<PAGE>
[LOGO]
$20,000,000
(AGGREGATE LIQUIDATION AMOUNT)
MARINER CAPITAL TRUST
8.3% PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, TO THE EXTENT DESCRIBED HEREIN, BY
FIRST MARINER BANCORP
---------------
The Preferred Securities offered hereby represent preferred undivided
beneficial interests in the assets of Mariner Capital Trust, a statutory
business trust created under the laws of the State of Delaware (the "Issuer
Trust"). First Mariner Bancorp (together with its subsidiary, First Mariner
Bank, where the context requires, the "Company") will initially be the holder of
all of the beneficial interests represented by common securities of the Issuer
Trust (the "Common Securities" and together with the Preferred Securities, the
"Trust Securities"). The Issuer Trust exists for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in 8.3% Junior Subordinated
Debentures (the "Junior Subordinated Debentures") to be issued by the Company.
(COVER CONTINUED ON NEXT PAGE)
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER INSURER OR GOVERNMENT
AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS OR PROCEEDS TO THE
PRICE TO PUBLIC(1) COMMISSIONS(2) ISSUER TRUST(3)
<S> <C> <C> <C>
Per Preferred Security................................... $10 $0.37(4) $9.63
Total (5)................................................ $20,000,000 $740,000(4) $19,260,000
</TABLE>
(1) Plus accrued Distributions, if any, from June 30, 1998.
(2) The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deduction of expenses payable by the Company estimated at $400,000.
(4) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Company has agreed to pay to the Underwriters, as compensation for arranging
the investment therein of such proceeds, $0.37 per Preferred Security (or
$740,000 in the aggregate). See "Underwriting."
(5) The Company and the Issuer Trust have granted the Underwriters a 30 day
option to purchase up to an additional $3,000,000 aggregate liquidation
amount of the Preferred Securities at the Price to Public less Underwriting
Discounts and Commissions. If the Underwriters exercise such option in full,
the total Price to Public and Proceeds to Issuer Trust will be $23,000,000
and $22,149,000, respectively. See "Underwriting."
------------------------------
The Preferred Securities are offered by the Underwriters subject to receipt
and acceptance by them, prior sale and the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Preferred Securities will be made in
book-entry form through the book-entry facilities of The Depository Trust
Company on or about June 30, 1998 against payment therefor in immediately
available funds.
FERRIS, BAKER WATTS
Incorporated
The date of this Prospectus is June 26, 1998
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The Junior Subordinated Debentures will mature on June 30, 2028, which date
may be shortened (such date, as it may be shortened, the "Stated Maturity") to a
date not earlier than June 30, 2003 if certain conditions are met (including the
Company having received the prior approval of the Board of Governors of the
Federal Reserve System (the "Federal Reserve") if then required under applicable
capital guidelines or policies of the Federal Reserve (such shortening of the
maturity date, the "Maturity Adjustment")). See "Description of Junior
Subordinated Debentures--General." The Preferred Securities will have a
preference under certain circumstances over the Common Securities with respect
to cash distributions and amounts payable on liquidation, redemption or
otherwise. See "Description of Preferred Securities-- Subordination of Common
Securities."
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. The Preferred Securities have been approved
for listing on the Nasdaq National Market under the symbol FMARP. Settlement for
the Preferred Securities will be made in immediately available funds. The
Preferred Securities will trade in DTC's Same-Day Funds Settlement System, and
secondary market trading activity for the Preferred Securities will therefore
settle in immediately available funds.
Holders of the Preferred Securities will be entitled to receive preferential
cumulative cash distributions accumulating from June 30, 1998 and payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, at the annual rate of 8.3% of the Liquidation Amount of $10 per Preferred
Security ("Distributions"). The first Distribution will be on September 30,
1998. The distribution rate and the distribution payment dates and other payment
dates for the Preferred Securities will correspond to the interest rate and
interest payment dates and other payment dates on the Junior Subordinated
Debentures, which will be the sole assets of the Issuer Trust. The Company has
the right to defer payments of interest on the Junior Subordinated Debentures at
any time from time to time for a period not exceeding 20 consecutive quarters
with respect to each deferral period (each, an "Extension Period"), provided
that no Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. No interest shall be due and payable during any
Extension Period, except at the end thereof. Upon the termination of any such
Extension Period and the payment of all amounts then due, the Company may elect
to begin a new Extension Period subject to the requirements set forth herein. If
interest payments on the Junior Subordinated Debentures are so deferred,
Distributions on the Preferred Securities will also be deferred and the Company
will not be permitted, subject to certain exceptions described herein, to
declare or pay any cash distributions with respect to the Company's capital
stock or with respect to debt securities of the Company that rank PARI PASSU in
all respects with or junior to the Junior Subordinated Debentures. During an
Extension Period, interest on the Junior Subordinated Debentures will continue
to accrue (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate) at the rate of 8.3% per annum,
compounded quarterly, and holders of Preferred Securities will be required to
accrue interest income for United States federal income tax purposes. See
"Description of Junior Subordinated Debentures--Option to Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences--US
Holders--Interest Income and Original Issue Discount."
The Company and the Issuer Trust believe that the Company's obligations
under the Guarantee, the Trust Agreement, the Junior Subordinated Debentures and
the Junior Subordinated Indenture (each as defined herein), taken together,
fully, irrevocably and unconditionally guarantee all the Issuer Trust's
obligations under the Preferred Securities as described below. See "Relationship
Among the Preferred Securities, the Junior Subordinated Debentures and the
Guarantee--Full and Unconditional Guarantee." The Guarantee of the Company will
guarantee the payment of Distributions and payments on liquidation or redemption
of the Preferred Securities, but only in each case to the extent of funds held
by the Issuer Trust, as described herein (the "Guarantee"). See "Description of
Guarantee." If the Company does not make payments on the Junior Subordinated
Debentures held by the Issuer Trust, the Issuer Trust may have insufficient
funds to pay Distributions on the Preferred Securities. The Guarantee does not
cover payment of Distributions when the Issuer Trust does not have sufficient
funds to pay such Distributions. In such event, a holder of Preferred Securities
may institute a legal proceeding directly against the Company to enforce payment
of such Distributions to such holder. See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Preferred Securities."
The obligations of the Company under the Guarantee and the Preferred Securities
will be subordinate and junior in right of payment to all Senior Indebtedness
(as defined in "Description of Junior Subordinated Debentures--Subordination")
of the Company.
The Preferred Securities will be subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debentures at
Stated Maturity or their earlier redemption in whole upon the occurrence of a
Tax Event, an Investment Company Event or a Capital Treatment Event (each as
defined herein) and (ii) in whole or in part at any time on or after June 30,
2003 contemporaneously with the optional redemption by the Company of the Junior
Subordinated Debentures in whole or in part. The Junior Subordinated Debentures
will be redeemable prior to maturity at the option of the Company (i) on or
after June 30, 2003, in whole at any time or in part from time to time, or (ii)
in whole, but not in part, at any time within 90 days following the occurrence
and continuation of a Tax Event, Investment Company Event or Capital Treatment
Event (each as defined herein), in each case at a redemption price set forth
herein, which includes the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption. The
ability of the Company to exercise its rights to redeem the Junior Subordinated
Debentures or to cause the redemption of the Preferred Securities prior to the
Stated Maturity may be subject to prior regulatory approval by the Federal
Reserve, if then required under applicable Federal Reserve capital guidelines or
policies. See "Description of Junior Subordinated Debentures-- Redemption" and
"Description of Preferred Securities--Liquidation Distribution Upon
Dissolution."
i
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The Company, as holder of the outstanding Common Securities, will have the
right at any time to dissolve the Issuer Trust and, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, to
cause the Junior Subordinated Debentures to be distributed to the holders of the
Preferred Securities in liquidation of the Issuer Trust. The ability of the
Company to dissolve the Issuer Trust may be subject to prior regulatory approval
of the Federal Reserve, if then required under applicable Federal Reserve
capital guidelines or policies. See "Description of Preferred Securities--
Liquidation Distribution Upon Dissolution."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Preferred Securities will be entitled to receive a Liquidation
Amount of $10 per Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Junior Subordinated Debentures. See
"Description of Preferred Securities--Liquidation Distribution Upon
Dissolution."
The Junior Subordinated Debentures will be unsecured and subordinated to all
Senior Indebtedness of the Company. See "Description of Junior Subordinated
Debentures--Subordination."
Prospective purchasers must carefully consider the restrictions on purchase
set forth in "Certain ERISA Considerations."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF
THE COMPANY, DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER INSURER OR GOVERNMENT AGENCY.
ii
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite
1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's web site on the Internet at http://www.sec.gov.
The Company and the Issuer Trust have filed with the Commission a
Registration Statement on Form S-1 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act of 1933, as amended, with respect to the Preferred Securities,
the Junior Subordinated Debentures and the Guarantee. This Prospectus does not
contain all the information set forth in the Registration Statement and exhibits
thereto, to which reference is hereby made.
No separate financial statements of the Issuer Trust have been included or
incorporated by reference herein. The Company and the Issuer Trust do not
consider that such financial statements would be material to potential
purchasers of the Preferred Securities because the Issuer Trust is a newly
formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any
activities other than holding as trust assets the Junior Subordinated Debentures
and issuing the Trust Securities. See "Mariner Capital Trust," "Description of
Preferred Securities," "Description of Junior Subordinated Debentures" and
"Description of Guarantee." In addition, the Company does not expect that the
Issuer Trust will be filing reports under the Exchange Act with the Commission.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING THE PREFERRED SECURITIES AND
BIDDING FOR AND PURCHASING THE PREFERRED SECURITIES AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
AS USED HEREIN, (I) THE "JUNIOR SUBORDINATED INDENTURE" MEANS THE JUNIOR
SUBORDINATED INDENTURE, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, BETWEEN
THE COMPANY AND WILMINGTON TRUST COMPANY, AS TRUSTEE (THE "DEBENTURE TRUSTEE"),
PURSUANT TO WHICH THE JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED, (II) THE
"TRUST AGREEMENT" MEANS THE AMENDED AND RESTATED TRUST AGREEMENT RELATING TO THE
ISSUER TRUST, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, AMONG THE COMPANY,
AS DEPOSITOR, AND WILMINGTON TRUST COMPANY, AS PROPERTY TRUSTEE (THE "PROPERTY
TRUSTEE") AND AS DELAWARE TRUSTEE (THE "DELAWARE TRUSTEE") (COLLECTIVELY, THE
"ISSUER TRUSTEES") AND (III) THE "GUARANTEE" MEANS THE GUARANTEE AGREEMENT
RELATING TO THE PREFERRED SECURITIES, AS AMENDED AND SUPPLEMENTED FROM TIME TO
TIME, BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANY, AS GUARANTEE TRUSTEE
(THE "GUARANTEE TRUSTEE").
FIRST MARINER BANCORP
First Mariner Bancorp, a bank holding company formed in Maryland in 1994,
conducts its business through its wholly owned subsidiary, First Mariner Bank
(the "Bank"). As of May 1, 1998, the Bank, which is headquartered in Baltimore
City, serves the central region of the State of Maryland through 18 full service
branches and 33 Automated Teller Machines ("ATMs"). At March 31, 1998, the
Company had total assets of $263,809,000. The Bank provides residential mortgage
lending services through its wholly owned subsidiary, First Mariner Mortgage
Corporation (the "Mortgage Subsidiary").
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 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 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 displaced by such consolidation and acquisition
opportunities from the remaining small independent banks in the Company's market
area.
The Company intends to continue to capture market share and expand in
Central Maryland. See "Business."
MARINER CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware law on
May 14, 1998. The Issuer Trust will be governed by a Trust Agreement among the
Company, as Depositor, and Wilmington Trust Company, as Delaware Trustee and as
Property Trustee. The Issuer Trust exists for the exclusive purposes of (i)
issuing and selling the Trust Securities, (ii) using the proceeds from the sale
of the Trust Securities to acquire the Junior Subordinated Debentures and (iii)
engaging in only those other activities necessary, convenient or incidental
thereto (such as registering the transfer of the Trust Securities). Accordingly,
the Junior Subordinated Debentures will be the sole assets of the Issuer Trust,
and payments under the Junior Subordinated Debentures will be the sole source of
revenue of the Issuer Trust.
1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED.................. $20,000,000 aggregate Liquidation Amount of 8.3%
Preferred Securities (Liquidation Amount $10 per
Preferred Security).
OFFERING PRICE...................... $10 per Preferred Security (Liquidation Amount $10),
plus accumulated Distributions, if any, from June 30,
1998.
DISTRIBUTIONS....................... The Distributions payable on each Preferred Security
will be fixed at a rate per annum of 8.3% of the
Liquidation Amount of $10 per Preferred Security,
will be cumulative, will accrue from the date of
issuance of the Preferred Securities and will be
payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, commencing
September 30, 1998. See "Description of Preferred
Securities--Distributions."
JUNIOR SUBORDINATED DEBENTURES...... The Issuer Trust will invest the proceeds from the
issuance of the Preferred Securities and Common
Securities in an equivalent amount of 8.3% Junior
Subordinated Debentures of the Company. The Junior
Subordinated Debentures will mature on June 30, 2028
subject to the Maturity Adjustment. The Junior
Subordinated Debentures will rank subordinate and
junior in right of payment to all Senior Indebtedness
of the Company. In addition, the Company's
obligations under the Junior Subordinated Debentures
will be structurally subordinated to all existing and
future liabilities and obligations of its
subsidiaries.
GUARANTEE........................... Under the terms of the Guarantee, the Company has
guaranteed the payment of Distributions and payments
on liquidation or redemption of the Preferred
Securities, but only in each case to the extent of
funds held by the Issuer Trust described herein. The
Company and the Issuer Trust believe that the
obligations of the Company under the Guarantee, the
Trust Agreement, the Junior Subordinated Debentures
and the Junior Subordinated Indenture, taken
together, fully, irrevocably and unconditionally
guarantee all of the Issuer Trust's obligations
relating to the Preferred Securities. The obligations
of the Company under the Guarantee and the Junior
Guarantee Subordinated Debentures are subordinate and
junior in right of payment to all Senior
Indebtedness. See "Description of Guarantee."
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
RIGHT TO DEFER INTEREST............. The Company has the right, at any time, to defer
payments of interest on the Junior Subordinated
Debentures for a period not exceeding 20 consecutive
quarters; provided that no Extension Period may
extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of the
Company's extension of the interest payment period,
quarterly Distributions on the Preferred Securities
will be deferred (though such Distribution would
continue to accrue with interest thereon compounded
quarterly, since interest will continue to accrue and
compound on the Junior Subordinated Debentures during
any such Extension Period). During an Extension
Period, the Company will be prohibited, subject to
certain exceptions described herein, from declaring
or paying any cash distributions with respect to its
capital stock or debt securities that rank pari passu
with or junior to the Junior Subordinated Debentures.
Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may
commence a new Extension Period, subject to the
foregoing requirements. See "Description of Junior
Subordinated Debentures--Option to Extend Interest
Payment Period." Should an Extension Period occur,
Preferred Security holders will continue to accrue
interest income (and DE MINIMIS original issue
discount, if any) for United States federal income
tax purposes. See "Certain Federal Income Tax
Consequences--U.S. Holders--Interest Income and
Original Issue Discount."
LIQUIDATION OF THE ISSUER TRUST..... The Company, as holder of the Common Securities, has
the right at any time to dissolve the Issuer Trust
and cause the Junior Subordinated Debentures to be
distributed to holders of Preferred Securities in
liquidation of the Issuer Trust, subject to the
Company having received prior approval of the Federal
Reserve to do so if then required under applicable
capital guidelines or policies of the Federal
Reserve. See "Description of Preferred
Securities--Liquidation Distribution Upon
Dissolution."
VOTING RIGHTS....................... Generally, the holders of the Preferred Securities
will not have any voting rights. See "Description of
Preferred Securities--Voting Rights; Amendment of
Trust Agreement."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
RANKING............................. The Preferred Securities will rank pari passu, and
payments thereon will be made pro rata, with the
Common Securities except as described under
"Description of Preferred Securities--Subordination
of Common Securities." The Junior Subordinated
Debentures will be unsecured and subordinate and
junior in right of payment to the extent and in the
manner set forth in the Junior Subordinated Indenture
to all Senior Indebtedness (as defined herein). See
"Description of Junior Subordinated Debentures." The
Guarantee will constitute an unsecured obligation of
the Company and will rank subordinate and junior in
right of payment to the extent and in the manner set
forth in the Guarantee to all Senior Indebtedness.
See "Description of Guarantee." In addition, because
the Company is a holding company, the Junior
Subordinated Debentures and the Guarantee effectively
will be subordinated to all existing and future
liabilities of the Company's subsidiaries, including
the deposit liabilities of the Bank. See "Description
of Junior Subordinated Debentures--Subordination."
REDEMPTION.......................... The Preferred Securities will be subject to mandatory
redemption (i) in whole, but not in part, at the
Stated Maturity upon repayment of the Junior
Subordinated Debentures, (ii) in whole, but not in
part, contemporaneously with the optional redemption
at any time by the Company of the Junior Subordinated
Debentures upon the occurrence and continuation of a
Tax Event, Investment Company Event or Capital
Treatment Event and (iii) in whole or in part, at any
time on or after June 30, 2003, contemporaneously
with the optional redemption by the Company of the
Junior Subordinated Debentures in whole or in part,
in each case at the applicable Redemption Price. See
"Description of Preferred Securities--Redemption."
NO RATING........................... The Preferred Securities are not expected to be rated
by any rating service, nor is any other security
issued by the Company so rated.
ERISA CONSIDERATIONS................ Prospective purchasers should carefully consider the
restrictions on purchase set forth under "Certain
ERISA Considerations."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
USE OF PROCEEDS..................... All proceeds to the Issuer Trust from the sale of the
Trust Securities will be invested by the Issuer Trust
in the Junior Subordinated Debentures. All of the net
proceeds received by the Company from the sale of the
Junior Subordinated Debentures will be used to
finance growth, which may include the acquisition of
branches or other financial institutions, and for
general corporate purposes which may include
investments in or extensions of credit to its direct
or indirect subsidiaries to support internal growth.
