<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended September 30, 1998.
-------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from .
--------------------
Commission file number: 0-21815
FIRST MARINER BANCORP
---------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1834860
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
1801 South Clinton Street, Baltimore, MD 21224 410-342-2600
- ---------------------------------------- ----- ------------
(Address of principal executive offices) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 90 days. Yes __X__ No ____
The number of shares of common stock outstanding as of November 12, 1998 is
3,164,925 shares.
<PAGE>
FIRST MARINER BANCORP
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1998 (unaudited) and at December 31, 1997............3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and September 30, 1997
(unaudited)........................................................4
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1998
and September 30, 1997 (unaudited).................................5
Notes to Consolidated Financial Statements (unaudited)................6
Item 2 - Management's discussion and analysis of
financial condition and results of operations.........................8
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk..........................................................16
PART II - OTHER INFORMATION
Item 1 - Legal proceedings.....................................................18
Item 2 - Changes in securities and use of proceeds.............................18
Item 3 - Defaults on senior securities.........................................18
Item 4 - Submission of matters to a vote of security holders...................18
Item 5 - Other information.....................................................18
Item 6 - Exhibits and reports on Form 8-K.....................................18
Signatures.....................................................................19
</TABLE>
2
<PAGE>
First Mariner Bancorp and Subsidiary
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks ...................................... $ 24,083,505 $ 13,240,476
Interest-bearing deposits .................................... 2,779,217 32,676,735
Available-for-sale securities, at fair value ................. 181,683,636 32,852,287
Investment securities, fair value of $6,566,094 and $8,642,595
respectively .............................................. 6,501,736 8,600,621
Mortgage loans held for sale ................................. 11,494,214 16,895,062
Loans receivable ............................................. 219,107,816 144,071,961
Allowance for loan losses .................................. (2,223,763) (1,613,621)
------------- -------------
Loans, net ................................................. 216,884,053 142,458,340
Other real estate owned ...................................... 2,031,210 1,944,236
Federal Home Loan Bank of Atlanta stock, at cost ............. 2,500,000 1,399,300
Property and equipment ....................................... 6,940,857 4,775,512
Accrued interest receivable .................................. 2,597,447 1,433,529
Prepaid expenses and other assets ............................ 2,306,188 708,208
------------- -------------
Total assets ........................................... $ 459,802,063 $ 256,984,306
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................... $ 243,527,117 $ 197,269,328
Federal Home Loan Bank advances ............................ 48,000,000 15,000,000
Other borrowings ........................................... 111,756,393 15,330,935
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the Company ........................................... 21,450,000 --
Accrued expenses and other liabilities ..................... 6,821,731 2,418,387
------------- -------------
Total liabilities ...................................... 431,555,241 230,018,650
------------- -------------
Stockholders' equity
Common stock, $.05 par value; 20,000,000 shares
authorized; 3,164,925 and 3,136,719 shares issued
and outstanding, respectively ........................... 156,836 158,246
Additional paid-in capital ................................... 34,374,715 34,088,589
Accumulated deficit .......................................... (7,153,574) (7,608,912)
Accumulated other comprehensive income, net of taxes ......... 867,435 329,143
------------- -------------
Total stockholders' equity .............................. 28,246,822 26,965,656
------------- -------------
Total liabilities and stockholders' equity ................... $ 459,802,063 $ 256,984,306
