORPORATE SECRETARY
FIRST MARINER MORTGAGE
COMPANY
Brett J. Carter
PRESIDENT
Lynda J. Jeffers
SENIOR VICE PRESIDENT
Albert Kavalsky
SENIOR VICE PRESIDENT
William A. Benner
VICE PRESIDENT
Deborah J. Leypoldt
VICE PRESIDENT
FIRST MARINER BANK
SENIOR OFFICERS
Edwin F. Hale, Sr.
CHAIRMAN & CHIEF EXECUTIVE OFFICER
George H. Mantakos
PRESIDENT
Joseph A. Cicero
CHIEF OPERATING OFFICER
M. Neil Brownawell, II
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Kevin M. Healey
SENIOR VICE PRESIDENT & CONTROLLER
Jane A. Higgins
SENIOR VICE PRESIDENT
RETAIL AND OPERATIONS
William A. Murphy
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Robert P. Warr
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
John Winkler
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Rodney J. Baker
VICE PRESIDENT
CONSUMER LENDING
Kathy J. Bennett
VICE PRESIDENT
BRANCH ADMINISTRATION
Frank Ciesla
VICE PRESIDENT
BRANCH ADMINISTRATION
Frances Crawford
VICE PRESIDENT
BRANCH ADMINISTRATION
Robert Friday, Jr.
VICE PRESIDENT
BRANCH ADMINISTRATION
Eugene A. Friedman
VICE PRESIDENT & CORPORATE SECRETARY
Linda D. Gaunt
VICE PRESIDENT
BRANCH ADMINISTRATION
Linda R. Heier
VICE PRESIDENT
BRANCH ADMINISTRATION
Kenneth C. Jones
VICE PRESIDENT
FACILITIES
Wayne W. Spencer
VICE PRESIDENT
BRANCH ADMINISTRATION
Gerard T. Stanczyk
VICE PRESIDENT
SYSTEMS
William F. Thompson
VICE PRESIDENT
INTERNAL AUDIT
Lila E. Yingling
VICE PRESIDENT
OPERATIONS
<PAGE>
SHAREHOLDER INFORMATION
- -------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
First Mariner Bancorp's periodic reports filed with the Securities and Exchange
Commission are available without charge to stockholders and other interested
parties. To request those publications, or if you have questions about First
Mariner Bancorp, you are invited to contact:
INVESTOR RELATIONS
First Mariner Bancorp
1801 South Clinton Street
Baltimore, MD 21224
410-342-2600
TRANSFER AGENT AND REGISTRAR
American Transfer & Trust Company
40 Wall Street
New York, NY 10005
212-936-5100
Communications concerning changes of address, lost certifcate and transfer
requests should be directed to the Transfer Agent.
ANNUAL MEETING
The 1998 Annual Meeting of Stockholders will be held on May 12, 1998 at Sparrows
Point Country Club, 919 Wise Avenue, Baltimore, Maryland.
1997 ANNUAL REPORT AND 10-K
This report is submitted for the general information of the stockholders of
First Mariner Bancorp and is not intended to be used in connection with any sale
or purchase of securities. Copies of Form 10-K are available without charge from
the Corporate Secretary of First Mariner Bancorp.
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 proxy statement in
connection with its Annual Meeting of Shareholders to be held on May 12, 1998,
which proxy statement will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year.
ITEM 10 EXECUTIVE COMMITTEE
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 12,
1998, which proxy statement will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
49
<PAGE>
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 12,
1998, 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 12,
1998, 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
(A) Exhibit 21 - List of subsidiaries
Exhibit 27 - Financial data schedule
(B) No reports filed on Form 8-K
50
<PAGE>
Recent Common Stock Prices
The Company's Common Stock is traded on the National Association of
Securities Dealers' Automated Quotation System ("Nasdaq") National Market
tier of the Nasdaq Stock Market under the symbol "FMAR".
The following table illustrates high and low sale prices of the
Company's Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Low High
----------- ------------
<S> <C> <C>
1997 QUARTER ENDED:
Fourth quarter $ 15.250 $ 17.000
Third quarter 12.375 17.125
Second quarter 12.000 13.125
First quarter 12.375 13.750
1995 QUARTER ENDED:
*
</TABLE>
* First Mariner Bancorp issued an initial stock offering in December 1996.
51
<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 Amendment No. 2 to
Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST MARINER BANCORP
By: /s/ Edwin F. Hale, Sr.
-------------------------------------------
Edwin F. Hale Sr.
Chairman and Chief Executive Officer
52
<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
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<INT-BEARING-DEPOSITS> 32676735
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32852787
<INVESTMENTS-CARRYING> 8600621
<INVESTMENTS-MARKET> 8642595
<LOANS> 142458340
<ALLOWANCE> 1613621
<TOTAL-ASSETS> 256984306
<DEPOSITS> 197269328
<SHORT-TERM> 30330935
<LIABILITIES-OTHER> 2418387
<LONG-TERM> 0
0
0
<COMMON> 142578
<OTHER-SE> 26823078
<TOTAL-LIABILITIES-AND-EQUITY> 256984306
<INTEREST-LOAN> 11953680
<INTEREST-INVEST> 2364321
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14318001
<INTEREST-DEPOSIT> 6142487
<INTEREST-EXPENSE> 6565434
<INTEREST-INCOME-NET> 7752567
<LOAN-LOSSES> 471959
<SECURITIES-GAINS> 479360
<EXPENSE-OTHER> 9458960
<INCOME-PRETAX> 173336
<INCOME-PRE-EXTRAORDINARY> 173336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365336
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 4.72
<LOANS-NON> 1550265
<LOANS-PAST> 276491
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1241663
<CHARGE-OFFS> 100001
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1613621
<ALLOWANCE-DOMESTIC> 1613621
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