See "Use of Proceeds" and "Capitalization." The
Preferred Securities may qualify in whole or in part
as Tier 1 or core capital of the Company, subject to
the 25% Capital Limitation (as defined under "Use of
Proceeds"), under the risk-based capital guidelines
of the Federal Reserve. The portion of the Preferred
Securities that exceeds the 25% Capital Limitation
will qualify as Tier 2 or supplementary capital of
the Company. See "Use of Proceeds."
NASDAQ NATIONAL MARKET SYMBOL....... The Preferred Securities have been approved for
listing on The Nasdaq National Market under the
symbol FMARP.
</TABLE>
For additional information regarding the Preferred Securities, see
"Description of Preferred Securities," "Description of Junior Subordinated
Debentures," "Description of Guarantee," "Relationship Among the Preferred
Securities, the Junior Subordinated Debentures and the Guarantee" and "Certain
Federal Income Tax Consequences."
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors" beginning on page 7.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following summary consolidated financial data for, and as of the end of,
each of the years ended December 31, 1997, 1996, 1995 and 1994 (year of
inception) are derived from the audited Consolidated Financial Statements of the
Company. The following summary interim consolidated data for, and as of the end
of, the three month periods ended March 31, 1998 and 1997 have been derived from
unaudited financial statements of the Company, which, in the opinion of
management, have been prepared on the same basis as the audited Consolidated
Financial Statements included herein, and reflect all adjustments, which are of
a normal recurring nature, necessary for a fair presentation of such data. The
results of the interim periods are not necessarily indicative of the results of
a full year. The summary consolidated financial data set forth below should be
read in conjunction with, and are qualified by reference to, the Consolidated
Financial Statements of the Company and the Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
OPERATIONS DATA:
Interest income...................................... $ 4,661 $ 2,904 $ 14,318 $ 6,736 $ 2,561 $ 1,209
Interest expense..................................... 2,220 1,184 6,565 3,107 1,269 504
Net interest income.................................. 2,441 1,720 7,753 3,629 1,292 705
Provision for loan losses............................ 152 135 472 1,040 190 59
Net interest income after provision for loan
losses............................................. 2,289 1,585 7,281 2,589 1,102 646
Gain on sale of securities........................... 285 13 479 330 9 --
Other noninterest income............................. 748 444 1,872 745 188 75
Other noninterest expenses........................... 3,171 2,018 9,459 5,837 2,581 979
Income (loss) before income tax benefit.............. 151 24 173 (2,173) (1,282) (258)
Income tax benefit................................... -- -- (192) -- -- (17)
Net income (loss).................................... 151 24 365 (2,173) (1,282) (241)
Net income (loss) per share-basic.................... 0.05 0.01 0.13 (1.72) (1.88) (1.07)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
MARCH 31, 1998 1997 1996 1995 1994
------------------- --------- --------- --------- ---------
FINANCIAL CONDITION DATA:
Total assets........................................ $ 263,809 $ 256,984 $ 132,562 $ 52,798 $ 26,303
Available-for-sale securities....................... 33,773 32,852 325 2,338 --
Investment securities, net.......................... 6,603 8,601 1,099 -- 2,631
Loans held for sale................................. 15,730 16,895 3,072 -- --
Loans receivable.................................... 160,531 144,072 92,064 29,935 20,030
Other real estate owned............................. 2,420 1,944 -- -- --
Total deposits...................................... 204,018 197,269 102,289 41,487 20,883
Short-term borrowings............................... 32,166 30,331 6,000 -- 3,150
Total stockholders' equity.......................... 27,204 26,966 23,796 10,702 1,977
OTHER DATA:
Average assets...................................... 237,491 176,283 82,314 37,213 27,063
Average equity...................................... 27,072 26,317 10,030 6,534 1,776
Return on average stockholders' equity.............. 2.23% 1.39% (21.67%) (19.62%) (13.57%)
Return on average total assets...................... 0.25% 0.21% (2.64%) (3.45%) (0.89%)
Average stockholders' equity to average total
assets............................................ 11.40% 14.93% 12.19% 17.56% 6.56%
Net interest spread................................. 3.65% 3.74% 4.08% 3.32% 2.95%
Net interest margin................................. 4.47% 4.72% 4.87% 3.99% 2.89%
Nonperforming loans to period-end loans............. 0.84% 1.08% 1.71% 2.11% 3.45%
Net chargeoffs to average loans..................... 0.26% 0.08% 0.27% 0.26% 0.11%
Allowance as a percent of period-end loans.......... 1.04% 1.12% 1.35% 1.26% 1.22%
Allowance as a percent of period-end nonperforming
loans............................................. 123.30% 104.13% 78.91% 59.40% 35.40%
</TABLE>
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
PREFERRED SECURITIES. CERTAIN STATEMENTS IN THIS PROSPECTUS ARE FORWARD-LOOKING
AND ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS OR PHRASES SUCH AS
"INTENDED," "WILL BE POSITIONED," "EXPECTS," IS OR ARE "EXPECTED,"
"ANTICIPATES," AND "ANTICIPATED." THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
THE COMPANY'S CURRENT EXPECTATIONS. TO THE EXTENT ANY OF THE INFORMATION
CONTAINED CONSTITUTES A "FORWARD-LOOKING STATEMENT," THE RISK FACTORS SET FORTH
BELOW ARE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENT.
RISK FACTORS RELATING TO THE OFFERING
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES. The obligations of the Company under the Guarantee
issued by the Company for the benefit of the holders of Preferred Securities and
under the Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior Indebtedness. At March 31, 1998, the Company had no Senior
Indebtedness. None of the Junior Subordinated Indenture, the Guarantee or the
Trust Agreement places any limitation on the amount of secured or unsecured
debt, including Senior Indebtedness, or debt that is PARI PASSU with the Junior
Subordinated Debentures, that may be incurred by the Company. See "Description
of Guarantee--Status of the Guarantee" and "Description of Junior Subordinated
Debentures-- Subordination."
The ability of the Issuer Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company's making payments on the Junior
Subordinated Debentures as and when required. See "Risk Factors--Limited Sources
for Payments on Junior Subordinated Debentures and Other Indebtedness."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES. So long as no
Event of Default (as defined in the Junior Subordinated Indenture) has occurred
and is continuing with respect to the Junior Subordinated Debentures (a
"Debenture Event of Default"), the Company has the right under the Junior
Subordinated Indenture to defer the payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarterly periods with respect to each Extension
Period, provided that no Extension Period may extend beyond the Stated Maturity
of the Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures--Debenture Events of Default." As a consequence of any such deferral,
quarterly Distributions on the Preferred Securities by the Issuer Trust will be
deferred during any such Extension Period. Distributions to which holders of the
Preferred Securities are entitled will accumulate additional Distributions
thereon during any Extension Period at the rate equal to 8.3% per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by four. The term "Distribution" as used herein shall include any such
additional Distributions. During any such Extension Period, the Company may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock or (ii) make any payment of principal of or interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Company
that rank PARI PASSU in all respects with or junior in interest to the Junior
Subordinated Debentures (other than (a) repurchases, redemptions or other
acquisitions of shares of capital stock of the Company in connection with any
employment contract, benefit plan or other similar arrangement with or for the
benefit of any one or more employees, officers, directors or consultants, in
connection with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of the Company (or securities
convertible into or exercisable for such capital stock) as consideration in an
acquisition transaction entered into prior to the applicable Extension Period,
(b) as a result of an exchange or conversion of any class or series of the
Company's capital stock (or any capital stock of a subsidiary of the Company)
for any class or series of the Company's capital stock or of any class or series
of the Company's indebtedness for any class or series of the Company's capital
stock, (c) the purchase of fractional interests
7
<PAGE>
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any stockholder's rights
plan, or the issuance of rights, stock or other property under any stockholder's
rights plan, or the redemption or repurchase of rights pursuant thereto, or (e)
any dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks PARI PASSU with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate equal to 8.3% per
annum, compounded quarterly, to the extent permitted by applicable law), the
Company may elect to begin a new Extension Period subject to the above
conditions. No interest shall be due and payable during an Extension Period,
except at the end thereof. The Company must give the Issuer Trustees notice of
its election of such Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Preferred Securities would have
been payable but for the election to begin such Extension Period and (ii) the
date the Property Trustee is required to give notice to holders of the Preferred
Securities of the record date or the date such Distributions are payable, but in
any event not less than one Business Day prior to such record date. The Property
Trustee will give notice of the Company's election to begin a new Extension
Period to the holders of the Preferred Securities. Subject to the foregoing,
there is no limitation on the number of times that the Company may elect to
begin an Extension Period. See "Description of Preferred
Securities--Distributions" and "Description of Junior Subordinated
Debentures--Option to Extend Interest Payment Period."
Should an Extension Period occur, a holder of Preferred Securities will
continue to accrue income (in the form of original issue discount) for United
States federal income tax purposes in respect of its pro rata share of the
Junior Subordinated Debentures held by the Issuer Trust (which will include a
holder's pro rata share of both the stated interest and DE MINIMIS original
issue discount, if any, on the Junior Subordinated Debentures). As a result, a
holder of Preferred Securities will include such interest income in gross income
for United States federal income tax purposes in advance of the receipt of cash
attributable to such original issue discount interest income, and will not
receive the cash in the form of interest payments related to such income from
the Issuer Trust if the holder disposes of the Preferred Securities prior to the
record date for the payment of Distributions with respect to such Extension
Period. See "Certain Federal Income Tax Consequences--US Holders--Interest
Income and Original Issue Discount" and "--Sales of Preferred Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. In
addition, as a result of the existence of the Company's right to defer interest
payments, the market price of the Preferred Securities (which represent
preferred undivided beneficial interests in the assets of the Issuer Trust) may
be more volatile than the market prices of other securities on which original
issue discount accrues that are not subject to such deferrals.
TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL TREATMENT EVENT
REDEMPTION. Upon the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event, the Company has the right
to redeem the Junior Subordinated Debentures in whole, but not in part, at any
time within 90 days following the occurrence of such Tax Event, Investment
Company Event or Capital Treatment Event and thereby cause a mandatory
redemption of the Preferred Securities and Common Securities. Any such
redemption shall be at a price equal to the liquidation amount of the Preferred
Securities and Common Securities, respectively, together with accumulated
Distributions to but excluding the date fixed for redemption. The ability of the
Company to exercise its rights to redeem the Junior Subordinated Debentures
prior to the stated maturity may be subject to prior regulatory approval by the
8
<PAGE>
Federal Reserve, if then required, as it currently is, under applicable Federal
Reserve capital guidelines or policies. See "Description of Junior Subordinated
Debentures--Redemption" and "Description of Preferred Securities--Liquidation
Distribution Upon Dissolution."
A "Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to the Company experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion will not be, deductible by the Company, in whole
or in part, for United States federal income tax purposes or (iii) the Issuer
Trust is, or will be within 90 days of the delivery of the opinion, subject to
more than a DE MINIMIS amount of other taxes, duties or other governmental
charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Preferred Securities.
A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the Company
will not be entitled to treat an amount equal to the aggregate Liquidation
Amount of the Preferred Securities as "Tier 1 Capital" (or the then equivalent
thereof), except as otherwise restricted under the 25% Capital Limitation (as
defined herein), for purposes of the risk-based capital adequacy guidelines of
the Federal Reserve, as then in effect and applicable to the Company.
POSSIBLE TAX LAW CHANGES. In both 1996 and 1997, the Clinton Administration
proposed to amend the Internal Revenue Code of 1986, as amended, to deny
deductions of interest and original issue discount on instruments with features
similar to those of the Junior Subordinated Debentures when issued under
arrangements similar to the Issuer Trust. Neither of these proposals was passed
by, and no such proposal is currently pending before, Congress. There can be no
assurance, however, that future legislative proposals, future regulations or
official administrative pronouncements, or future judicial decisions will not
adversely affect the ability of the Company to deduct interest on the Junior
Subordinated Debentures. Such a change could give rise to a Tax Event, which may
permit the Company, upon approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve, to cause a
redemption of the Preferred Securities, as described more fully under
"Description of the Preferred Securities-- Redemption."
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES. The
holders of all the outstanding Common Securities have the right at any time to
dissolve the Issuer Trust and, after satisfaction of liabilities to creditors of
the Issuer Trust as provided by applicable law, cause the Junior Subordinated
Debentures to be distributed to the holders of the Preferred Securities and
Common Securities in
9
<PAGE>
liquidation of the Issuer Trust. The Company initially will be the holder of all
of the outstanding Common Securities. The ability of the Company to dissolve the
Issuer Trust may be subject to prior regulatory approval of the Federal Reserve,
if then required under applicable Federal Reserve capital guidelines or
policies. See "Description of Preferred Securities--Liquidation Distribution
Upon Dissolution." The Junior Subordinated Debentures, if distributed, may be
subject to restrictions on transfer pursuant to applicable securities laws.
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Junior Subordinated Debentures upon a
liquidation of the Issuer Trust will not be a taxable event to holders of the
Preferred Securities. However, if a Tax Event were to occur that would cause the
Issuer Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by the Issuer Trust would be a taxable
event to the Issuer Trust and the holders of the Preferred Securities. See
"Certain Federal Income Tax Consequences--Receipt of Junior Subordinated
Debentures or Cash Upon Liquidation of the Trust."
RIGHTS UNDER THE GUARANTEE. Wilmington Trust Company will act as the
trustee under the Guarantee and will hold the Guarantee for the benefit of the
holders of the Preferred Securities. Wilmington Trust Company also will act as
Debenture Trustee for the Junior Subordinated Debentures and as Property Trustee
and Delaware Trustee under the Trust Agreement. The Guarantee guarantees to the
holders of the Preferred Securities the following payments, to the extent not
paid by or on behalf of the Issuer Trust: (i) any accumulated and unpaid
Distributions required to be paid on the Preferred Securities, to the extent
that the Issuer Trust has funds on hand available therefor at such time, (ii)
the Redemption Price with respect to any Preferred Securities called for
redemption, to the extent that the Issuer Trust has funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary dissolution of
the Issuer Trust (unless the Junior Subordinated Debentures are distributed to
holders of the Preferred Securities), the lesser of (a) the aggregate of the
Liquidation Amount and all accumulated and unpaid Distributions to the date of
payment, to the extent that the Issuer Trust has funds on hand available
therefor at such time, and (b) the amount of assets of the Issuer Trust
remaining available for distribution to holders of the Preferred Securities on
liquidation of the Issuer Trust. The Guarantee is subordinated as described
under "--Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures" and "Description of Guarantee--Status of the
Guarantee."
The holders of not less than a majority in aggregate Liquidation Amount of
the outstanding Preferred Securities have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Issuer Trust, the Guarantee Trustee or any other
person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust would lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by the Company to such holder of Preferred Securities in the Direct Action.
Except as described herein, holders of Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly
10
<PAGE>
any other rights in respect of the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures--Enforcement of Certain Rights by
Holders of Preferred Securities," "--Debenture Events of Default" and
"Description of Guarantee." The Trust Agreement provides that each holder of
Preferred Securities by acceptance thereof agrees to the provisions of the
Guarantee and the Junior Subordinated Indenture.
LIMITED SOURCES FOR PAYMENTS ON JUNIOR SUBORDINATED DEBENTURES AND OTHER
INDEBTEDNESS. The Company is a legal entity distinct from the Bank, although
the principal source of the Company's cash revenues is dividends from the Bank.
As a holding company, the ability of the Company to pay interest and principal
on the Junior Subordinated Debentures, to pay other indebtedness and to conduct
lending and investment activities directly or in non-banking subsidiaries will
depend significantly on the receipt of dividends or other distributions from the
Bank, as well as any cash reserves and other liquid assets held by the Company
(including proceeds from the sale of the Junior Subordinated Debentures to the
Issuer Trust), the ability of the Company to realize returns on its investments
and any proceeds from any subsequent securities offering or other borrowings.
The ability of the Bank to pay dividends or make other distributions to the
Company is dependent on the Bank's compliance with applicable regulatory capital
requirements and regulatory restrictions. The Bank must obtain approval of the
Maryland Commissioner of Financial Regulation to pay dividends to the Company
for so long as the Bank's statement of financial condition reflects, as it did
at March 31, 1998, negative undivided profits (accumulated deficit). The Company
anticipates that such approval will be required for the foreseeable future. See
"Supervision and Regulation--Limits on Dividends and Other Payments."
The right of the Company to participate in the assets of any subsidiary upon
the latter's liquidation, reorganization or otherwise (and thus the ability of
the holders of Preferred Securities to benefit indirectly from any such
distribution) will be subject to the claims of its subsidiaries' creditors,
which will take priority except to the extent that the Company may itself be a
creditor with a recognized claim.
The Bank is also subject to restrictions under federal law which limit the
transfer of funds by it to the Company, whether in the form of loans, extensions
of credit, investments, asset purchases or otherwise. Such transfers by the Bank
to the Company or any nonbank subsidiary of the Company are limited in amount to
10% of the Bank's capital and surplus and, with respect to the Company and all
its nonbank subsidiaries, to an aggregate of 20% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are required to be
secured in specified amounts. Federal law also prohibits banks from purchasing
"low-quality" assets from affiliates.
TRADING CHARACTERISTICS OF PREFERRED SECURITIES. The Preferred Securities
may trade at prices that do not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. See
"Certain Federal Income Tax Consequences--U.S. Holders--Sales of Preferred
Securities." A holder of Preferred Securities that disposes of its Preferred
Securities between record dates for payments of Distributions (and consequently
does not receive a Distribution from the Issuer Trust for the period prior to
such disposition) will nevertheless be required for federal income tax purposes
to include in income as ordinary income an amount equal to the accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in the Preferred
Securities disposed of. Such holder will recognize a capital loss to the extent
the selling price (which may not fully reflect the value of accrued but unpaid
interest) is less than its adjusted tax basis (which will include accrued but
unpaid interest). Subject to certain limited exceptions, capital losses cannot
be applied to offset ordinary income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences--U.S. Holders--Sales of
Preferred Securities."