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
First Mariner Bancorp and Subsidiary
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 4,803,896 $ 3,174,842 $12,875,233 $ 8,422,042
Investments 2,909,633 608,048 4,897,832 1,425,553
----------- ----------- ----------- -----------
Total interest income 7,713,529 3,782,890 17,773,065 9,847,595
----------- ----------- ----------- -----------
Interest expense:
Deposits 2,383,569 1,681,598 6,647,183 4,146,326
Borrowed funds and other 2,135,030 97,625 2,721,328 173,428
----------- ----------- ----------- -----------
Total interest expense 4,518,599 1,779,223 9,368,511 4,319,754
----------- ----------- ----------- -----------
Net interest income 3,194,930 2,003,667 8,404,554 5,527,841
Provision for loan losses 338,000 129,742 707,467 365,504
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,856,930 1,873,925 7,697,087 5,162,337
----------- ----------- ----------- -----------
Noninterest income:
Gain on sale of loans 500,793 127,177 1,085,112 279,593
Service fees on deposits 654,941 339,596 1,552,937 852,427
Gain on sale of securities 22,241 166,911 457,656 236,158
Other operating income 243,814 92,626 497,297 213,381
----------- ----------- ----------- -----------
Total noninterest income 1,421,789 726,310 3,593,002 1,581,559
----------- ----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 1,933,665 1,285,961 4,996,067 3,182,111
Net occupancy 473,278 309,135 1,302,070 802,514
Deposit insurance premiums 31,257 25,387 89,613 55,423
Furniture, fixtures and equipment 210,720 102,910 545,591 304,198
Professional services 185,558 35,602 480,242 112,496
Advertising 172,358 136,968 525,337 391,539
Data processing 231,724 143,000 640,445 339,999
Cleaning and Maintenance 102,462 47,987 276,683 136,912
ATM Expenses 128,268 28,989 297,787 171,693
Other 628,132 379,852 1,650,020 1,054,485
----------- ----------- ----------- -----------
Total noninterest expenses 4,097,422 2,495,791 10,803,855 6,551,370
----------- ----------- ----------- -----------
Income before taxes 181,297 104,444 486,234 192,526
Provision for income taxes -- 1,250 -- 1,250
----------- ----------- ----------- -----------
Net income $ 181,297 $ 103,194 $ 486,234 $ 191,276
----------- ----------- ----------- -----------
Net income per common share:
Basic $ 0.05 $ 0.03 $ 0.15 $ 0.06
Diluted 0.05 0.03 0.14 0.06
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
First Mariner Bancorp and Subsidiary
Consolidated Statements of Cash Flow (Unaudited)
For the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Cash flows from operating activities: 1998 1997
------------- -------------
<S> <C> <C>
Net income $ 486,234 $ 191,276
Adjustments to reconcile net income to net cash used by operating activities:
Amortization of unearned loan fees, net (352,487) (522,001)
Amortization of premiums on deposits (10,649) (18,140)
Amortization of discounts on loans 39,659 49,310
Depreciation and amortization 751,735 445,090
Provision for loan losses 707,467 365,505
Gain on sale of securities 457,656) (236,158)
Gain on sale of residential mortgages (1,085,112) (279,593)
Change in mortgage loans held for sale 6,485,960 (6,622,244)
Increase in accrued interest receivable (1,163,918) (455,795)
Net increase (decrease) in accrued expenses and other liabilities 4,403,344 (56,937)
Net increase in prepaid expenses and other assets (1,992,867) (922,312)
------------- -------------
Net cash used in operating activities 7,811,710 (8,061,999)
------------- -------------
Cash flows from investing activities:
Loan disbursements, net of principal repayments (75,255,862) (43,460,783)
Purchase of property and equipment (2,879,098) (1,652,032)
Purchases of Federal Home Loan Bank of Atlanta stock (1,100,700) (419,700)
Sale of available-for-sale securities 11,198,016 2,337,625
Purchase of available-for-sale securities (172,007,452) (22,496,207)
Maturity of available-for-sale securities 6,500,000 --
Maturity of investment securities 2,099,000 --
Purchase of investment securities -- (3,401,938)
Principal repayments of available-for-sale securities 6,830,825 454,779
Construction disbursements-other real estate owned (607,318) --
Sale of other real estate owned 955,854 --
------------- -------------
Net cash used in investing activities (224,266,735) (68,638,256)
------------- -------------
Cash flows from financing activities:
Net increase in deposits 46,268,438 71,174,482
Proceeds from long term advances from Federal Home Loan Bank of Atlanta 43,000,000 5,000,000
Net proceeds of other borrowings 96,425,458 6,832,592
Repayment of long term advances from Federal Home Loan Bank of Atlanta (10,000,000) (6,000,000)