LIMITED VOTING RIGHTS. Holders of Preferred Securities will have limited
voting rights relating generally to the modification of the Preferred Securities
and the Guarantee and the exercise of the Issuer Trust's rights as holder of
Junior Subordinated Debentures. Holders of Preferred Securities are not entitled
to appoint, remove or replace the Property Trustee or the Delaware Trustee
except upon the occurrence of certain events specified in the Trust Agreement
and described herein. The Property Trustee and the holders of all the Common
Securities may, subject to certain conditions, amend the Trust
11
<PAGE>
Agreement without the consent of holders of Preferred Securities to cure any
ambiguity or make other provisions not inconsistent with the Trust Agreement or
to ensure that the Issuer Trust (i) will not be taxable as a corporation for
United States federal income tax purposes, or (ii) will not be required to
register as an "investment company" under the Investment Company Act. See
"Description of Preferred Securities--Voting Rights; Amendment of Trust
Agreement" and "--Removal of Issuer Trustees; Appointment of Successors."
LIMITED COVENANTS. The Junior Subordinated Indenture contains only limited
covenants and the Trust Agreement does not contain any covenants. As a result,
neither the Junior Subordinated Indenture nor the Trust Agreement protects
holders of the Junior Subordinated Debentures or the Preferred Securities,
respectively, in the event of a material change in the Company's financial
condition or results of operations, and neither document limits the ability of
the Company or any subsidiary to incur or assume additional indebtedness or
other obligations. Additionally, neither the Junior Subordinated Indenture nor
the Trust Agreement contains any financial ratios or specified levels of
liquidity with which the Company must comply. Therefore, the provisions of these
documents should not be considered a significant factor in evaluating whether
the Company will be able to comply with its obligations under the Junior
Subordinated Debentures or the Guarantee.
BROAD DISCRETION AS TO USE OF PROCEEDS OF THE SALE OF JUNIOR SUBORDINATED
DEBENTURES. The Company will use all of the net proceeds of the sale to the
Issuer Trust of the Junior Subordinated Debentures to finance growth, which may
include the acquisition of branches or other financial institutions, and for
general corporate purposes which may include investments in or extensions of
credit to its direct or indirect subsidiaries to support internal growth.
Accordingly, management will have broad discretion with respect to the
expenditure of the net proceeds of the sale of the Junior Subordinated
Debentures, and the amounts and timing of the use of proceeds will depend upon
the funding requirements of the Company and its direct and indirect subsidiaries
and the availability of other funds. See "Use of Proceeds." The Company does not
currently have any agreements, understanding or commitments relating to future
acquisitions, other than an agreement to purchase approximately 19% of the
outstanding common stock of Glen Burnie Bancorp, subject to regulatory approval.
ABSENCE OF MARKET. The Preferred Securities are a new issue of securities
with no established trading market. The Preferred Securities have been approved
for listing on The Nasdaq National Market. One of the requirements for initial
listing is the presence of three market makers for the Preferred Securities. The
Nasdaq National Market maintenance standards require the existence of two market
makers for continued listing. Firms which agree to make a market are not
obligated to do so and market making may be interrupted or discontinued at any
time without notice at their sole discretion. Accordingly, no assurance can be
given as to the development or liquidity of any market for the Preferred
Securities.
MARKET PRICES. There can be no assurance as to the market prices for
Preferred Securities, or the market prices for Junior Subordinated Debentures
that may be distributed in exchange for Preferred Securities if a liquidation of
the Issuer Trust occurs. Accordingly, the Preferred Securities or the Junior
Subordinated Debentures that a holder of Preferred Securities may receive on
liquidation of the Issuer Trust may trade at a discount to the price that the
investor paid to purchase the Preferred Securities offered hereby. Because
holders of Preferred Securities may receive Junior Subordinated Debentures on
termination of the Issuer Trust, prospective purchasers of Preferred Securities
are also making an investment decision with regard to the Junior Subordinated
Debentures and should carefully review all the information regarding the Junior
Subordinated Debentures contained herein. See "Description of Junior
Subordinated Debentures."
RISK FACTORS RELATING TO THE COMPANY
RISKS OF EXPANSION STRATEGIES; RECENT PROFITABILITY. Since May 1995, it has
been the strategy of the Company to rapidly increase the number of Bank branches
prior to the time that the volume of business is sufficient to generate profits
from branch operations. This strategy was implemented in order to have a branch
network in place to take advantage of business opportunities as they arose. This
strategy anticipates
12
<PAGE>
losses from branch operations until such time, if any, as branch deposits and
the volume of other banking business reach the levels necessary to support
profitable branch operations. The success of the Company's strategy will be
dependent on management's ability to generate business and increase deposits at
levels necessary to support profitable branch operations. See "Business."
It is the intention of management to continue to expand the business of the
Company through the opening of additional branches and the acquisition of
existing banks in the Company's market area. The success of the Company's
expansion strategy will be dependent upon its ability to manage the growth, to
improve its operational and financial systems, to attract and train qualified
employees, and, to a certain extent, on the availability of potential
acquisitions meeting the Company's investment criteria, management's ability to
successfully operate and integrate the acquired business with and into the
business of the Company, and the Bank's ability to obtain required regulatory
approval. See "Business."
There can be no assurance that the Company will be successful in
implementing these strategies and managing its anticipated growth.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the continued
services of certain key management personnel, including Edwin F. Hale, Sr.,
Chairman of the Board and Chief Executive Officer of the Company and the Bank,
Joseph A. Cicero, President of the Company and Chief Operating Officer of the
Bank, and George H. Mantakos, Executive Vice President of the Company and
President of the Bank. The Company's continued growth and profitability will
depend upon its ability to attract and retain skilled managerial, marketing and
technical personnel. Competition for qualified personnel in the banking industry
is intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. See "Management."
CONCENTRATIONS IN REAL ESTATE LENDING AND RELATED RISKS. The Bank is
currently dependent on real estate lending activities, which at March 31, 1998
had produced real estate loans totaling approximately 80.73% of the Company's
loan portfolio. Real estate loan origination activity, including refinancings,
generally is greater during periods of declining interest rates and favorable
economic conditions, and has been favorably affected by relatively lower market
interest rates during the past several years. There is no assurance such
favorable conditions will continue.
Real estate loans are subject to the risk that real estate values in a
geographical area or for a particular type of real estate will decrease, and to
the risk that borrowers will be unable to meet their loan obligations.
Commercial real estate and construction loans, which have higher average
balances and greater sensitivity to market conditions than other types of loans
in the Bank's loan portfolio, constitute 55.07% of the Bank's loan portfolio as
of March 31, 1998. The Company attempts to minimize these risks by making real
estate loans that are secured by a variety of different types of real estate,
limiting real estate loans to 80% of the appraised value of the real estate,
generally lending in its market area, and, regardless of collateral, reviewing
the potential borrower's ability to meet debt service obligations. See
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Composition of Loan Portfolio."
COMPETITION. The Company and the Bank operate in a competitive environment,
competing for deposits and loans with commercial banks, thrifts and other
financial entities. Numerous mergers and consolidations involving banks in the
market in which the Bank operates have occurred recently, resulting in an
intensification of competition in the banking industry in the Company's
geographical market. Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market and mutual
funds and other investment alternatives. Competition for loans comes primarily
from other commercial banks, savings associations, mortgage banking firms,
credit unions and other financial intermediaries. Many of the financial
intermediaries operating in the Company's market area offer certain services,
such as trust, investment and international banking services, which the Company
does not offer. In addition, banks with a larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have higher lending
limits and are thereby able to serve the needs of larger customers.
13
<PAGE>
Recent changes in federal banking laws facilitate interstate branching and
merger activity among banks. Such changes may result in an even greater degree
of competition in the banking industry and the Company may be brought into
competition with institutions with which it does not presently compete. There
can be no assurance that the profitability of the Company will not be adversely
affected by the increased competition which may characterize the banking
industry in the future. See "Business-- Competition" and "Supervision and
Regulation--Interstate Banking Legislation."
CONTROL BY MANAGEMENT. A total of 618,213 shares of Common Stock is
beneficially owned by the directors and executive officers of the Company,
representing approximately 21.5% of the Common Stock outstanding at March 31,
1998. In addition, options and warrants to purchase an aggregate of 610,002
shares of Common Stock are beneficially owned by directors and executive
officers. Assuming the directors and executive officers exercise all their stock
options and warrants, the directors and executive officers would beneficially
own approximately 35.3% of the Common Stock outstanding. Edwin F. Hale, Sr., who
is the Chairman, Chief Executive Officer, and the largest stockholder of the
Company, beneficially owns 415,628 shares of Common Stock, representing
approximately 14.5% of the Common Stock outstanding at March 31, 1998. Mr. Hale
also hold options and warrants to purchase 491,672 shares, which, if exercised
in total, would represent approximately 27.0% of the Common Stock outstanding.
The foregoing information does not give effect to the 10% stock dividend payable
to holders of record as of May 26, 1998 of the Company's Common Stock. See
"Securities Ownership of Certain Beneficial Owners and Management."
DEVELOPMENTS IN TECHNOLOGY. The market for financial services, including
banking services and consumer finance services, is increasingly affected by
advances in technology including developments in telecommunications, data
processing, computers, automation, Internet-based banking, telebanking, debit
cards and so-called "smart" cards. The ability of the Company, including the
Bank, to compete successfully in its markets may depend on the extent to which
it is able to exploit such technological changes. However, there can be no
assurance that the development of these or any other new technologies, or the
Company's success or failure in anticipating or responding to such developments,
will materially affect the Company's business, financial condition and operating
results.
YEAR 2000 ISSUES. The "Year 2000" issue is the result of computer programs
and equipment which are dependent on "embedded chip technology" using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or equipment that are date dependent may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activity. Based on assessments made to date, pursuant to the Company's Year 2000
Action Plan, the Company has determined that it and its vendors may be required
to modify or replace portions of its software and other equipment so that its
and its vendors' computer, security, and communications systems will properly
utilize dates beyond December 31, 1999. The Company believes that with
modifications or conversions of software, and replacement of equipment which
cannot be made Year 2000 compliant, the Year 2000 issue can be mitigated. If
such modifications, conversions or equipment replacements are not made, or are
not completed in a timely manner, the Year 2000 issue could have a material
adverse impact on the operations of the Company. In addition to issues relating
to internal Year 2000 compliance, the Company may be vulnerable to the failure
of third party suppliers and large customers to remedy their own Year 2000
issues. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Action Plan."
MARKET VALUE OF INVESTMENTS; SALES OF SECURITIES. Approximately 83.65% of
the Company's investment securities portfolio as of March 31, 1998 has been
designated as available-for-sale pursuant to Statement of Financial Accounting
Standards No. 115 ("SFAS 115") relating to accounting for investments. SFAS 115
requires that unrealized gains and losses in the estimated value of the
available-for-sale portfolio be "marked to market" and reflected as a separate
item in stockholders' equity (net of tax) as accumulated other comprehensive
income. At March 31, 1998, the Company maintained approximately 12.80% of its
14
<PAGE>
total assets in securities available-for-sale. Sales of such securities in the
past have been a source of net income for the Company. In 1997 and the first
quarter of 1998, income from such sales exceeded the net income of the Company.
There can be no assurance that future market performance of the Company's
investment portfolio will continue to enable the Company to realize income from
this source. Stockholders' equity will continue to reflect the unrealized gains
and losses (net of tax) of these investments. There can be no assurance that the
market value of the Company's investment portfolio will not decline, causing a
corresponding decline in stockholders' equity.
Management believes that several factors will affect the market values of
the Company's investment portfolio. These include, but are not limited to,
changes in interest rates or expectations of changes, the degree of volatility
in the securities markets, inflation rates or expectations of inflation and the
slope of the interest rate yield curve. (The yield curve refers to the
differences between longer-term and shorter-term interest rates. A positively
sloped yield curve means shorter-term rates are lower than longer-term rates.)
Also, the passage of time will affect the market values of the securities, in
that the closer they are to maturing, the closer the market price should be to
par value. In addition to the foregoing, there are other factors that impact
specific categories of the portfolio differently.
ALLOWANCE FOR LOAN LOSSES. The inability of borrowers to repay loans can
erode the earnings and capital of banks. Like all financial institutions, the
Company's subsidiaries maintain an allowance for loan losses to provide for loan
defaults and nonperformance. The allowance is based on prior experience with
loan losses, as well as an evaluation of the risks in the current portfolio, and
is maintained at a level considered adequate by management to absorb anticipated
losses. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond management's control, and such losses may exceed current estimates. At
March 31, 1998, the Bank had nonperforming loans (i.e., loans 90 days or more
delinquent on a contractual basis or on a nonaccrual status) of approximately
$1.356 million and an allowance for loan losses of $1.672 million on gross loans
of $160.531 million; thus, the allowance for loan losses at March 31, 1998
represented 1.04% of total loans and 123.30% of nonperforming loans. There can
be no assurance that the Company's allowance for loan losses will be adequate to
cover actual losses. Future provisions for loan losses could materially and
adversely affect results of operations of the Company.
The level of loan loss allowance has been based upon management's continual
review of the loan portfolio. Management reviews the loans by type and nature of
collateral and establishes a provision for loan losses based upon historical
chargeoff experience, the present and prospective financial condition of
specific borrowers, industry concentrations within the loan portfolio, size of
the credit, existence and quality of any collateral, profitability, and general
economic conditions. Although management uses the best information available to
make determinations with respect to the allowance for loan losses, future
adjustments may be necessary in the event there are additional loan losses or if
economic conditions differ substantially from the assumptions used. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Material additions to the Company's allowance for loan losses would result in a
decrease in the Company's net income and capital.
IMPACT OF INTEREST RATES AND OTHER ECONOMIC CONDITIONS. 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
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 the Federal Home Loan Bank of
Atlanta ("FHLB"). 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 given time period is considered liability-sensitive and is
reflected as negative
15
<PAGE>
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. The Company believes that at March 31, 1998, its
interest rate exposure is less than 5% of capital in a plus or minus 2% rate
shock scenario. 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 March 31, 1998, the Company had a one year cumulative
negative gap of $20.730 million or 7.86% of total assets.
CONSIDERATIONS RELATING TO LOAN PORTFOLIO OF THE BANK. During the past
three years, the Company has experienced significant growth in its loan
portfolio. Loans increased 11.42% during the first three months of 1998 to
$160.531 million at March 31, 1998, from $144.072 million at December 31, 1997.
Commercial real estate loans increased by 9.10% or $7.371 million during the
first three months of 1998 and comprised 55.07% of total loans as of March 31,
1998. The nature of commercial real estate loans is such that they may present
more credit risk to the Company than other types of loans such as home equity or
residential real estate loans. Further, most of these loans are concentrated in
Central Maryland. As a result, a decline in the general economic conditions of
Central Maryland could have a material adverse effect on the Company's financial
condition and results of operations taken as a whole.
SUPERVISION AND REGULATION OF BANK HOLDING COMPANIES AND THEIR
SUBSIDIARIES. Bank holding companies and their subsidiaries operate in a highly
regulated environment and are subject to supervision and examination by several
federal and state regulatory agencies. The Company is subject to the Bank
Holding Company Act of 1956, as amended (the "BHC Act") and to regulation and
supervision by the Federal Reserve and the Maryland Commissioner of Financial
Regulation (the "Maryland Commissioner"), and the Bank is subject to regulation
and supervision by the Maryland Commissioner and the Federal Deposit Insurance
Corporation ("FDIC"). The Bank also is a member of the FHLB and is subject to
regulation thereby. Federal and state banking laws and regulations govern
matters ranging from restrictions on permissible investments and activities, the
regulation of certain debt obligations, changes in the control of bank holding
companies, and the maintenance of adequate capital to the general business
operations and financial condition of the Bank, including permissible types,
amounts and terms of loans and investments, the amount of reserves against
deposits, restrictions on dividends, establishment of branch offices, and the
maximum rate of interest that may be charged by law. The Federal Reserve, the
FDIC, and the Maryland Commissioner also possess cease and desist powers over
bank holding companies and banks, to prevent or remedy unsafe or unsound
practices or violations of law. These and other restrictions limit the manner in
which the Company and the Bank may conduct their business and obtain financing.
Furthermore, the commercial banking business is affected not only by general
economic conditions but also by the monetary policies of the Federal Reserve.
These monetary policies have had and are expected to continue to have
significant effects on the operating results of commercial banks. Changes in
monetary, fiscal or legislative policies may affect the ability of the Bank to
attract deposits and make loans. See "Supervision and Regulation."
FORWARD-LOOKING INFORMATION. In recent years, significant new federal
legislation has imposed numerous new legal and regulatory requirements on
financial institutions. In addition to the uncertainties posed by possible
legislative change, there are many other uncertainties that may make the
Company's historical performance an unreliable indicator of its future
performance, and forward-looking information, including projections of future
performance, is subject to numerous possible adverse developments, including,
but not limited to, the possibility of adverse economic developments which may
increase default and delinquency risks in the Company's loan portfolios; shifts
in interest rates which may result in shrinking interest margins; deposit
outflows; interest rates on competing investments; shifts in demand for
financial services and loan products; increases generally in competitive
pressure in the banking and financial services industry; changes in accounting
policies or guidelines, or monetary and fiscal policies of the Federal
government; changes in the quality or composition of the Company's loan and
investment portfolios; or other significant uncertainties.
16
<PAGE>
MARINER CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware law
pursuant to the filing of a certificate of trust with the Delaware Secretary of
State on May 14, 1998. The Issuer Trust will be governed by a Trust Agreement
among the Company, as Depositor, and Wilmington Trust Company, as Delaware
Trustee and as Property Trustee. Under the Trust Agreement, two individuals
selected by the holders of the Common Securities will act as administrators with
respect to the Issuer Trust (the "Administrators"). The Company, which initially
will be the holder of the Common Securities, has selected two individuals who
are employees of and affiliated with the Company to serve as the Administrators.
See "Description of Preferred Securities--Miscellaneous." The Issuer Trust
exists for the exclusive purposes of (i) issuing the Trust Securities, (ii)
using the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, convenient or incidental thereto (such as registering the transfer of
Trust Securities). Accordingly, the Junior Subordinated Debentures will be the
sole assets of the Issuer Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Issuer Trust.
All the Common Securities initially will be owned by the Company. The Common
Securities rank PARI PASSU, and payments will be made thereon pro rata, with the
Preferred Securities, except that upon the occurrence and during the
continuation of a Debenture Event of Default arising as a result of any failure
by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holders of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. See "Description of Preferred Securities--Subordination of Common
Securities." The Company will acquire Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of the Issuer Trust. The
Issuer Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The address of the Delaware Trustee, the Property Trustee,
the Guarantee Trustee and the Debenture Trustee is Wilmington Trust Company,
Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890,
telephone number (302) 651-1000.
NEITHER THE PREFERRED SECURITIES NOR THE JUNIOR SUBORDINATED DEBENTURES ARE
OBLIGATIONS OF OR GUARANTEED BY FIRST MARINER BANK OR ANY OTHER BANK.
USE OF PROCEEDS
All of the proceeds to the Issuer Trust from the sale of the Trust
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. All the net proceeds to be received by the Company from the sale of
the Junior Subordinated Debentures will be used for general corporate purposes,
although it is likely that approximately half of such proceeds will be used
initially to make additional capital contributions to the Bank to fund its
operations and continued expansion. The Bank's ability to pay dividends to the
Company is subject to regulation. See "Supervision and Regulation." Portions of
the net proceeds from the sale of the Junior Subordinated Debentures also may be
used in the future for acquisitions by the Company or the Bank, or extensions of
credit by the Company to the Bank. Pending such uses the net proceeds may be
temporarily invested. The precise amounts and timing of the application of
proceeds will depend upon the funding requirements of the Company and its direct
and indirect subsidiaries and the availability of other funds. The Company may
from time to time engage in additional financings of a character and in amounts
to be determined. The proceeds from the sale of the Preferred Securities may
qualify as Tier 1 or core capital with respect to the Company under the
risk-based capital guidelines established by the Federal Reserve, however,
capital received from the proceeds of the sale of the Preferred Securities
cannot constitute more than 25% of the total Tier 1 capital of the Company (the
"25% Capital Limitation"). Amounts in excess of the 25% Capital Limitation will
constitute Tier 2 or supplementary capital of the Company.
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998, and as adjusted to give effect to the offering of
the Preferred Securities, assuming the Underwriters' over-allotment option is
not exercised. The following data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Company-obligated, mandatorily redeemable securities of subsidiary trust holding solely
junior subordinated debentures of the Company (1)...................................... $ -- $ 20,000
Stockholders' Equity:
Preferred Stock........................................................................ -- --
Common Stock, $0.05 par value; 20,000,000 shares authorized; 2,869,063 shares
outstanding(2)....................................................................... 143 143
Additional paid-in-capital............................................................. 30,000 30,000
Accumulated deficit.................................................................... (3,180) (3,180)
Accumulated other comprehensive income................................................. 241 241
Total stockholders' equity........................................................... 27,204 27,204
Total capitalization............................................................... 27,204 47,204
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets................................................. 12.68% 16.59%
Regulatory minimum..................................................................... 4.00% 4.00%
Total capital to risk-adjusted assets.................................................. 13.47% 22.51%
Regulatory minimum..................................................................... 8.00% 8.00%
Leverage ratio......................................................................... 11.27% 13.76%
Regulatory minimum..................................................................... 4.00% 4.00%
</TABLE>
- ------------------------
(1) As described herein, the sole asset of the Issuer Trust will be $20,600,000
principal amount of Junior Subordinated Debentures issued by the Company to
the Issuer Trust (including $600,000 attributable to the issuance of the
Common Securities of the Issuer Trust to the Company). The Junior
Subordinated Debentures will bear interest at a fixed rate of 8.3% per annum
and will mature on June 30, 2028. The Company initially will own all of the
Common Securities of the Issuer Trust.
(2) Shares of Common Stock outstanding have not been adjusted to give effect to
the 10% stock dividend payable to holders of record as of May 26, 1998.
18
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
Earnings to Fixed Charges:
Excluding interest on deposits............................ 1.62x 1.26x 1.25x -- -- --
Including interest on deposits............................ 1.07x 1.02x 1.03x -- -- --
</TABLE>
The sum of fixed charges exceeded earnings for both the ratio excluding and
including interest on deposits for the years ended December 31, 1996, 1995 and
1994 by $2.2 million, $1.3 million and $0.3 million, respectively.
For purposes of computing the consolidated ratios, earnings consist of
income before income taxes plus fixed charges (excluding capitalized interest).
Fixed charges consist of interest on short-term debt and one-third of rent
expense, which approximates the interest component of such expense. In addition,
where indicated, fixed charges include interest on deposits.
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be included in the consolidated statements of
financial condition of the Company and appropriate disclosures about the
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to the consolidated financial statements of the
Company. For financial reporting purposes, Distributions on the Preferred
Securities will be recorded in the consolidated statements of operations of the
Company.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for, and as of the end
of, each of the years ended December 31, 1997, 1996, 1995 and 1994 (year of
inception) are derived from the audited Consolidated Financial Statements of the
Company. The following selected interim consolidated data for, and as of the end
of, the three month periods ended March 31, 1998 and 1997 have been derived from
unaudited financial statements of the Company, which, in the opinion of
management, have been prepared on the same basis as the audited Consolidated
Financial Statements included herein, and reflect all adjustments, which are of
a normal recurring nature, necessary for a fair presentation of such data. The
results of the interim periods are not necessarily indicative of the results of
a full year. The selected consolidated financial data set forth below should be
read in conjunction with, and are qualified by reference to, the Consolidated
Financial Statements of the Company and the Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
OPERATIONS DATA:
Interest income...................................... $ 4,661 $ 2,904 $ 14,318 $ 6,736 $ 2,561 $ 1,209
Interest expense..................................... 2,220 1,184 6,565 3,107 1,269 504
Net interest income.................................. 2,441 1,720 7,753 3,629 1,292 705
Provision for loan losses............................ 152 135 472 1,040 190 59
Net interest income after provision for loan
losses............................................. 2,289 1,585 7,281 2,589 1,102 646
Gain on sale of securities........................... 285 13 479 330 9 --
Other noninterest income............................. 748 444 1,872 745 188 75
Other noninterest expenses........................... 3,171 2,018 9,459 5,837 2,581 979
Income (loss) before income tax benefit.............. 151 24 173 (2,173) (1,282) (258)
Income tax benefit................................... -- -- (192) -- -- (17)
Net income (loss).................................... 151 24 365 (2,173) (1,282) (241)
Net income (loss) per share-basic.................... 0.05 0.01 0.13 (1.72) (1.88) (1.07)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ------------------------------------------
1998 1997 1996 1995 1994
------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets........................................ $ 263,809 $ 256,984 $ 132,562 $ 52,798 $ 26,303
Available-for-sale securities....................... 33,773 32,852 325 2,338 --
Investment securities, net.......................... 6,603 8,601 1,099 -- 2,631
Loans held for sale................................. 15,730 16,895 3,072 -- --
Loans receivable.................................... 160,531 144,072 92,064 29,935 20,030
Other real estate owned............................. 2,420 1,944 -- -- --
Total deposits...................................... 204,018 197,269 102,289 41,487 20,883
Short-term borrowings............................... 32,166 30,331 6,000 -- 3,150
Total stockholders' equity.......................... 27,204 26,966 23,796 10,702 1,977
OTHER DATA:
Average assets...................................... 237,491 176,283 82,314 37,213 27,063
Average equity...................................... 27,072 26,317 10,030 6,534 1,776
Return on average stockholders' equity.............. 2.23% 1.39% (21.67%) (19.62%) (13.57%)
Return on average total assets...................... 0.25% 0.21% (2.64%) (3.45%) (0.89%)
Average stockholders' equity to average total
assets............................................ 11.40% 14.93% 12.19% 17.56% 6.56%
Net interest spread................................. 3.65% 3.74% 4.08% 3.32% 2.95%
Net interest margin................................. 4.47% 4.72% 4.87% 3.99% 2.89%
Nonperforming loans to period-end loans............. 0.84% 1.08% 1.71% 2.11% 3.45%
Net chargeoffs to average loans..................... 0.26% 0.08% 0.27% 0.26% 0.11%
Allowance as a percent of period-end loans.......... 1.04% 1.12% 1.35% 1.26% 1.22%
Allowance as a percent of period-end nonperforming
loans............................................. 123.30% 104.13% 78.91% 59.40% 35.40%
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The principal objective of this financial review is to provide a discussion
and an overview of the financial condition and results of operations of the
First Mariner Bancorp and its direct and indirect subsidiaries for the years
ended December 31, 1997, 1996 and 1995, and for the three month period ended
March 31, 1998. This discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, as well as statistical
information included elsewhere in this Prospectus.
In addition to historical information, this document 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, the federal government, changes in tax policies, changes in interest rates,
deposit flow, the cost of funds, demand for loan products and financial
services, changes in the Company's competitive position, changes in the quality
or composition of loan and investment portfolios, and the ability of the Company
to manage growth.
OVERVIEW
First Mariner Bancorp, through its wholly owned subsidiary, First Mariner
Bank, offers consumer and commercial banking services throughout central
Maryland. The Bank provides mortgage lending services through its wholly owned
subsidiary, First Mariner Mortgage Corporation.
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 changed its name to First Mariner Bancorp
in May 1995. 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.
RESULTS OF OPERATIONS
NET INTEREST INCOME/MARGINS
The primary source of earnings for the Company is net interest income, which
is the difference between income earned on interest-earning assets, such as
loans and investment securities, and expense incurred on 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.
THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS ENDED MARCH 31,
1997. First quarter net interest income before provision for loan losses was
$2,440,731 in 1998, an increase of 41.88% over $1,720,339 in 1997, reflecting an
increase of $84,692,000 in average earning assets, partly offset by a decrease
in the net yield on average earning assets. The net yield on earning assets was
4.47% for the first three months of 1998 as compared to 5.10% for the first
three months of 1997.
1997 VERSUS 1996. Net interest income increased to $7,752,567 for the year
ended December 31, 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 the year ended December 31, 1997, a 120.64% increase
as compared to $74,470,000 for the year ended December 31, 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. Average loans increased by 92.86% to $124,794,000 and average
deposits 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
21
<PAGE>
Baltimore-Washington area. The increase in deposits was due to the aggressive
expansion of the Company's retail banking network to 16 branches and the
introduction of new checking and money market products. Interest income on loans
increased to $11,953,680 for 1997 which represents 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 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%, respectively, for
1997 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. 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 was invested in
investments.
1996 VERSUS 1995. Net interest income increased to $3,629,109 for the year
ended December 31, 1996, a 180.9% increase from net interest income of
$1,291,819 earned during the year ended December 31, 1995. Earning assets
averaged $74,470,000 for the year ended December 31, 1996, a 129.7% increase as
compared to $32,415,000 for the year ended December 31, 1995. The increase in
net interest income was due to the growth of the loan portfolio and increases in
yields on the loan portfolio. Average loans as a percentage of total average
earning assets increased to 86.9% in 1996 as compared with 70.0% in 1995.
Interest income on loans of $6,177,495 for the year ended December 31, 1996
increased by $4,195,907, or 211.7% from $1,981,588 for the year ended December
31, 1995, reflecting a significant increase in the average balance of loans
which totaled $64,706,000 for 1996 as compared to $22,699,000 for 1995.
The Company's net interest margin was 4.87% for the year ended December 31,
1996 as compared to 3.99% for the year ended December 31, 1995 which was
achieved by adding higher yielding loans in 1996.
The "Comparative Average Balances-Yields and Rates" table 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 noninterest-bearing
deposits.
22
<PAGE>
COMPARATIVE AVERAGE BALANCES-YIELDS AND RATES
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
THREE MONTHS ENDED MARCH 31, 31,
-------------------------------------------------------------------- ---------
1998 1997 1997
--------------------------------- --------------------------------- ---------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE
--------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans (net of unearned income) (2).... $ 164,701 $ 3,784 9.32% $ 110,287 $ 2,526 9.29% $ 124,794
Mortgage-backed securities available
for sale............................ 24,040 412 6.95% -- -- 0.00% 7,527
Interest-bearing bank balances........ 14,818 201 5.50% 17,177 258 6.09% 21,137
Treasury notes and agencies held to
maturity............................ 8,506 125 5.96% 8,218 107 5.28% 8,704
Other earning assets.................. 9,341 139 6.03% 1,032 13 5.11% 2,150
--------- ----------- --------- ----------- ---------
Total earning assets................ 221,406 4,661 8.54% 136,714 2,904 8.61% 164,312
----------- -----------
Allowance for loan losses............. (1,638) (1,295) (1,441)
Other assets.......................... 17,723 12,153 13,412
--------- --------- ---------
Total assets........................ $ 237,491 $ 147,572 $ 176,283
--------- --------- ---------
--------- --------- ---------
Liabilities and stockholders' equity:
Deposits:
Savings............................. $ 8,615 53 2.50% $ 6,498 37 2.31% $ 7,194
NOW/MMDA............................ 74,493 787 4.28% 18,677 117 2.54% 35,242
Certificates........................ 87,996 1,226 5.65% 78,324 988 5.12% 82,552
--------- ----------- --------- ----------- ---------
Total interest-bearing deposits... 171,104 2,066 4.90% 103,500 1,142 4.47% 124,988
Other borrowed funds.................. 13,058 154 4.78% 3,319 42 5.13% 7,071
--------- ----------- --------- ----------- ---------
Total interest-bearing
liabilities..................... 184,162 2,220 4.89% 106,818 1,184 4.50% 132,059
Demand deposits....................... 25,381 12,554 16,374
Other liabilities..................... 876 1,594 1,533
Stockholders' equity.................. 27,072 26,605 26,317
--------- --------- ---------
Total liabilities and
stockholders' equity............ $ 237,491 $ 147,572 $ 176,283
--------- --------- ---------
--------- --------- ---------
Interest rate spread.................. 3.65% 4.12%
--------- ---------
--------- ---------
(Average yield less average rate)
Net interest income................... $ 2,441 $ 1,720
----------- -----------
----------- -----------
(Interest income less interest
expense)
Net Interest Margin................... 4.47% 5.10%
--------- ---------
--------- ---------
(Net interest income/total earning
assets)
<CAPTION>
1996 1995 (1)
----------------------------------- ------------------------
INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/
EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE
----------- --------- ----------- ----------- --------- ----------- -----------
<S> <C>
Assets:
Loans (net of unearned income) (2).... $ 11,954 9.58% $ 64,706 $ 6,177 9.55% $ 22,699 $ 1,982
Mortgage-backed securities available
for sale............................ 521 6.92% -- -- -- 2,303 177
Interest-bearing bank balances........ 1,212 5.73% 8,878 525 5.91% 7,112 381
Treasury notes and agencies held to
maturity............................ 535 6.15% 88 5 5.68% -- --
Other earning assets.................. 96 4.47% 798 29 3.63% 301 22
----------- ----------- ----------- ----------- -----------
Total earning assets................ 14,318 8.71% 74,470 6,736 9.05% 32,415 2,562
----------- ----------- -----------
Allowance for loan losses............. (670) (256)
Other assets.......................... 8,514 5,054
----------- -----------
Total assets........................ $ 82,314 $ 37,213
----------- -----------
----------- -----------
Liabilities and stockholders' equity:
Deposits:
Savings............................. 195 2.71% $ 4,635 139 3.00% $ 3,081 66
NOW/MMDA............................ 1,311 3.72% 12,588 353 2.80% 6,477 211
Certificates........................ 4,636 5.62% 43,391 2,507 5.78% 16,793 900
----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits... 6,142 4.91% 60,614 2,999 4.95% 26,351 1,177
Other borrowed funds.................. 423 5.98% 1,950 108 5.54% 1,406 93
----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities..................... 6,565 4.97% 62,564 3,107 4.97% 27,757 1,270
Demand deposits....................... 7,753 984
Other liabilities..................... 1,967 1,938
Stockholders' equity.................. 10,030 6,534
----------- -----------
Total liabilities and
stockholders' equity............ $ 82,314 $ 37,213
----------- -----------
----------- -----------
Interest rate spread.................. 3.74% 4.08%
--------- ---------
--------- ---------
(Average yield less average rate)
Net interest income................... $ 7,753 $ 3,629 $ 1,292
----------- ----------- -----------
----------- ----------- -----------
(Interest income less interest
expense)
Net Interest Margin................... 4.72% 4.87%
--------- ---------
--------- ---------
(Net interest income/total earning
assets)
<CAPTION>
YIELD/
RATE
---------
Assets:
Loans (net of unearned income) (2).... 8.73%
Mortgage-backed securities available
for sale............................ --
Interest-bearing bank balances........ 5.36%
Treasury notes and agencies held to
maturity............................ 0.00%
Other earning assets.................. 7.31%
Total earning assets................ 7.90%
Allowance for loan losses.............
Other assets..........................
Total assets........................
Liabilities and stockholders' equity:
Deposits:
Savings............................. 2.14%
NOW/MMDA............................ 3.26%
Certificates........................ 5.36%
Total interest-bearing deposits... 4.47%
Other borrowed funds.................. 6.61%
Total interest-bearing
liabilities..................... 4.58%
Demand deposits.......................
Other liabilities.....................
Stockholders' equity..................
Total liabilities and
stockholders' equity............