Proceeds from stock issuance and exercise of stock options and
warrants, net 256,640 2,343,600
Proceeds from trust preferred securities offering 21,450,000 --
------------- -------------
Net cash provided by financing activities 197,400,536 79,350,674
------------- -------------
Decrease in cash and cash equivalents (19,054,489) 2,650,419
Cash and cash equivalents at beginning of period 45,917,211 32,510,060
------------- -------------
Cash and cash equivalents at end of period $ 26,862,722 $ 35,160,479
------------- -------------
Supplemental information:
Interest paid on deposits and borrowed funds $ 8,862,873 $ 4,319,754
Real estate acquired in satisfaction of loans 435,510 1,862,143
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Note 1 - Basis of Presentation
The foregoing consolidated financial statements of First Mariner Bancorp
(the "Company") are unaudited; however, in the opinion of management, all
adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of the results of interim periods have been included. These
statements should be read in conjunction with the financial statements and
accompanying notes included in First Mariner Bancorp's Annual Report on Form
10-KSB for the year ended December 31, 1997. The results shown in this interim
report are not necessarily indicative of results to be expected for the full
year.
Certain reclassifications have been made to amounts previously reported to
conform with current classifications. Consolidation of financial information has
resulted in the elimination of all significant intercompany accounts and
transactions.
Note 2 - Comprehensive Income
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130).
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
financial statements that are displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period of transactions
and other events and circumstances from nonowner sources. Comprehensive income
will thus represent the sum of net income and other accumulated comprehensive
income. The accumulated balance of other accumulated comprehensive income is
required to be displayed separately from retained earnings and additional
paid-in capital in the statement of financial position. The adoption of SFAS No.
130 resulted primarily in the Company reporting unrealized gains and losses on
available-for-sale securities in other comprehensive income.
6
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Net income $ 486,234 $ 191,276
Changes in accumulated other comprehensive income-unrealized
gains on investments 538,292 456,352
---------- ----------
Total comprehensive income $1,024,526 $ 647,628
---------- ----------
---------- ----------
</TABLE>
Note 3 - Redeemable Trust Preferred Securities
Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust holding debentures of the Company (trust preferred securities)
consist of 2,145,000 securities with a liquidation amount of $10 per security,
which were issued in June 1998 by a statutory business trust, Mariner Capital
Trust (the "Trust"). The Trust is a wholly owned subsidiary of the Company
because the Company owns all of the securities of the Trust that possesses
general voting powers. The Trust used the proceeds of the trust preferred
securities to purchase at par $22,113,401 of 8.3% junior subordinated debentures
of the Company due June 30, 2028. The junior subordinated debentures are the
sole assets of the Trust.
Payments to be made by the Trust on the trust preferred securities are
dependent on payments that the Company has undertaken to make, particularly the
payments to be made by the Company on the debentures. Considered together, the
obligations of the Company constitute a full and unconditional guarantee of the
Trust's obligations under the trust preferred securities.
Distributions on the trust preferred securities are payable from interest
payments received on the debentures and are due quarterly at a rate of 8.3% of
the liquidation amount, subject to deferral for up to five years under certain
conditions. Distributions payable are included in operating expenses.
Redemptions of the trust preferred securities are payable at the liquidation
amount from redemption payments received on the debentures. The Company may
redeem the debentures at par at any time after June 30, 2003.
Note 4 - Per Share Data
On May 12, 1998, the Board of Directors declared a 10% stock dividend
payable to shareholders of record on May 26, 1998. Average shares outstanding
and all per share amounts are based on the increased number of shares giving
retroactive effect to the stock dividend.