Interest rate spread.................. 3.32%
---------
---------
(Average yield less average rate)
Net interest income...................
(Interest income less interest
expense)
Net Interest Margin................... 3.99%
---------
---------
(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.
(2) Loans held for sale and loans on nonaccrual status are included in the
calculation of average balances.
23
<PAGE>
Changes in interest income and interest expense result from variances in
both volume and rates. The Company has an asset and liability management policy
designed to provide a balance between rate sensitive assets and rate sensitive
liabilities to attempt to optimize interest margins and to provide adequate
liquidity for anticipated needs. The "Rate/Volume Analysis" table below
indicates the changes in the Company's net interest income as a result of
changes in volume and rates.
RATE/VOLUME ANALYSIS (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------
<S> <C> <C> <C>
NET
AVERAGE AVERAGE INCREASE/
VOLUME RATE (DECREASE)
--------- ----------- -----------
Interest Income:
Loans (net of unearned income).............................................. $ 1,250 $ 8 $ 1,258
Mortgage-backed securities available for sale............................... 412 -- 412
Interest-bearing bank balances.............................................. (73) 16 (57)
Treasury notes and agencies held to maturity................................ 4 14 18
Other earnings assets....................................................... 127 (1) 126
-----------
Total interest income(1).................................................... 1,783 (26) 1,757
-----------
Interest Expense:
Savings..................................................................... 13 3 16
NOW/MMDA.................................................................... 589 81 670
Certificates................................................................ 135 103 238
Other borrowed funds........................................................ 115 (3) 112
-----------
Total interest expense(1)................................................... 933 103 1,036
-----------
Change in net interest income(1).............................................. 850 (129) $ 721
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
COMPARED TO
YEAR ENDED DECEMBER 31, 1996
-----------------------------------
<S> <C> <C> <C>
NET
AVERAGE AVERAGE INCREASE/
VOLUME RATE (DECREASE)
--------- ----------- -----------
Interest Income:
Loans (net of unearned income)................................................... $ 5,758 $ 19 $ 5,777
Mortgage-backed securities available for sale.................................... 521 -- 521
Interest-bearing bank balances................................................... 703 (16) 687
Treasury notes and agencies held to maturity..................................... 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..................................................................... 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>
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
COMPARED TO
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
<S> <C> <C> <C>
NET
AVERAGE AVERAGE INCREASE/
VOLUME RATE (DECREASE)
--------- ----------- -----------
Interest Income:
Loans (net of unearned income)................................................... $ 4,012 $ 183 $ 4,195
Mortgage-backed securities available for sale.................................... (177) -- (177)
Interest-bearing bank balances................................................... 120 44 164
Other earnings assets............................................................ 3 (11) (8)
-----------
Total interest income(1)......................................................... 3,806 368 4,174
-----------
Interest Expense:
Savings.......................................................................... 47 26 73
NOW/MMDA......................................................................... 171 (29) 142
Certificates..................................................................... 1,537 70 1,607
Other borrowed funds............................................................. 30 (15) 15
-----------
Total interest expense (1)....................................................... 1,730 107 1,837
-----------
Change in net interest income(1)................................................... 2,076 261 $ 2,337
-----------
-----------
</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.
NONINTEREST INCOME
Noninterest income is principally derived from mortgage banking activities,
service fees on deposit accounts, ATM fees and gains on sale of investment
securities.
The following table sets forth the principal components of the Company's
noninterest income during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
------------ ---------- ------------ ------------ ----------
Gain on sale of loans.......................... $ 236,828 $ 143,906 $ 430,353 $ -- $ --
Service fees on deposits....................... 392,366 260,419 864,533 336,662 94,918
Gain on sale of securities..................... 284,797 13,500 479,360 330,030 8,970
Other operating income......................... 118,692 39,480 577,442 407,251 93,126
------------ ---------- ------------ ------------ ----------
Total noninterest income....................... $ 1,032,683 $ 457,305 $ 2,351,688 $ 1,073,943 $ 197,014
------------ ---------- ------------ ------------ ----------
------------ ---------- ------------ ------------ ----------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS ENDED MARCH 31,
1997. Noninterest income increased $575,378 or 125.82% for the first quarter
1998 to $1,032,683 from $457,305 in 1997. The principal reasons were an increase
in gains on the sale of securities, an increase in gains on sale of loans sold
by First Mariner Mortgage Corporation, and an increase in deposit related fees,
primarily ATM fees and overdraft fees. First Mariner Mortgage Corporation sold
$28,663,000 of residential mortgage loans in the first quarter of 1998 compared
to approximately $4,900,000 in the first quarter of 1997.
1997 VERSUS 1996. Noninterest income for year ended December 31, 1997 was
$2,351,688 as compared to $1,073,974 for the year ended December 31, 1996, an
increase of $1,277,714 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 service charges rose 156.80% over the
prior year due to
25
<PAGE>
a 153.75% increase in average demand deposits. This growth was the result of the
expanded branch network and continued promotion and sales effort 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. 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.
1996 VERSUS 1995. Noninterest income for the year ended December 31, 1996
was $1,073,943 as compared to $197,014 for the year ended December 31, 1995, an
increase of $876,929 or 445.1%. This increase, to a large extent, was due to a
gain realized on the sale of securities in 1996 of $330,030. Other significant
increases were experienced in service fees on loans which increased to $303,353
from $84,173 or 260.4% and service fees on deposits which increased to $336,662
from $94,918 or 254.7%. These increases were due to significantly increased
activity in both deposits and loans.
NONINTEREST EXPENSE
The following table sets forth the principal components of the Company's
noninterest expense during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Salaries and employee benefits............. $ 1,471,183 $ 960,721 $ 4,370,685 $ 2,744,057 $ 1,189,172
Net occupancy.............................. 399,518 232,236 1,269,291 786,825 275,660
Deposit insurance premiums................. 27,407 13,025 76,880 229,293 79,783
Furniture, fixtures and equipment.......... 148,497 97,999 360,407 253,394 82,968
Professional services...................... 160,493 38,564 380,124 135,811 233,448
Advertising................................ 170,492 116,400 574,308 379,566 147,549
Data processing............................ 192,000 101,000 533,244 452,090 156,101
Other...................................... 600,015 458,623 1,894,021 855,699 416,730
------------ ------------ ------------ ------------ ------------
Total noninterest expense................ $ 3,169,605 $ 2,018,568 $ 9,458,960 $ 5,836,735 $ 2,581,411
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS ENDED MARCH 31, 1997.
First quarter noninterest expense increased $1,151,037 or 57.02% to $3,169,605
in 1998 from $2,018,568 in 1997. Increases in almost all areas were incurred to
support the substantially increased asset base and the expanding branch network.
1997 VERSUS 1996. Noninterest expense totaled $9,458,960 for the year ended
December 31, 1997 as compared to $5,836,735 for the year ended December 31,
1996, an increase of $3,622,225 or 62.06%. This increase reflects management's
continued emphasis on growth through branch expansion 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 Company's expansion programs. Also, additional employees were added to
support the loan and deposit growth. Occupancy costs grew $482,466 or 61.32%
over 1996. This increase was 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 was primarily due to additional branch locations, expansion of First
Mariner Mortgage Corporation and higher volumes of loans, deposits and
transactions.
26
<PAGE>
While total noninterest expense increased $3,622,225, noninterest expense as
a percent of average total assets decreased from 1996 to 1997. Noninterest
expense as a percent of average total assets was 5.37% in 1997 as compared to
7.10% in 1996.
1996 VERSUS 1995. Noninterest expense totaled $5,836,735 for the year ended
December 31,1996 as compared to $2,581,411 for the year ended December 31, 1995,
an increase of $3,255,324 or 126.1%. This increase reflects increased
administrative expenses and management's continuing emphasis on growth through
branching. Also included in the operating expenses for 1996 was the accrual of a
one-time federal assessment of $154,000 to recapitalize the Savings Association
Insurance Fund. Noninterest expense as a percentage of average total assets
increased to 7.1% for the year ended December 31, 1996 as compared to 6.9% for
the year ended December 31, 1995. Salaries and employee benefits continued to
account for the largest component of noninterest expense, comprising 47.0% of
total noninterest expenses for 1996 and 46.1% for 1995. The increase was due to
increased staffing as a result of administrative personnel necessary to
effectively serve a significantly increased customer base. Occupancy expense
increased to $786,825 for 1996 as compared with $275,660 for 1995, an increase
of $511,165, or 185.4%, caused by the Company's continuing expansion into new
local markets. As a result of this growth, other major components of noninterest
expense increased as well.
INCOME TAXES
In assessing the realizability of the deferred tax asset, management has
determined that the valuation 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 operating profits.
The Company did not recognize any income taxes for the three months ended March
31, 1998 or 1997 due to the availability of net operating loss carryforwards.
The amount of the net operating loss carryforward for federal income tax
purposes at December 31, 1997 approximated $2,125,000. As a result of ownership
changes, utilization of a portion of the net operating loss carryforward is
subject to an annual limitation.
FINANCIAL CONDITION
ASSETS
MARCH 31, 1998 VERSUS DECEMBER 31, 1997. The Company's total assets were
$263,809,000 at March 31, 1998, compared to $256,984,000 at December 31, 1997,
increasing $6,825,000 or 2.66% for the first three months of 1998. Earning
assets increased $2,876,000 or 1.22% to $237,973,000 from $235,097,000.
1997 VERSUS 1996. At December 31, 1997, the Company's total assets were
$256,984,000 as compared to $132,562,000 at December 31, 1996, an increase of
93.9%. This increase was primarily due to the continued 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.
1996 VERSUS 1995. At December 31, 1996, the Company's total assets were
$132,562,000 as compared to $52,798,000 at December 31, 1995, an increase of
151.1%. This increase was primarily due to the continued growth in the branch
network and marketing of deposit and loan products. The Bank's overall asset
size and customer base, both individual and commercial, increased significantly
during 1995 and this growth continued through 1996.
27
<PAGE>
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.
MARCH 31, 1998 VERSUS DECEMBER 31, 1997. Total loans receivable increased
$16,459,000 or 11.42% to $160,531,000 for the first three months of 1998.
Loans held for sale decreased $1,165,000 from $16,895,000 at December 31,
1997 to $15,730,000 at March 31, 1998, reflecting normal mortgage banking
activity in the Bank's mortgage banking subsidiary, First Mariner Mortgage
Corporation. First Mariner Mortgage Corporation sold $28,663,000 of residential
mortgages during the first quarter of 1998 in comparison to approximately
$4,900,000 in 1997.
1997 VERSUS 1996. Total loans receivable at December 31, 1997 were
$144,072,000 as compared to $92,064,000 on December 31, 1996, which represents
an increase of $52,008,000 or 56.49%. 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.
Significant growth was experienced in residential real estate which
increased $17,256,000 and commercial real estate and construction loans which
increased $25,151,000. At December 31, 1997 the loan to deposit ratio was 73.03%
as compared to 90.00% at December 31, 1996.
1996 VERSUS 1995. Total loans, at December 31, 1996 were $92,064,000 as
compared to $29,935,000 on December 31, 1995 which represents an increase of
$62,129,000 or 207.6%. Significant growth was experienced in commercial real
estate and construction loans which increased $44,413,000 and commercial loans
which increased $16,227,000. At December 31,1996 the loan to deposit ratio was
90.0% as compared to 72.4% at December 31, 1995. During the year ended December
31, 1996 average loans were $64,706,000 and constituted 86.9% of earning assets
and 78.6% of total assets for the same period. This average loan balance
represents an increase of $42,007,000 or 185.1% over the year ended December 31,
1995. During the year ended December 31, 1995, average loans were $22,699,000
and constituted 70.0% of average earning assets and 61.0% of average total
assets.
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994
-------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
TYPE OF LOANS
Commercial................................ $ 24,076,283 $ 24,118,724 $ 17,096,663 $ 869,641 $ 886,976
Commercial real estate and
construction(1)......................... 88,410,062 81,039,474 55,888,029 11,474,741 799,177
Residential real estate................... 41,184,604 34,396,190 17,140,556 16,215,918 16,886,708
Consumer.................................. 7,222,533 4,992,111 2,566,226 1,450,721 1,327,400
-------------- -------------- ------------- ------------- -------------
Total loans........................... 160,893,482 144,546,499 92,691,474 30,011,021 19,900,261
Add:
Unamortized loan premiums............... 123,127 139,564 205,311 283,926 375,708
Less:
Unearned income......................... 486,087 614,102 832,712 360,051 171,866
Unearned loan discounts................. -- -- -- -- 73,677
-------------- -------------- ------------- ------------- -------------
Net loans............................. $ 160,530,522 $ 144,071,961 $ 92,064,073 $ 29,934,896 $ 20,030,426
-------------- -------------- ------------- ------------- -------------
-------------- -------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(1) Net of undisbursed principal
28
<PAGE>
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 Company's income. See also the discussion under
"Liquidity and Interest Rate Sensitivity" below. The following table sets forth
the maturity distribution, classified according to sensitivity to changes in
interest rate, for the Company's loan portfolio. 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.
MATURITY SCHEDULE OF SELECTED LOANS (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
--------- ----------- ----------- --------- --------- --------- ----------- ----------- ---------
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>
DECEMBER 31, 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10 +
TOTAL YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
--------- --------- ----------- ----------- --------- ---------
Residential real
estate.......... $ 17,140 $ 3,811 $ 3,449 $ 1,132 $ 7,824 $ 16,216
Commercial real
estate and
construction.... 55,888 8,886 2,209 15 365 11,475
Commercial........ 17,097 585 166 118 -- 869
Consumer.......... 2,566 399 795 24 233 1,451
--------- --------- ----------- ----------- --------- ---------
Total........... $ 92,691 $ 13,681 $ 6,619 $ 1,289 $ 8,422 $ 30,011
--------- --------- ----------- ----------- --------- ---------
--------- --------- ----------- ----------- --------- ---------
Fixed interest
rate............ $ 45,805 $ 6,567 $ 3,177 $ 619 $ 4,043 $ 14,406
Variable interest
rate............ 46,886 7,114 3,442 670 4,379 15,605
--------- --------- ----------- ----------- --------- ---------
Total........... $ 92,691 $ 13,681 $ 6,619 $ 1,289 $ 8,422 $ 30,011
--------- --------- ----------- ----------- --------- ---------
--------- --------- ----------- ----------- --------- ---------
</TABLE>
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 losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on nonaccruing, 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 any 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 chargeoffs, delinquency trends, previous collection experience, and
the risk rating on each individual loan along with an assessment of the effects
of external economic conditions. 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.
29
<PAGE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994
-------------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of
period...................................... $ 1,613,621 $ 1,241,663 $ 376,287 $ 244,847 $ 207,409
-------------- ----------- --------- ---------- ----------
Loans charged off:
Commercial.................................. (95,000) (100,001) (157,365) (8,595) --
Real estate................................. -- -- (48,680) (47,307) (14,825)
Consumer.................................... -- -- (42,147) (3,959) (6,815)
-------------- ----------- --------- ---------- ----------
Total loans charged off................... (95,000) (100,001) (248,192) (59,861) (21,640)
-------------- ----------- --------- ---------- ----------
Recoveries:
Commercial.................................. -- -- 63,000 -- --
Real estate................................. -- -- -- -- --
Consumer.................................... 1,396 -- 10,932 1,250 --
-------------- ----------- --------- ---------- ----------
Total recoveries.......................... 1,396 -- 73,932 1,250 --
-------------- ----------- --------- ---------- ----------
Net chargeoffs (93,604) (100,001) (174,260) (58,611) (21,640)
-------------- ----------- --------- ---------- ----------
Provision for loan losses..................... 152,467 471,959 1,039,636 190,051 59,078
-------------- ----------- --------- ---------- ----------
Allowance for loan losses, end of period...... $ 1,672,484 $ 1,613,621 $1,241,663 $ 376,287 $ 244,847
-------------- ----------- --------- ---------- ----------
-------------- ----------- --------- ---------- ----------
Loans (net of premiums and discounts)
Period-end balance.......................... 160,531,000 144,072,000 92,064,000 29,935,000 20,030,000
Average balance during period............... 147,702,000 124,794,000 64,706,000 22,699,000 19,865,000
Allowance as percentage of period-end loan
balance..................................... 1.04% 1.12% 1.35% 1.26% 1.22%
Percent of average loans:
Provision for loan losses................... 0.42% 0.38% 1.61% 0.84% 0.30%
Net chargeoffs.............................. 0.26% 0.08% 0.27% 0.26% 0.11%
</TABLE>
Management's judgment as to the level of future losses on existing loans is
based on management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers. 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
chargeoffs 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 table below indicates the specific reserves allocated by loan type and also
the general reserves included in the allowance for loan losses at the dates
indicated.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
MARCH 31, 1998 1997 1996
------------------------------------ ------------------------------------ -----------------------
PERCENT OF PERCENT OF
PERCENT LOANS TO PERCENT LOANS TO PERCENT
AMOUNT OF TOTAL TOTAL LOANS AMOUNT OF TOTAL TOTAL LOANS AMOUNT OF TOTAL
------------ --------- ----------- ------------ --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.................... $ 208,640 12.5% 15.0% $ 205,463 12.7% 16.7% $ 75,430 6.1%
Real estate................... 946,786 56.6% 80.6% 918,226 56.9% 79.8% 793,014 63.9%
Consumer...................... 21,597 1.3% 4.4% 13,577 0.8% 3.5% 8,460 0.7%
Unallocated................... 495,461 29.6% 476,355 29.6% 364,759 29.3%
------------ --------- ----------- ------------ --------- ----------- ------------ ---------
Total....................... $ 1,672,484 100.0% 100.0% $ 1,613,621 100.0% 100.0% $ 1,241,663 100.0%
------------ --------- ----------- ------------ --------- ----------- ------------ ---------
------------ --------- ----------- ------------ --------- ----------- ------------ ---------
<CAPTION>
1995 1994
---------------------------------- ----------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO PERCENT LOANS TO PERCENT LOANS TO
TOTAL LOANS AMOUNT OF TOTAL TOTAL LOANS AMOUNT OF TOTAL TOTAL LOANS
----------- ---------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial.................... 18.4% $ 43,879 11.7% 2.9% $ 5,142 2.1% 4.5%
Real estate................... 78.8% 92,449 24.5% 92.3% 157,682 64.4% 88.8%
Consumer...................... 2.8% 28,229 7.5% 4.8% 8,570 3.5% 6.7%
Unallocated................... 211,730 56.3% 73,453 30.0%
----------- ---------- --------- ----------- ---------- --------- -----------
Total....................... 100.0% $ 376,287 100.0% 100.0% $ 244,847 100.0% 100.0%
----------- ---------- --------- ----------- ---------- --------- -----------
----------- ---------- --------- ----------- ---------- --------- -----------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS ENDED MARCH 31,
1997. The first quarter provision for loan losses was $152,467 in 1998 compared
to $135,000 for the three month period in 1997.
30
<PAGE>
Net chargeoffs for the three months ended March 31, 1998 were $93,604 compared
to no net chargeoffs recorded for the same three month period in 1997. The
allowance for loan losses stands at $1,672,484 at March 31, 1998 compared to
$1,613,621 at December 31, 1997. As of March 31, 1998 the allowance for loan
loss is 1.04% of outstanding loans as compared to 1.12% on December 31, 1997.
1997 VERSUS 1996. 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.
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 chargeoffs 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 1.12% of outstanding loans as
compared with 1.35% 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 nonconsumer loans and the
disproportionate 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.
1996 VERSUS 1995. The Company provided $1,039,636 for loan losses for the
year ended December 31, 1996, as compared to $190,051 for the year ended
December 31, 1995.
As of December 31, 1996 the allowance for loan losses was $1,241,663, as
compared with the December 31, 1995 balance of $376,287, an increase of
$865,376. Net chargeoffs of $174,260 were recognized for 1996. The growth in the
reserve was warranted by the growth in the loan portfolio. The allowance for
loan losses at December 31, 1996 represented 1.35% of outstanding loans as
compared with 1.26% as of December 31, 1995. The increase in the percentage was
based on management's evaluation of the loan portfolio as of December 31, 1996.
CREDIT RISK MANAGEMENT
As a result of management's ongoing review of the loan portfolio, a loan may
be classified as nonaccrual even though the presence of collateral or the
borrower's financial strength may be sufficient to provide for ultimate
repayment. Interest on nonaccrual loans is recognized only when received.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994
-------------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual basis........................... $ 1,356,000 $ 1,550,000 $ 1,574,000 $ 633,000 $ 692,000
Real estate acquired by foreclosure................. 2,420,000 1,944,000 -- -- --
-------------- ------------ ------------ ---------- ----------
Total nonperforming assets........................ $ 3,776,000 $ 3,494,000 $ 1,574,000 $ 633,000 $ 692,000
-------------- ------------ ------------ ---------- ----------
-------------- ------------ ------------ ---------- ----------
Loans past-due 90 days or more and accruing......... $ 268,000 $ 276,000 (1) (1) (1)
-------------- ------------ ------------ ---------- ----------
-------------- ------------ ------------ ---------- ----------
</TABLE>
- ------------------------
(1) Data not available
MARCH 31, 1998 VERSUS DECEMBER 31, 1997. Nonperforming assets, expressed as
a percentage of total assets, increased to 1.45% at March 31, 1998 from 1.36% at
December 31, 1997, reflecting the increase in real estate acquired by
foreclosure. Nonaccrual loans were $1,356,000 at March 31, 1998 compared to
$1,550,000 at December 31, 1997. At March 31, 1998, the allowance for loan
losses represented 123.3% of nonaccruing loans compared to 104.1% at December
31, 1997. Management believes the allowance for loan losses at March 31, 1998 is
adequate.
31
<PAGE>
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. As of December 31, 1997, 107 lots were under
contract for settlement through July 2000, and the remainder of the project was
being marketed for sale.
CAPITAL RESOURCES
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.
The Bank has exceeded its capital adequacy requirements to date. The Company
continually monitors its capital adequacy ratios on an ongoing basis to assure
that the Bank exceeds its regulatory capital requirements.
Capital is classified as Tier 1 (generally common stockholders' equity less
certain intangible assets) and Total Capital (generally 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 4% Tier 1 leverage capital ratio (Tier 1 capital to average total
assets for the previous quarter). The Bank's capital position was as follows at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
MARCH 31, 1998 1997 1996 1995
--------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total capital to risk weighted assets................................ 10.4% 12.0% 14.2% 32.1%
Tier 1 capital to risk weighted assets............................... 9.5% 11.0% 13.3% 30.9%
Tier 1 capital leverage ratio........................................ 8.0% 10.2% 14.7% 25.4%
</TABLE>
MARCH 31, 1998 VERSUS DECEMBER 31, 1997. Stockholders' equity increased
$238,485 or 0.88% in 1998 to $27,204,141 from $26,965,656 as of December 31,
1997. No dividends have been declared by the Company since its inception.
1997 VERSUS 1996. Stockholders' equity was $26,965,596 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 of the exercise of warrants and options (6,000 and
8,300 respectively) and 1997 income of $365,336.
1996 VERSUS 1995. Stockholders' equity was $23,796,002 as of December 31,
1996 as compared to $10,701,986 as of December 31, 1995. The increase of
$13,094,016 was primarily the result of the proceeds of the stock sale in
December, 1996 of $15,249,410 reduced by the 1996 loss of $2,173,319.
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
statement of financial condition 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
32
<PAGE>
and liabilities which are subject to interest-rate pricing within a given time
period, including both floating rate or adjustable rate instruments and
instruments which are approaching maturity.
The Company's management and the Board of Directors oversee the
asset/liability management function and meet periodically to monitor and manage
the statement of financial condition, control interest rate exposure, and
evaluate pricing strategies for the Company. The asset mix of the statement of
financial condition is continually evaluated in terms of several variables;
yield, credit quality, appropriate funding sources and liquidity. Management of
the liability mix of the statement of financial condition 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.
As of March 31, 1998, the Company's interest sensitive liabilities exceeded
interest sensitive assets within a one year period by $21 million or 8% of
assets. The Company's savings products are structured to give management the
ability to reset the rates paid on a monthly basis. This causes the Company to
become more liability sensitive. If interest rates rise, the rate paid on
savings deposits may follow, and the Company's net interest margin may decline.
The Company believes that, as of March 31, 1998, its interest rate exposure is
less than 5% of capital, in a plus or minus 2% rate shock scenario.
The interest rate sensitivity position at March 31, 1998 is presented below
in the table captioned "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.
RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------------------------------
LONGER THAN
10 YEARS
180 DAYS 181 DAYS- ONE-FIVE FIVE-TEN OR NON-
OR LESS ONE YEAR YEARS YEARS SENSITIVE TOTAL
---------- ---------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Interest-bearing deposits................ $ 21,436 $ -- $ -- $ -- $ -- $ 21,436
Investment securities.................... 9,651 4,139 20,440 5,102 1,944 41,276
Loans held for sale...................... 15,730 -- -- -- -- 15,730
Loans.................................... 87,075 15,760 40,089 12,562 5,045 160,531
---------- ---------- --------- --------- ------------ ----------
Total interest-earnings assets......... $ 133,892 $ 19,899 $ 60,529 $ 17,664 $ 6,989 $ 238,973
---------- ---------- --------- --------- ------------ ----------
Interest-bearing liabilities:
Savings.................................. $ 2,600 $ 349 $ 2,796 $ 3,493 -- $ 9,238
NOW accounts............................. 3,301 443 3,548 4,434 -- 11,726
Money market accounts.................... 66,509 -- -- -- -- 66,509
Certificates............................. 36,257 33,241 16,161 -- -- 85,659
Borrowings............................... 31,786 35 236 109 -- 32,166
---------- ---------- --------- --------- ------------ ----------
Total interest-bearing liabilities..... $ 140,453 $ 34,068 $ 22,741 $ 8,036 $ -- $ 205,298
---------- ---------- --------- --------- ------------ ----------
Interest rate sensitive gap................ $ (6,561) $ (14,169) $ 37,788 $ 9,628 $ 6,989 $ 33,675
---------- ---------- --------- --------- ------------ ----------
---------- ---------- --------- --------- ------------ ----------
Cumulative interest rate gap............... $ (6,561) $ (20,730) $ 17,058 $ 26,686 $ 33,675
---------- ---------- --------- --------- ------------
---------- ---------- --------- --------- ------------
Ratio of rate sensitive assets to rate
sensitive liabilities.................... 95% 58% 266% 220%
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
33
<PAGE>
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 the table below captioned "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.
DEPOSITS
The Bank uses deposits as the primary source of funding of its assets. The
Bank has experienced significant growth in its deposits, especially in CD's. The
following table describes the maturity of time deposits of $100,000 or more at
the dates indicated.
MATURITY OF TIME DEPOSITS $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- ------------
Under 3 months................................... $ 6,773,625 $ 1,056,043 $ 947,201
3 to 6 months.................................... 8,046,094 3,245,085 470,056
6 to 12 months................................... 4,169,824 2,759,789 521,703
Over 12 months................................... 3,117,059 4,266,016 706,687
------------- ------------- ------------
Total............................................ $ 22,106,602 $ 11,326,933 $ 2,645,647
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
MARCH 31, 1998 VERSUS DECEMBER 31, 1997. Deposits were $204,017,844 as of
March 31, 1998, increasing $6,748,516 or 3.42% from the December 31, 1997
balance of $197,269,328. The increase in deposits was attributable to activity
generated by an advertising campaign and the expanding branch network.
1997 VERSUS 1996. Total deposits increased to $197,269,328 at December 31,
1997 which is an increase of 92.85% from $102,289,146 as of December 31, 1996.
1996 VERSUS 1995. Total deposits as of December 31, 1996 were $102,289,146
compared to $41,486,641 as of December 31, 1995, an increase of $60,802,505.
While the main source of these increases was CD's, all other types of deposits
increased as well, including savings accounts, money market savings deposits,
interest-bearing deposits, and noninterest-bearing demand deposits. These
increases reflect management's growth strategy which includes significant
marketing and promotion and the development of a branching network.
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 tables detail the average amount, the average rate paid
on, and the total of, the following primary deposit categories for the years
ended December 31, 1997, 1996 and 1995.
34
<PAGE>
AVERAGE DEPOSIT COMPOSITION AND COST
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
-------------- ----------- -----------
<S> <C> <C> <C>
Noninterest-bearing demand deposits........................................... $ 16,374,000 -- 11.6%
-------------- -----
NOW & money market savings deposits........................................... 35,242,000 3.72% 24.9%
Regular savings deposits...................................................... 7,194,000 2.71% 5.1%
Time deposits................................................................. 82,552,000 5.62% 58.4%
-------------- -----
Total interest-bearing deposits............................................. 124,988,000 4.91% 88.4%
-------------- -----
Total deposits.............................................................. $ 141,362,000 4.34% 100.0%
-------------- --- -----
-------------- --- -----
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
-------------- ----------- -----------
<S> <C> <C> <C>
Noninterest-bearing demand deposits........................................... $ 7,753,000 -- 11.3%
-------------- -----
NOW & money market savings deposits........................................... 12,588,000 2.80% 18.4%
Regular savings deposits...................................................... 4,635,000 3.00% 6.8%
Time deposits................................................................. 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%
-------------- --- -----
-------------- --- -----
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
-------------- ----------- -----------
<S> <C> <C> <C>
Noninterest-bearing demand deposits........................................... $ 984,000 -- 3.6%
-------------- -----
NOW & money market savings deposits........................................... 6,477,000 3.26% 23.7%
Regular savings deposits...................................................... 3,081,000 2.14% 11.3%
Time deposits................................................................. 16,793,000 5.36% 61.4%
-------------- -----
Total interest-bearing deposits............................................. 26,351,000 4.47% 96.4%
-------------- -----
Total deposits.............................................................. $ 27,335,000 4.31% 100.0%
-------------- --- -----
-------------- --- -----
</TABLE>
INVESTMENT SECURITIES
MARCH 31, 1998 VERSUS DECEMBER 31, 1997. The investment portfolio,
consisting of available-for-sale and held-to-maturity securities, decreased
$1,077,080 from December 31, 1997. Interest-bearing deposits as of March 31,
1998 fell $11,340,231 to $21,336,504 when compared to the December 31, 1997
balance of $32,676,735. Interest-bearing deposits and securities designated as
available-for-sale represent a significant source of liquidity as of March 31,
1998.
1997 VERSUS 1996. The investment portfolio, consisting of
available-for-sale and held-to-maturity securities, increased $40,029,033 from
December 31, 1996.
1996 VERSUS 1995. The investment portfolio, consisting of
available-for-sale and held-to-maturity securities, increased $1,324,875 from
December 31, 1995.
The following table presents the composition of the Company's securities
portfolio as of March 31, 1998 and December 31, 1997, 1996 and 1995.
35
<PAGE>
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, 1998 1997 1996 1995
-------------- ------------- ------------ ---------
Investment securities--available-for-sale:
Mortgage-backed securities............................. $ 28,292,815 $ 24,255,633 $ -- $ --
FHLB Bonds............................................. 3,995,000 6,432,635 -- --
Other equity securities................................ 1,485,028 2,164,019 324,875 --
-------------- ------------- ------------ ---------
Total securities--available-for-sale................. 33,772,843 32,852,287 324,875 --
-------------- ------------- ------------ ---------
Investment securities--held to maturity:
U.S. Treasury securities............................... 6,503,985 8,501,621 1,000,000 --
Other securities....................................... 99,000 99,000 99,000 99,000
-------------- ------------- ------------ ---------
Total investment securities--held to maturity........ 6,602,985 8,600,621 1,099,000 99,000
-------------- ------------- ------------ ---------
Total investment securities.......................... $ 40,375,828 $ 41,452,908 $ 1,423,875 $ 99,000
-------------- ------------- ------------ ---------
-------------- ------------- ------------ ---------
</TABLE>
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 $38,000,000 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. Certain information regarding
borrowings appears in the following table.
BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------ ------------
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 month-end:
FHLB advances....................................................... $ 15,000,000 $ 6,000,000 $ 3,150,000
Short-term promissory notes......................................... 15,460,935 -- --
Average outstanding:
FHLB advances....................................................... $ 1,904,000 $ 1,950,000 $ 1,406,000
Short-term promissory notes......................................... 4,128,000 -- --
Weighted average interest rate during the year:
FHLB advances....................................................... 6.05% 5.50% 6.60%
Short-term promissory notes......................................... 5.47% -- --
</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
36
<PAGE>
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, led by senior management, assigned the responsibility to complete Year
2000 preparations, with a targeted completion date of 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 these 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 issued Statement of
Financial Accounting Standards 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.
37
<PAGE>
BUSINESS
GENERAL
First Mariner Bancorp 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, whose deposits are
insured by the Federal Deposit Insurance Corporation. At May 1, 1998, the Bank,
which is headquartered in Baltimore City, serves the central region of the State
of Maryland through 18 full service branches and 33 Automated Teller Machines.
At March 31, 1998, the Company had total assets of $263,809,000.
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 Bank offers residential mortgage lending services through its
wholly owned subsidiary, First Mariner Mortgage Corporation.
The Company's executive offices are located at 1801 South Clinton Street,
Baltimore, Maryland 21224 and its telephone number is (410) 342-2600.
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. Within its core market, the Company
opened four branches in 1997, five branches in 1996 and five branches in 1995.
The Bank opened a branch in Easton (Talbot County) on March 31, 1998 and a
branch in Perry Hall (Baltimore County) on April 20, 1998. The Bank has received
regulatory approvals to open a branch in Rosedale (Baltimore County) and a
branch in Severna Park (Anne Arundel County), and anticipates that these
branches will open during the third quarter of 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 emphasizes personal
attention and professional service to its customers while delivering a range of
traditional and contemporary financial products and performing many of the
essential banking services offered by its larger competitors. The Bank offers
its customers access to local bank officers who are empowered to act with
flexibility to meet customers' needs in order to foster and develop long-term
loan and deposit relationships. The Company believes that individuals and
businesses in its market area are dissatisfied with the large out-of-state
banking institutions which have acquired local banks. Management believes that
the Bank has a window of opportunity to establish business ties with customers
who have been displaced by the consolidations and who are anxious to forge
banking relationships with locally owned and managed institutions. These
consolidations also benefit the Bank by making available experienced and
entrepreneurial managers displaced by such consolidation and acquisition
opportunities from the remaining small independent banks in the Company's market
area.
38
<PAGE>
GROWTH STRATEGIES
The Company's continuing strategy is to capture market share and build a
community franchise for its stockholders, customers and employees. To do so, the
Company intends to:
--Expand its existing network of traditional branches and ATMs
ultimately to 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 Markets 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 establishments 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 core market area. Christopher R.
D'Anna, executive vice president of Mars, and Dennis McCoy, former chief
executive officer of Mars, 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.
BANKING SERVICES
COMMERCIAL BANKING. The Bank focuses its commercial loan originations on
small and mid-sized businesses (generally up to $20 million in annual sales) and
such loans are generally accompanied by 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 has introduced 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 products
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
39
<PAGE>
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 March 31, 1998, the Bank's loan portfolio
totaled $160,531,000 representing approximately 60.9% of its total assets of
$263,809,000. The following table sets forth the Bank's loans by major
categories as of March 31, 1998:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
-------------- -----------
<S> <C> <C>
Commercial....................................................... $ 24,076,000 15.0%
Real Estate Development and Construction......................... 33,976,000 21.2%
Real Estate Mortgage:
Residential.................................................... 41,275,000 25.7%
Commercial..................................................... 53,982,000 33.6%
Consumer......................................................... 7,222,000 4.5%
-------------- -----
Loans Receivable................................................. $ 160,531,000 100.0%
-------------- -----
-------------- -----
</TABLE>
COMMERCIAL LOANS. The Bank originates secured and unsecured loans for
business purposes. Less than 1% 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,
principals' 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 borrowers.