7
<PAGE>
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share is computed after adjusting the numerator and
denominator of the basic earnings per share 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 calculation of earnings per common share is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income-basic and diluted $ 181,297 $ 103,194 $ 486,234 191,276
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted-average shares outstanding 3,164,925 3,122,199 3,155,526 3,102,782
Dilutive securities-options and
warrants 376,226 261,998 419,244 241,699
--------- --------- --------- ---------
Adjusted weighted-average shares
outstanding-dilutive 3,541,151 3,384,197 3,574,770 3,344,481
--------- --------- --------- ---------
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read and reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
In addition to historical information, this Form 10-Q contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans and expectations, and unknown outcomes. The
Company's actual results could differ materially from management's expectations.
Factors that could contribute to those differences include, but are not limited
to, changes in regulations applicable to the Company's business, successful
implementation of Company's branch expansion strategy, its concentration in real
estate lending, increased competition, changes in technology, particularly
internet banking, impact of interest rates, possibility of economic recession or
slow down (which could impact credit quality, adequacy of loan loss reserve and
loan growth) and control by and dependency on key personnel, particularly Edwin
F. Hale, Sr., chairman of the board of directors and CEO of the Company.
The Company
The Company is a bank holding company formed in Maryland in 1994 under the
name MarylandsBank Corporation that later changed its name to First Mariner
Bancorp in May 1995. The business of the Company is conducted through its
wholly-owned
8
<PAGE>
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 22
full service branches and 36 Automated Teller Machines ("ATMs").
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.
The Company's executive offices are located at 1801 South Clinton Street,
Baltimore, Maryland 21224 and its telephone number is (410) 342 - 2600.
Financial Condition
The Company's total assets were $459,802,063 at September 30, 1998,
compared to $256,984,306 at December 31, 1997, increasing $202,817,757 or 79%
for the nine months of 1998. Earning assets increased $187,570,653 or 79% to
$424,066,619 from $236,495,966, primarily due to increases in loans outstanding
of $75,035,855 and available-for-sale securities.
The investment portfolio, consisting of available-for-sale and
held-to-maturity securities increased $146,732,464 from December 31, 1997 as the
Company engaged in a leverage strategy in the third quarter as a result of the
completion of the issuance of $21.450 million of trust preferred securities of
Mariner Capital Trust, a trust established by the Company for financing
purposes. These trust preferred securities are classified as long term
borrowings for balance sheet purposes, but a portion of the proceeds qualify as
Tier 1 Capital for regulatory purposes. Interest bearing deposits as of
September 30, 1998 decreased by $2,779,217 to $29,897,518 when compared to the
December 31, 1997 balance of $32,676,735. Investment securities designated as
available-for-sale and interest-bearing deposits represent a significant source
of liquidity as of September 30, 1998.
The investment portfolio at carrying value consists of the following:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
September 30, December 31, September 30, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. Treasury securities and agency
notes $ -- $ 6,500,000 $ 6,501,736 $ 8,600,621
Mortgage backed securities 155,466,850 24,122,529 -- --
Trust preferred securities 17,089,314 -- -- --
Other securities 7,714,251 1,693,521 -- --
Unrealized gains 1,413,221 536,237 -- --
------------ ------------ ------------ ------------
Total investment securities $181,683,636 $ 32,852,287 $ 6,501,736 $ 8,600,621
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
9
<PAGE>
Total loans receivable increased $75,035,855 or 52% to $219,107,816 for the
first nine months of 1998. The majority of the increase was real estate secured
loans. Mortgage loans held for sale decreased $5,400,848 from $16,895,062 at
December 31, 1997 to $11,494,214 at September 30, 1998, reflecting an
accelerated pace of delivery of residential mortgages to investors by the Bank's
mortgage banking subsidiary, First Mariner Mortgage Corporation. First Mariner
Mortgage Corporation originated $155,813,000 of residential mortgages during the
first nine months of 1998 in comparison to approximately $48,725,000 during the
first nine months of 1997. An increase in loan production staff and a favorable
interest rate environment (lower interest rates) were significant factors in
this growth in residential mortgages.
The loan portfolio was comprised of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
Type of Loans
- -------------
<S> <C> <C> <C> <C>
Commercial $ 32,763,080 14.94% $ 24,118,724 16.69%
Commercial real estate and
construction (1) 115,264,241 52.57% 81,039,474 56.06%
Residential real estate 54,330,440 24.78% 34,396,190 23.80%
Consumer and other 16,912,859 7.71% 4,992,111 3.45%
------------ ----- ------------ -----
Total loans 219,270,620 100.00% 144,546,499 100.00%
Add:
Unamortized loan premiums 99,905 139,564
Less:
Unearned income 262,709 614,102
------------ ------------
Loans receivable $219,107,816 $144,071,961
------------ ------------
------------ ------------
</TABLE>
(1) Net of undisbursed principal
10
<PAGE>
Credit Risk Management
The third quarter provision for loan losses in 1998 was $338,000 resulting
in a year-to-date provision for loan losses of $707,467, which compares to
$365,504 for the nine month period ended September 30, 1997. The allowance for
loan losses stands at $2,223,763 at September 30, 1998 compared to $1,613,621 at
December 31, 1997. As of September 30, 1998 the allowance for loan losses is
1.01% of outstanding loans as compared to 1.14% at September 30, 1997.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine months ended
---------------------------------------
September 30, 1998 September 30, 1997
<S> <C> <C>
Allowance for loan losses, beginning of period $ 1,613,621 $ 1,241,663
------------- -------------
Loans charged off:
Commercial (42,869) (100,000)
Real estate (70,000) --
Consumer (11,656) --
------------- -------------
Total loans charged off (124,525) (100,000)
------------- -------------
Recoveries
Commercial 7,615 --
Real estate 4,082 --
Consumer 15,503 --
------------- -------------
Total recoveries 27,200 --
------------- -------------
Net chargeoffs (97,325) (100,000)
------------- -------------
Provision for loan losses 707,467 365,504
------------- -------------
Allowance for loan losses, end of period $ 2,223,763 $ 1,507,167
------------- -------------
------------- -------------
Loans receivable
Period-end balance 219,107,816 132,376,000
Average balance during period 175,327,000 113,700,000
Allowance as percentage of period-end loan balance 1.01% 1.14%
Percent of average loans:
Provision for loan losses (annualized) 0.54% 0.43%
Net chargeoffs (annualized) 0.07% 0.12%
</TABLE>
11
<PAGE>
Non-performing assets, expressed as a percentage of total assets, decreased
to 0.61% at September 30, 1998 from 1.36% at December 31, 1997, reflecting the
decrease in loans on nonaccrual basis and the significant increase in assets.
Nonaccrual loans were $775,000 at September 30, 1998 compared to $1,550,000 at
December 31, 1997 as the result of payments received on these loans.
Non-performing assets were as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Loans on nonaccrual basis $ 775,000 $1,550,000 $1,771,000
Real estate acquired by foreclosure 2,031,000 1,944,000 1,862,000
---------- ---------- ----------
Total non-performing assets $2,806,000 $3,494,000 $3,633,000
---------- ---------- ----------
---------- ---------- ----------
Loans past-due 90 days or more $ 369,000 $ 276,000 $ 696,000
---------- ---------- ----------
---------- ---------- ----------
Nonaccrual loans as a percentage of loans 0.4% 1.1% 1.2%
</TABLE>
In November 1998, the Company placed on nonaccrual status a $486,000
residential construction loan consisting of 9 partially completed townhouse
units in Harford County, Maryland. The Company is currently evaluating its
alternatives regarding the project which may include foreclosing and completing
the project or selling the property as is. The Company does not anticipate any
significant loss at this time.
At September 30, 1998, the allowance for loan losses represented 287.0% of
nonaccruing loans compared to 104.1% at December 31, 1997. Management believes
the allowance for loan losses at September 30, 1998 is adequate.