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. The real estate development
and construction loan portfolio consisted of the following as of March 31, 1998:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------------- -----------
<S> <C> <C>
Residential Construction........................................... $ 7,648,000 22.5%
Commercial Construction............................................ -- --
Residential Land Development....................................... 25,329,000 74.6%
Residential Land Acquisition....................................... 684,000 2.0%
Commercial Land Acquisition........................................ 315,000 0.9%
------------- -----
Total Real Estate--Development and Construction.................... $ 33,976,000 100.0%
------------- -----
------------- -----
</TABLE>
The Bank provides interim residential real estate development and
construction loans to builders, developers, and persons who will ultimately
occupy 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
40
<PAGE>
these loans are generally adjustable. The Bank 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 that meet the Bank's underwriting criteria. 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 or construction and personal guarantees are typically obtained.
Further, to assure that reliance is not placed solely in the value of the
underlying property, the Bank considers the financial condition and reputation
of the borrower and any guarantors, the amount of the borrower's equity in the
project, independent appraisals, costs estimates and pre-construction sale
information.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. The Bank's wholly owned subsidiary,
First Mariner Mortgage Corporation, originates adjustable and fixed-rate
residential first mortgage loans. Such mortgage loans are generally originated
under terms, conditions and documentation acceptable to the secondary mortgage
market. The Bank retains some of these loans in 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, 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 in amounts up to 80% of the
appraised value, less the amount of any existing prior liens on the property and
generally have a maximum term of 10 years. The interest rates on home equity
loans generally are adjustable.
CREDIT ADMINISTRATION
The Bank's lending activities are subject to written policies approved by
the Board of Directors to ensure proper management of credit risk. Loans are
subject to a predetermined 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 any 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
41
<PAGE>
Committee is authorized to approve loans up to the Bank's legal lending limit,
which approximates $2,727,000 as of March 31, 1998.
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 have
greater financial resources or have substantially higher lending limits than
does the Bank.
To compete with other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers and specialized services
tailored to meet its customers' needs. In those instances where the Bank is
unable to accommodate a customer's needs, the Bank will arrange for those
services to be provided by other banks with which it has a relationship.
EMPLOYEES
At May 1, 1998, the Bank had 161 full time and nine part time employees, and
the Mortgage Subsidiary had 46 full time and two part time employees.
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 $566,988 annually, of which approximately $532,000 is allocated
for 35,830 square feet of office and approximately $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. See
"Management--Certain Relationships and Related Transactions."
42
<PAGE>
The Bank has branches at the following locations:
<TABLE>
<CAPTION>
SQUARE LEASE RENEWAL
LOCATION FEET ANNUAL RENT EXPIRATION OPTIONS
- ---------------------------------------------------------- ----------- --------------------- ----------- ---------
<S> <C> <C> <C> <C>
1801 South Clinton Street................................. 1,170 $35,000 10/31/04 5 years
(Baltimore City)
115 East Joppa Road....................................... 2,750 Owns building -- --
Towson (Baltimore County) (subject to $25
ground rent)
8631 Loch Raven Boulevard................................. 1,000 $14,100 Month- to- --
Towson (Baltimore County) Month
9833 Liberty Road......................................... 2,800 Owns building -- --
Randallstown (Baltimore County) (subject to $12,000
ground rent)
12 A South Bel Air Parkway................................ 2,288 Owns building 06/30/17 --
Bel Air (Harford County) (subject to $35,000
ground rent)
16 South Calvert Street................................... 2,515 $26,595 05/14/01 5 years
(Baltimore City)
2375 Rolling Road (Mars Store)............................ 667 $36,500 11/01/00 5 years
Woodlawn (Baltimore County)
Chesapeake Center Drive................................... 484 $36,500 05/01/00 5 years
(Mars Store)
Glen Burnie (Anne Arundel County)
1013 Reisterstown Road.................................... 4,156 Owns building -- --
Pikesville (Baltimore County)
60 Painters Mill Road..................................... 2,350 $70,000 10/31/05 5 years
Owings Mills (Baltimore County)
161 Jennifer Road......................................... 4,400 $85,446 06/30/01 5 years
Annapolis (Anne Arundel County)
1401 Pulaski Highway...................................... 484 $36,500 12/03/01 5 years
(Mars Store)
Edgewood (Harford County)
1770 Merritt Boulevard.................................... 2,500 $32,500 02/19/07 5 years
Dundalk (Baltimore County)
1740 York Road............................................ 1,200 $36,000 04/30/12 15 years
Lutherville (Baltimore County)
1018 Beards Hill Road..................................... 525 $36,500 05/20/02 5 years
(Mars Store)
Aberdeen (Harford County)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SQUARE LEASE RENEWAL
LOCATION FEET ANNUAL RENT EXPIRATION OPTIONS
- ---------------------------------------------------------- ----------- --------------------- ----------- ---------
<S> <C> <C> <C> <C>
15 East Padonia Road...................................... 276 $36,500 10/19/02 5 years
(Mars Store)
Timonium (Baltimore County)
8443 Bel Air Road......................................... 2,050 Owns building -- --
Baltimore (Baltimore County)
8133 Elliott Road......................................... 2,099 $31,485 3/31/03 5 years
Easton (Talbot County) X 2
8206 Pulaski Highway (1).................................. 6,500 $38,350 2/28/08 5 years
Rosedale (Baltimore County) X 2
360 Governor Ritchie Highway (1).......................... 2,200 $40,700 5/31/08 5 years
Severna Park (Anne Arundel County) X 2
</TABLE>
- ------------------------
(1) The Rosedale and Severna Park branches are expected to open in the third
quarter of 1998.
LEGAL PROCEEDINGS
None of the Issuer Trust, the Company or 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.
44
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
TERM DIRECTOR
NAME AGE POSITION EXPIRES SINCE
- ------------------------------------------- --- ------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Edwin F. Hale, Sr.......................... 51 Chairman of the Board and Chief Executive 1999 1995
Officer of the Company and of the Bank
Joseph A. Cicero........................... 54 Director and President of the Company and 2000 1996
Chief Operating Officer of the Bank
Barry B. Bondroff.......................... 49 Director 1999 1995
Rose M. Cernak............................. 67 Director 2001 1995
Christopher D'Anna......................... 33 Director 2001 1995
Bruce H. Hoffman........................... 50 Director 1999 1995
Melvin S. Kabik............................ 73 Director 2000 1995
R. Andrew Larkin........................... 45 Director 1999 1995
George H. Mantakos......................... 56 Director and Executive Vice President of 2001 1994
the Company and President of the Bank
Jay J. J. Matricciani...................... 56 Director 2000 1995
Dennis C. McCoy............................ 54 Director 1999 1995
Walter L. McManus, Jr...................... 55 Director 1999 1995
James P. O'Conor........................... 68 Director 1999 1995
John J. Oliver, Jr......................... 52 Director 2000 1997
Hanan Y. Sibel............................. 66 Director 2000 1995
Leonard Stoler............................. 67 Director 2000 1995
Governor William Donald Schaefer........... 76 Director Emeritus N/A N/A
Kevin M. Healey............................ 41 Controller of the Company and Controller N/A N/A
and Senior Vice President of the Bank
</TABLE>
EDWIN F. HALE, SR. is Chairman and Chief Executive Officer of the Company
and of the Bank. He also is Chairman and Chief Executive Officer of Hale Trans,
Inc. the parent company of Hale Intermodal Transport Co., and Hale Intermodal
Marine Co., private Baltimore-based trucking and shipping companies which he
founded in 1975 and 1984, respectively. He is Chairman and Chief Executive
Officer of Peterbilt of Central Maryland, LLC. Mr. Hale is the former Chairman
of the Board and Chief Executive Officer of Baltimore Bancorp, which was
acquired by First Union Bancorp. He is the owner of Baltimore Blast Corp., a
professional indoor soccer team.
BARRY B. BONDROFF has been the managing officer of Grabush, Newman & Co.,
P.A. a certified public accounting firm, since 1982. Mr. Bondroff is a member of
the American Institute of Certified Public Accountants, and is a former member
of the Board of Directors of Baltimore Bancorp.
ROSE M. CERNAK has served as President of Olde Obrycki's Crab House, Inc.,
since 1995. Prior thereto, Ms. Cernak acted as a general manager and vice
president of Obrycki's. She is a former member of the Board of Directors of
Baltimore Bancorp.
JOSEPH A. CICERO is the President of the Company and Chief Operating Officer
of the Bank. Mr. Cicero was Maryland Area President of First Union Bank during
1996 and Maryland Area President for First Fidelity Bank from November 1994 to
December 1995. Prior thereto, he was Executive Vice President and Chief
Financial Officer and a director of Baltimore Bancorp from January 1992 to
November 1994.
45
<PAGE>
CHRISTOPHER P. D'ANNA is an executive vice president of Mars Super Markets,
Inc., a regional supermarket chain, and has been employed with Mars in various
capacities for more than five years.
BRUCE H. HOFFMAN has served as the Executive Director of the Maryland
Stadium Authority since 1989. Mr. Hoffman is currently responsible for the
operation and maintenance of Oriole Park at Camden Yards, the Baltimore
Convention Center expansion, the Ocean City Convention Center expansion, and the
financing, design, construction, and operation of the National Football League
stadium for the Baltimore Ravens, Baltimore's NFL professional football team. He
is a former member of the Board of Directors of Baltimore Bancorp.
MELVIN S. KABIK operates his own commercial real estate company. He
previously owned and operated Eddie's Supermarkets in Baltimore, Maryland. He is
a former member of the Board of Directors of Baltimore Bancorp.
R. ANDREW LARKIN has served as the President of the Maryland Realty
Investment Corp., a real estate investment firm, since 1985. Mr. Larkin is a
former member of the Board of Directors of Baltimore Bancorp.
GEORGE H. MANTAKOS is Executive Vice President of the Company, and President
of the Bank. Mr. Mantakos previously served as President of the Company and
Chief Executive Officer for the Bank. Mr. Mantakos began his banking career with
Union Trust Company. In 1985, he resigned his position as Senior Vice President
in charge of the Corporate and Commercial Banking Division of Union Trust to
become President and Chief Executive Officer of Fairview Federal. Fairview
Federal was acquired by Columbia Bancorp in June 1992. Mr. Mantakos was
appointed to the Board of Directors of Columbia Bancorp and to the Executive
Committee/Board of Directors of the Columbia Bank. He resigned from these
positions to become a founder and organizer of MarylandsBank, FSB, the
predecessor of the Bank.
JAY J. J. MATRICCIANI has served as President of The Matricciani Company, a
utility and paving contractor, since 1992. He is also a partner in Matro
Properties, a heavy equipment rental company.
DENNIS C. MCCOY has provided representation in matters relating to state and
local relations with various government bodies and agencies for Government
Affairs-Maryland, Inc. since 1996. Mr. McCoy was the Chief Executive Officer and
General Counsel of Mars Super Markets, Inc. from January 1995 through November
1995. Prior thereto he was a partner at Polovoy & McCoy, a law firm.
WALTER L. MCMANUS, JR. has served as President of Castlewood Realty Co.
Inc., a commercial real estate company, since 1970.
JAMES P. O'CONOR has served as Chairman and Chief Executive Officer of
O'Conor, Piper & Flynn, a real estate brokerage company, since 1984. He is a
former member of the Board of Directors of Baltimore Bancorp.
JOHN J. OLIVER, JR. is the Chief Executive Officer and Publisher of the
Afro-American Newspapers.
HANAN Y. SIBEL has served as Chairman and Chief Executive Officer of
Chaimson Brokerage Co., Inc., a food brokerage company, since 1970.
LEONARD STOLER has been the owner and President of Len Stoler Inc., an
automobile dealership, since 1968.
GOVERNOR WILLIAM DONALD SCHAEFER was Governor of the State of Maryland from
1986 to 1995 and was Mayor of the City of Baltimore from 1971 to 1986. He is
presently of counsel to the law firm of Gordon, Feinblatt, Rothman, Hoffberger
and Hollander, LLC.
46
<PAGE>
KEVIN M. HEALEY is the Controller of the Company and Controller and Senior
Vice President of the Bank. From 1984 through 1996, he served as an assistant
controller for Provident Bank of Maryland, a regional bank.
DIRECTOR COMPENSATION
Directors receive fees for their services, and are reimbursed for expenses
incurred in connection with their service as directors. Directors receive $400
for each Board meeting attended. Directors receive no compensation for attending
committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and the
Bank for the last three fiscal years to the Chief Executive Officer of the
Company and the Bank and to any other executive officer of the Company or the
Bank who received compensation in excess of $100,000 during any of the last
three fiscal years of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- -------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS COMPENSATION
- --------------------------------------- --------- --------- --------- ------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edwin F. Hale, Sr...................... 1997 $ 200,000 $ 100,000 $ 12,050(2) -- $ 1,260(1)
Chairman of the Board and Chief 1996 $ 50,000 -- $ 12,048(2) 120,000 --
Executive Officer of the Company and 1995 -- (3) -- $ 12,048(2) -- --
the Bank
Joseph A. Cicero(4).................... 1997 $ 150,000 -- -- -- $ 1,299(1)
President of the Company and Chief 1996 $ 9,135 -- -- 15,000 --
Operating Officer of the Bank 1995 -- -- -- -- --
George H. Mantakos..................... 1997 $ 110,000 $ 20,000 $ 4,139(2) -- $ 1,580(1)
Executive Vice President of the 1996 $ 110,000 $ 20,000 $ 4,000(2) 10,000 --
Company and President of the Bank 1995 $ 110,000 $ 20,000 $ 3,000(2) 10,500 --
</TABLE>
- ------------------------
(1) The amount disclosed represents the matching funds under the Company's
401(k) Plan.
(2) The amount disclosed represents car lease payments made by the Company on
behalf of Mr. Hale and Mr. Mantakos, respectively.
(3) Mr. Hale did not receive a salary in 1995.
(4) Mr. Cicero joined the Company in December 1996.
47
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the executive officers during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
No stock options were exercised by the executive officers named in the
Summary Compensation Table during 1997. The following table sets forth certain
information regarding unexercised options held by the named executive officers
as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Edwin F. Hale, Sr......................................... 120,000(2) -- $ 720,000 --
Joseph A. Cicero.......................................... 15,000(2) -- 90,000 --
George H. Mantakos........................................ 20,500(2) -- 123,000 --
</TABLE>
- ------------------------
(1) The closing price of the Common Stock on December 31, 1997 was $16.00.
(2) The exercise price of these options is $10.00 per share. The number of
shares has not been adjusted to reflect the 10% stock dividend payable to
stockholders of record as of May 26, 1998.
EMPLOYMENT ARRANGEMENTS AND AGREEMENTS
The Company and the Bank are parties to an Employment Agreement with George
H. Mantakos dated May 1, 1995, pursuant to which Mr. Mantakos is employed as the
President of the Bank. This Employment Agreement will expire on May 1, 1999. The
agreement provides for an annual salary of $110,000 which will be adjusted on
the anniversary date of the agreement to an amount to be approved by the Board
of Directors. Mr. Mantakos is entitled to participate in any management bonus
plans established by the Bank and to receive all benefits offered to employees.
Mr. Mantakos will, at the discretion of the Chairman, have the opportunity to
receive a bonus in a maximum amount of $20,000 per year. Mr. Mantakos receives
the use of an automobile provided by the Bank. The term of the Employment
Agreement is one year, expiring in 1999 and, if not terminated within 90 days of
its termination date, is automatically renewed for one additional year,
provided, however, that the Board of Directors of the Bank may terminate the
agreement at any time. In the event of involuntary termination for reasons other
than gross negligence, fraud or dishonesty (or in the event of the material
diminution of or interference with Mr. Mantakos' duties, or a change of control
of the Bank), the Bank is obligated to pay Mr. Mantakos his salary through the
remaining term plus additional severance equal to the then current annual
salary, but not less than $110,000. In such event, Mr. Mantakos is permitted to
exercise all options, and warrants held by him, and the Company is obligated to
repurchase all or part of Mr. Mantakos' Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged in transactions in the ordinary course of business
with some of its directors, officers, principal stockholders and their
associates. Management believes that all such transactions were made on terms at
least as favorable to the Company as those that could be obtained at the time
between unrelated persons in similar transactions.
The Bank has five full-service branches with ATMs and nine non-branch ATMs
in Mars Super Markets. The Bank pays rent of $36,500 per year to Mars Super
Markets, Inc. for approximately 200-500 square feet of space in each of the
stores where branches are located. The Bank also bears all costs of construction
of each branch. The Bank, however, incurs no charge from Mars in connection with
the
48
<PAGE>
installation of ATMs. The Bank intends to open additional branches in Mars Super
Markets in the future. The terms of the arrangement are described in a Master
Lease Agreement between the Company and Mars dated March 1, 1996. Christopher P.
D'Anna, Executive Vice President of Mars Super Markets, Inc., is a member of the
Board of Directors of the Company and the Bank. Dennis C. McCoy, formerly the
Chief Executive Officer and General Counsel of Mars Super Markets, Inc., is also
a member of the Board of Directors of the Company and the Bank.
The Bank has entered into a 15 year Lease Agreement dated January 17, 1997
with Blakefield Associates, L.L.C. for a 2,200 square foot building utilized as
a full service branch of the Bank located at 1740 York Road, Lutherville,
Maryland. The Company pays rent of $36,000 per year to Blakefield Associates,
L.L.C. Dennis M. Doyle, President of Blakefield Associates, L.L.C., together
with his wife, controls Blakefield Associates, L.L.C. Mr. Doyle was a member of
the Board of Directors of the Company and the Bank until May 1997.