Deposits were $243,527,117 as of September 30, 1998, increasing $46,257,789
or 23% from the December 31, 1997 balance of $197,269,328. The increase in
deposits is attributable to activity generated by an ongoing advertising
campaign and the addition of new branches this year. Since January 1998, the
Company has opened six branch banking offices, three of which have been in
supermarket locations. Federal Home Bank of Atlanta advances and other
borrowings increased by $129,425,458 as of September 30, 1998 from $30,330,935
as of December 31, 1997 to $159,756,393 at September 30, 1998. The other
borrowings consist of long-term repurchase agreements with investment banking
firms with convertible or callable options of approximately one to two years.
The gross proceeds of the offering of preferred securities by the Company's
trust subsidiary in the amount of $21,450,000 were used to purchase the
Company's 8.3% Junior Subordinated Debentures due June 30, 2028. The increase in
borrowings primarily was part of the Company's leverage strategy whereby these
funds were used to purchase available-for-sale mortgage backed securities at a
positive net interest margin.
12
<PAGE>
Results of Operations
Net Interest Income. Net interest income before provision for loan losses
was $3,194,930 for the third quarter of 1998, an increase of 59% over $2,003,667
for the third quarter of 1997, reflecting primarily an increase of $216,143,000
in average earning assets. The increase in average earning assets was comprised
of an increase of $73,706,000 in average loans and $142,437,000 in average
investments, primarily available-for-sale mortgage backed securities. For the
nine month period ended September 30, net interest income before provision for
loan losses was $8,404,554 in 1998 compared to $5,527,841 in 1997 reflecting an
increase of 52%. The net yield on earning assets was 3.91% for the first nine
months of 1998 as compared to 5.01% for the comparable period of 1997. The
decline in the net yield on earning assets was primarily due to the leveraging
strategy adopted by the Company in 1998 whereby available-for-sale securities
were funded by borrowings at significantly lower interest rate spreads than were
generally available in the loan and deposit portfolios.
Noninterest Income and Expenses-Noninterest income increased $695,479 or
96% for the third quarter of 1998 to $1,421,789 from $726,310 for the third
quarter of 1997. For the nine month period in 1998, noninterest income was
$3,593,002 compared to the nine month period in 1997 of $1,581,559, an increase
of $2,011,443 or 127%. The principal reasons for the increase were gains on sale
of securities, gains on sale of loans and an increase in deposit related fees.
The increase in service charge on deposits was a result of an increase in the
number of ATM's from 26 at September 30, 1997 to 36 at September 30, 1998 and an
increase in overdraft fees relating to a greater number of transaction account
holders. The increase in the gains on sale of loans was a result of the greater
volume of residential mortgage loans originated and sold by First Mariner
Mortgage Corporation.
Third quarter noninterest expense increased $1,601,631 or 64% to $4,097,422
in 1998 from $2,495,791 in the third quarter of 1997. For the nine month period
ended September 30, 1998, noninterest expense was $10,803,855 compared to the
nine month period ended September 30, 1997 of $6,551,370, an increase of
$4,252,485 or 65%. Increases in almost all categories of expense and mortgage
banking were incurred to support the substantially increased asset base and the
expanding branch network.
Income Taxes- The Company did not recognize any income tax benefit or
expense for the nine months ended September 30, 1998 due to the availability of
net operating loss carryforwards.
Liquidity and Capital Resources
Stockholders' equity increased $1,281,166 or 5% in the first nine months of
1998 to $28,246,822 from $26,965,656 as of December 31, 1997. No cash dividends
have
13
<PAGE>
been declared by the Company since its inception. A ten percent stock
dividend was declared on May 12, 1998 and paid to stockholders of record on
May 26, 1998.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks and bank holding companies are required to maintain capital levels based
on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
The Bank has exceeded its capital adequacy requirements to date. The
Company regularly monitors its capital adequacy ratios to assure that the Bank
exceeds its regulatory capital requirements. The regulatory capital ratios are
listed below:
<TABLE>
<CAPTION>
At September 30,
--------------
(unaudited)
1998 1997
---- ----
<S> <C> <C>
Regulatory capital ratios
Leverage
Consolidated 8.8% 13.3%
The Bank 8.0% 9.8%
Tier 1 capital to risk weighted assets
Consolidated 14.5% 15.7%
The Bank 13.1% 10.9%
Total capital to risk weighted assets
Consolidated 20.4% 16.6%
The Bank 14.0% 11.8%
</TABLE>
The Bank's principal sources of liquidity are cash and cash equivalents,
which are cash on hand, amounts due from financial institutions, federal funds
sold, stock investments, money market mutual funds, interest bearing deposit and
available-for-sale securities. The levels of such assets are dependent on the
Bank's operating, financing and investment activities at any given time and are
influenced by anticipated deposit flows and loan growth.
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS), Disclosures about Segments of
an Enterprise and Related Information No. 131. 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 statements
issued to shareholders. No. 131 is effective for financial statements periods
beginning after December 15, 1997. Management intends to adopt its provision
during 1998.
14
<PAGE>
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter, on that date, hedging relationships must be designated as new
and documented pursuant to the provisions of SFAS No. 133. Earlier application
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of SFAS No. 133. It should not be applied
retroactively to financial statements of prior periods. Management is in the
process of evaluating the potential impacts of this new accounting standard.
YEAR 2000 ACTION PLAN
In 1997, the Company adopted a Year 2000 Action Plan (the "Plan"). This
plan is consistent with the mandates and guidelines set forth by the FDIC and
FFIEC. As part of the plan the Company has established a senior management
committee to address the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000. In
developing the Plan the committee identified five phases: Awareness, Assessment,
Renovation, Validation, and Implementation. The last four phases consist of (1)
inventorying Year 2000 affected items, (2) assigning priorities to identified
items, (3) assessing the Year 2000 compliance of items determined to be material
to the company; (4) repairing or replacing material items that are determined
not to be Year 2000 compliant; (5) testing material items; and (6) designing and
implementing contingency and business continuation plans for items identified as
critical.
The awareness phase is a continuing effort to educate employees, customers,
business partners and vendors of the impact of the Year 2000 issues. The effort
is well under way through communication with the appropriate constituencies and
required training for all employees.
During the assessment phase which was completed by September 30, 1998, an
inventory database was created that details all hardware, software, facilities
equipment, and vendors. Each item was assigned a priority based on its
importance to the operations of the company and the risk associated with non
compliance. The critical areas were identified as the core banking system of
deposits and loans, (outsourced to NCR), the Automated Teller Machine (ATM)
network, the communication and telephone systems, the operating systems, and the
credit card processing system. In addition, the Company has assessed
non-information technology systems as well including the alarm systems at the
various locations of the Company.
15
<PAGE>
The validation phase has been completed for our major mission critical
processor NCR. On May 9, 1998, a Year 2000 test was conducted to validate the
changes made to the NCR system. The test was considered a success although
future testing to assure integration with other key systems of the Bank is
anticipated for 1999. Approximately 90% of the Company's ATM's have been
upgraded to be compliant with Year 2000. The remaining ATM's, which are from a
different vendor, are currently being evaluated and are anticipated to be
compliant by April 1999. The validation and renovation, if necessary, of other
mission critical and material operating and support systems will continue
through June 1999. As these systems are found to be non compliant they will be
renovated, modified or replaced with validation tests conducted to assure future
compliance. Contingency planning for all mission critical functions is underway
and will be completed by June 1999.
The reasonably likely worst case scenario that management believes at this
time may occur would be that the branch banking network, including deposit
processing could be off-line immediately following year end, 1999. This off-line
processing would have minimal impact if the length of time that this condition
existed is limited. To plan for this scenario, the Company will provide every
branch with the necessary data to process transactions at their locations. In
addition, to accommodate all branches, the customer call center located at
headquarters will have a complete trial balance of all accounts for all branch
locations.
Costs
Total costs associated with the Plan will primarily include costs incurred
to upgrade the existing software and hardware not currently Year 2000 compliant.
The Company expects that these costs would be incurred in the normal course of
business as software and hardware is ordinarily upgraded to keep pace with
technological advances. To date, the Company has not spend any funds on
consultants; however, the Company has spent approximately $36,000 on making its
ATM's Year 2000 compliant and approximately $1,000 on education and training
seminars for Company personnel. The Company does not track internal costs for
personnel devoted the Year 2000 issues; however, one individual has spend a
significant amount of time overseeing the project and many other individuals
have spent numerous hours to ensure the Company will be compliant. Actual costs
are not expected to exceed $500,000 over a period of eighteen months.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Results of operations for financial institutions, including the Company,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate values, rapid changes in interest
rates and the monetary
16
<PAGE>
and fiscal policies of the federal government. The profitability of the Company
is in part a function of the spread between the interest rates earned on assets
and the interest rates paid on deposits and other interest-bearing liabilities
(net interest income), including advances from Federal Home Loan Bank of Atlanta
("FHLB") and other borrowing. Interest rate risk arises from mismatches (i.e.,
the interest sensitivity gap) between the dollar amount of repricing or maturing
assets and liabilities and is measured in terms of the ratio of the interest
rate sensitivity gap to total assets. More assets repricing or maturing than
liabilities over a given time period is considered asset-sensitive and is
reflected as a positive gap, and more liabilities repricing or maturing than
assets over a give time period is considered liability-sensitive and is
reflected as negative gap. An asset-sensitive position (i.e., a positive gap)
will generally enhance earnings in a rising interest rate environment and will
negatively impact earnings in a falling interest rate environment, while a
liability-sensitive position (i.e., a negative gap) will generally enhance
earnings in a falling interest rate environment and negatively impact earnings
in a rising interest rate environment. Fluctuations in interest rates are not
predictable or controllable. The Company has attempted to structure its asset
and liability management strategies to mitigate the impact on net interest
income of changes in market interest rates. However, there can be no assurance
that the Company will be able to manage interest rate risk so as to avoid
significant adverse effects on net interest income. At September 30, 1998, the
Company had a one year cumulative negative gap of approximately $3.647 million
or 1% of total assets.
17
<PAGE>
PART II - Other Information
Item 1 - Legal proceedings - None
Item 2 - Changes in securities and use of proceeds - None
Item 3 - Defaults on senior securities - None
Item 4 - Submission of matters to a vote of security holders - None
Item 5 - Other information - None
Item 6 - Exhibits and reports on Form 8-K
(a) Exhibit Number
27 - Financial Data Schedule
(b) On October 26, 1998, the Company filed on Form 8-K an
announcement that it had completed the acquisition of
approximately 18.9% of the outstanding shares of common stock of
Glen Burnie Bancorp on October 19, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MARINER BANCORP
Date: 11/16/98 By: /s/ Edwin F. Hale Sr.
-------- ---------------------
Edwin F. Hale Sr.
Chairman and Chief Executive Officer
Date: 11/16/98 By: /s/ Kevin M. Healey
-------- ---------------------
Kevin M. Healey
Controller (Principal Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,083,505
<SECURITIES> 93,404,569
<RECEIVABLES> 347,847
<ALLOWANCES> 2,223,763
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,855,584
<DEPRECIATION> 1,914,727
<TOTAL-ASSETS> 459,802,063
<CURRENT-LIABILITIES> 1,569,092
<BONDS> 0
0
0
<COMMON> 158,246
<OTHER-SE> 28,088,576
<TOTAL-LIABILITY-AND-EQUITY> 459,802,063
<SALES> 0
<TOTAL-REVENUES> 21,366,067
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,803,855
<LOSS-PROVISION> 707,467
<INTEREST-EXPENSE> 9,368,511
<INCOME-PRETAX> 486,234
<INCOME-TAX> 0
<INCOME-CONTINUING> 486,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 486,234
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