The Bank has entered into a five year Lease Agreement dated November 1, 1997
with Edwin F. Hale, Sr. for approximately 37,000 square feet used for a full
service branch of the Bank and the headquarters and executive offices of the
Bank and the Company at 1801 South Clinton Street, Baltimore, Maryland. The
Company pays rent of $566,988 per year. The term of the lease subsequently was
extended for two additional years. Mr. Hale is the Chairman and Chief Executive
Officer of the Company. The Bank intends to sublease 656 square feet of office
space to Baltimore Blast Corp., a professional soccer team, for a term of five
years with annual base rent equal to $9,512. Mr. Hale owns Baltimore Blast Corp.
Prior to November 1, 1996, the Company leased space for the branch and limited
space for the headquarters and executive offices from Hale Intermodal Transport
Co., pursuant to a lease entered into as of September 1, 1996. The lease
provided for annual rent payments of approximately $212,700. Mr. Hale is an
officer, director and stockholder of Hale Intermodal Transport Co.
The Bank has entered into a Lease Agreement dated as of June 1, 1998 with
Building #2, L.L.C, a limited liability company affiliated with Mr. Hale, for
approximately 5,000 square feet to be used for an operations office of the Bank
at 1516 Baylis Street, Baltimore, Maryland. The lease has a term of five years,
commencing September 1, 1998, and provides for annual base rent of $60,000.
Ronald M. Shapiro was a member of the Board of Directors in 1997 and is
counsel to the law firm of Shapiro and Olander, which had provided legal
services to the Company and the Bank in 1997. Mr. Shapiro resigned from the
Board in 1997.
During the past three years the Bank has had banking transactions in the
ordinary course of its business with: (i) its directors; (ii) its executive
officers; (iii) its 5% or greater shareholders; (iv) members of the immediate
family of its directors or executive officers and 5% or greater shareholders;
and (v) the associates of such persons, on substantially the same terms,
including interest rates, collateral, and repayment terms of loans, as those
prevailing at the same time for comparable transactions with others. The
extensions of credit by the Bank to these persons have not and do not currently
involve more than the normal risk of collectibility or present other unfavorable
features. At March 31, 1998, the balance of loans outstanding to directors,
executive officers, owners of 5% or more of the outstanding Common Stock, and
their associates, aggregated $5,982,000.
49
<PAGE>
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following sets forth information as of March 31, 1998, relating to the
beneficial ownership of the Common Stock by (i) each person or group known by
the Company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each of the Company's directors; and (iii) all directors and executive
officers of the Company as a group. Unless otherwise noted below, the persons
named in the table have sole investment powers with respect to each of the
shares reported as beneficially owned by such person. The address of all
individuals named in the table is 1801 South Clinton Street, Baltimore, Maryland
21224.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES(1) PERCENT OF CLASS
- ------------------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Edwin F. Hale, Sr.(2).................................................... 907,300 27.0%
Barry B. Bondroff(3)..................................................... 17,493 0.6%
Rose M. Cernak(4)........................................................ 18,483 0.6%
Joseph A. Cicero(5)...................................................... 17,000 0.6%
Christopher P. D'Anna(6)................................................. 14,983 0.5%
Bruce H. Hoffman(7)...................................................... 20,758 0.7%
Melvin S. Kabik(8)....................................................... 14,383 0.5%
R. Andrew Larkin, Jr.(9)................................................. 10,550 0.4%
George H. Mantakos(10)................................................... 30,500 1.1%
Jay J.J. Matricciani(11)................................................. 21,583 0.8%
Dennis C. McCoy(12)...................................................... 14,333 0.5%
Walter L. McManus, Jr.(13)............................................... 80,066 2.8%
John J. Oliver, Jr....................................................... 100 *
James P. O'Conor(14)..................................................... 23,800 0.8%
Hanan Y. Sibel(15)....................................................... 14,433 0.5%
Leonard Stoler(16)....................................................... 20,900 0.7%
Kevin M. Healey(17)...................................................... 1,550 *
All directors and executive officers as a group (17 persons)(18)......... 1,228,215 35.3%
T. Rowe Price Associates, Inc.(19)....................................... 182,300 6.4%
T. Rowe Price Small Cap Stock Fund, Inc.(19)............................. 170,000 5.9%
100 E. Pratt Street
Baltimore, MD 21202
</TABLE>
- ------------------------
(*) Less than 0.1%.
(1) Includes shares of Common Stock subject to options or warrants held by the
named individual which are exercisable as of, or within 60 days of March 31,
1998.
(2) Includes warrants to purchase 371,672 shares and options to purchase 120,000
shares and 2,300 shares in his Individual Retirement Account.
(3) Includes warrants to purchase 3,333 shares and options to purchase 1,200
shares.
(4) Includes 10,000 shares held jointly with her husband; also includes warrants
to purchase 3,333 shares and options to purchase 1,100 shares.
(5) Includes options to purchase 15,000 shares.
(6) Includes 10,000 shares held by D'Anna Family Enterprise, LLC, of which he is
a member; also includes warrants to purchase 3,333 shares and options to
purchase 1,100 shares
(7) Includes 16,025 shares held jointly with his wife; also includes warrants to
purchase 3,333 shares and options to purchase 1,200 shares.
50
<PAGE>
(8) Includes 10,000 shares held jointly with his wife; also includes warrants to
purchase 3,333 shares and options to purchase 1,000 shares.
(9) Includes 5,000 shares held in an Individual Retirement Account; also
includes warrants to purchase 5,000 shares and options to purchase 500
shares.
(10) Includes 4,000 shares held in an Individual Retirement Account and 1,000
shares held jointly with his wife; also includes warrants to purchase 5,000
shares and options to purchase 20,500 shares.
(11) Includes 3,000 shares held jointly with his wife, 1,000 shares held in an
Individual Retirement Account, and 10,000 shares held by Matro Properties,
of which he is a partner; also includes warrants to purchase 3,333 shares
and options to purchase 1,200 shares.
(12) Includes 9,950 shares held jointly with his wife; also includes warrants to
purchase 3,333 shares and options to purchase 1,000 shares.
(13) Includes warrants to purchase 16,666 shares and options to purchase 1,200
shares.
(14) Includes warrants to purchase 10,000 shares and options to purchase 1,000
shares.
(15) Includes warrants to purchase 3,333 shares and options to purchase 1,100
shares.
(16) Includes warrants to purchase 5,000 shares and options to purchase 900
shares.
(17) Includes options to purchase 1,000 shares.
(18) Includes warrants to purchase 440,002 shares and options to purchase
170,000 shares.
(19) Based upon information disclosed in Schedule 13G filed with the Securities
and Exchange Commission on February 12, 1998, T. Rowe Price Associates, Inc.
disclosed that it had sole power to vote 12,300 shares of Common Stock and
sole power to dispose of 182,300 shares of Common Stock representing 6.4% of
the Common Stock of the Company. T. Rowe Price Small Cap Stock Fund, Inc.
disclosed that it had sole power to vote 170,000 shares of Common Stock, or
5.9%, but no power to dispose of any shares.
51
<PAGE>
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Property Trustee and the Delaware Trustee (collectively, the "Issuer Trustees")
on behalf of the Issuer Trust will issue the Preferred Securities and the Common
Securities. The Preferred Securities will represent preferred undivided
beneficial interests in the assets of the Issuer Trust. The holders of the
Preferred Securities will be entitled to a preference in certain circumstances
with respect to Distributions and amounts payable on redemption or liquidation
over the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain terms and provisions of the Preferred
Securities and the Trust Agreement does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions of
the Trust Agreement, including the definitions therein of certain terms.
Wherever particular defined terms of the Trust Agreement are referred to herein,
such defined terms are incorporated herein by reference. A copy of the form of
the Trust Agreement is available from the Issuer Trustees upon request.
GENERAL
The Preferred Securities will be limited to $23,000,000 aggregate
Liquidation Amount outstanding. The Preferred Securities will rank pari passu,
and payments will be made thereon pro rata, with the Common Securities except as
described under "--Subordination of Common Securities." The Junior Subordinated
Debentures will be registered in the name of the Issuer Trust and held by the
Property Trustee in trust for the benefit of the holders of the Preferred
Securities and Common Securities. The Guarantee will be a guarantee on a
subordinated basis with respect to the Preferred Securities but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when the Issuer Trust does not have
funds on hand available to make such payments. See "Description of Guarantee."
DISTRIBUTIONS
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and Distributions on each Preferred Security
will be payable at an annual rate of 8.3% the stated Liquidation Amount of $10
per Preferred Security, payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (each a "Distribution Date"), to the
holders of the Preferred Securities at the close of business on the 15th day of
each March, June, September and December (whether or not a Business Day (as
defined below)) next preceding the relevant Distribution Date. Distributions on
the Preferred Securities will be cumulative. Distributions will accumulate from
June 30, 1998. The first Distribution Date for the Preferred Securities will be
September 30, 1998. The amount of Distributions payable for any period less than
a full Distribution period will be computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in such
period. Distributions payable for each full Distribution period will be computed
by dividing the rate per annum by four. If any date on which Distributions are
payable on the Preferred Securities is not a Business Day, then payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (without any additional Distributions or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable.
So long as no Debenture Event of Default has occurred and is continuing, the
Company has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by the Issuer Trust will be deferred during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate of 8.3% per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the
52
<PAGE>
actual days elapsed in a partial month in such period. Additional Distributions
payable for each full Distribution period will be computed by dividing the rate
per annum by four. The term "Distributions" as used herein shall include any
such additional Distributions. During any such Extension Period, the Company may
not (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock or (ii) make any payment of principal of or interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Company
that rank pari passu in all respects with or junior in interest to the Junior
Subordinated Debentures, (other than (a) repurchases, redemptions or other
acquisitions of shares of capital stock of the Company in connection with any
employment contract, benefit plan or other similar arrangement with or for the
benefit of any one or more employees, officers, directors or consultants, in
connection with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of the Company (or securities
convertible into or exercisable for such capital stock) as consideration in an
acquisition transaction entered into prior to the applicable Extension Period,
(b) as a result of an exchange or conversion of any class or series of the
Company's capital stock (or any capital stock of a subsidiary of the Company)
for any class or series of the Company's capital stock or of any class or series
of the Company's indebtedness for any class or series of the Company's capital
stock, (c) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, (d) any declaration of a
dividend in connection with any stockholder's rights plan, or the issuance of
rights, stock or other property under any stockholder's rights plan, or the
redemption or repurchase of rights pursuant thereto, or (e) any dividend in the
form of stock, warrants, options or other rights where the dividend stock or the
stock issuable upon exercise of such warrants, options or other rights is the
same stock as that on which the dividend is being paid or ranks pari passu with
or junior to such stock). Prior to the termination of any such Extension Period,
the Company may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Junior Subordinated Debentures. Upon the termination
of any such Extension Period and the payment of all amounts then due, the
Company may elect to begin a new Extension Period. No interest shall be due and
payable during an Extension Period, except at the end thereof. The Company must
give the Issuer Trustees notice of its election of such Extension Period at
least one Business Day prior to the earlier of (i) the date the Distributions on
the Preferred Securities would have been payable but for the election to begin
such Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Preferred Securities of the record date or the date
such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
Company's election to begin a new Extension Period to the holders of the
Preferred Securities. Subject to the foregoing, there is no limitation on the
number of times that the Company may elect to begin an Extension Period. See
"Description of Junior Subordinated Debentures--Option To Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences--US
Holders--Interest Income and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of the
Preferred Securities will be limited to payments under the Junior Subordinated
Debentures. See "Description of Junior Subordinated Debentures." If the Company
does not make payments on the Junior Subordinated Debentures, the Issuer Trust
will not have funds available to pay Distributions or other amounts payable on
the Preferred Securities. The payment of Distributions and other amounts payable
on the Preferred Securities (if and to the extent the Issuer Trust has funds
legally available for and cash sufficient to make such payments) is guaranteed
by the Company on a limited basis as set forth herein under "Description of
Guarantee."
53
<PAGE>
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Preferred Securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Preferred Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date"). If less than all the Junior Subordinated Debentures are to be repaid or
redeemed on a Redemption Date, then the proceeds from such repayment or
redemption shall be allocated to the redemption pro rata of the Preferred
Securities and the Common Securities. The amount of premium, if any, paid by the
Company upon the redemption of all or any part of the Junior Subordinated
Debentures to be repaid or redeemed on a Redemption Date shall be allocated to
the redemption pro rata of the Preferred Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures (i)
on or after June 30, 2003, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event, Investment Company Event
or Capital Treatment Event (each as defined below), in each case subject to
possible regulatory approval. See "--Liquidation Distribution Upon Dissolution."
A redemption of the Junior Subordinated Debentures would cause a mandatory
redemption of a Like Amount of the Preferred Securities and Common Securities at
the Redemption Price.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer Trust has funds on hand
available for the payment of such Redemption Price. See also "--Subordination of
Common Securities."
If the Issuer Trust gives a notice of redemption in respect of the Preferred
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are available, in the case of Preferred Securities held in
book-entry form, the Property Trustee will deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price and will give DTC irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Preferred Securities. With respect to Preferred Securities not held in
book-entry form, the Property Trustee, to the extent funds are available, will
irrevocably deposit with the paying agent for the Preferred Securities funds
sufficient to pay the applicable Redemption Price and will give such paying
agent irrevocable instructions and authority to pay the Redemption Price to the
holders thereof upon surrender of their certificates evidencing the Preferred
Securities. Notwithstanding the foregoing, Distributions payable on or prior to
the Redemption Date for any Preferred Securities called for redemption shall be
payable to the holders of the Preferred Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit all
rights of the holders of such Preferred Securities so called for redemption will
cease, except the right of the holders of such Preferred Securities to receive
the Redemption Price and any Distribution payable in respect of the Preferred
Securities on or prior to the Redemption Date, but without interest on such
Redemption Price, and such Preferred Securities will cease to be outstanding. If
any date fixed for redemption of Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding day which is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Preferred Securities called for redemption is improperly withheld or
refused and not paid either by the
54
<PAGE>
Issuer Trust or by the Company pursuant to the Guarantee as described under
"Description of Guarantee," Distributions on such Preferred Securities will
continue to accumulate at the then applicable rate, from the Redemption Date
originally established by the Issuer Trust for such Preferred Securities to the
date such Redemption Price is actually paid, in which case the actual payment
date will be the date fixed for redemption for purposes of calculating the
Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Preferred Securities and Common Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Preferred Securities and Common Securities to be redeemed shall be allocated pro
rata to the Preferred Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Property Trustee from the outstanding
Preferred Securities not previously called for redemption, or if the Preferred
Securities are then held in the form of a Global Preferred Security (as defined
below), in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Preferred Securities selected for redemption and, in the case of
any Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
Liquidation Amount of Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each registered holder of Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Preferred Securities is withheld or refused and not paid either
by the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Preferred Securities or portions thereof) called for
redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, and the
Liquidation Distribution in respect of, the Preferred Securities and Common
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of such Preferred Securities and Common Securities. However, if on any
Distribution Date or Redemption Date a Debenture Event of Default has occurred
and is continuing as a result of any failure by the Company to pay any amounts
in respect of the Junior Subordinated Debentures when due, no payment of any
Distribution on, or Redemption Price of, or the Liquidation Distribution in
respect of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all the outstanding Preferred Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the Redemption
Price the full amount of such Redemption Price on all the outstanding Preferred
Securities then called for redemption, or in the case of payment of the
Liquidation Distribution the full amount of such Liquidation Distribution on all
outstanding Preferred Securities shall have been made or provided for, and all
funds available to the Property Trustee shall first be applied to the payment in
full in cash of all Distributions on, or Redemption Price of, the Preferred
Securities then due and payable.
55
<PAGE>
In the case of any Event of Default (as defined below) resulting from a
Debenture Event of Default, the holders of the Common Securities will be deemed
to have waived any right to act with respect to any such Event of Default under
the Trust Agreement until the effects of all such Events of Default with respect
to such Preferred Securities have been cured, waived or otherwise eliminated.
See "--Events of Default; Notice" and "Description of Junior Subordinated
Debentures--Debenture Events of Default." Until all such Events of Default under
the Trust Agreement with respect to the Preferred Securities have been so cured,
waived or otherwise eliminated, the Property Trustee will act solely on behalf
of the holders of the Preferred Securities and not on behalf of the holders of
the Common Securities, and only the holders of the Preferred Securities will
have the right to direct the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer Trust is $10 per Preferred Security plus accumulated
and unpaid Distributions, subject to certain exceptions, which may be in the
form of a distribution of such amount in Junior Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust.
The Federal Reserve's risk-based capital guidelines currently provide that
redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption should
consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a like
amount of a similar or higher quality capital instrument and the Federal Reserve
considers the organization's capital position to be fully adequate after the
redemption).
In the event the Company, while a holder of Common Securities, dissolves the
Issuer Trust prior to the stated maturity of the Preferred Securities and the
dissolution of the Issuer Trust is deemed to constitute the redemption of
capital instruments by the Federal Reserve under its risk-based capital
guidelines or policies, the dissolution of the Issuer Trust by the Company may
be subject to the prior approval of the Federal Reserve. Moreover, any changes
in applicable law or changes in the Federal Reserve's risk-based capital
guidelines or policies could impose a requirement on the Company that it obtain
the prior approval of the Federal Reserve to dissolve the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company or the holder of the Common Securities, (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holders of the Trust
Securities, if the holders of Common Securities have given written direction to
the Property Trustee to dissolve the Issuer Trust (which direction, subject to
the foregoing restrictions, is optional and wholly within the discretion of the
holders of Common Securities), (iii) the repayment of all the Preferred
Securities in connection with the redemption of all the Trust Securities as
described under "--Redemption" and (iv) the entry of an order for the
dissolution of the Issuer Trust by a court of competent jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i), (ii)
or (iv) above, the Issuer Trust will be liquidated by the Property Trustee as
expeditiously as the Property Trustee determines to be possible by distributing,
after satisfaction of liabilities to creditors of the Issuer Trust as provided
by applicable law, to the holders of such Trust Securities a Like Amount of the
Junior Subordinated Debentures, unless such distribution is not practical, in
which event such holders will be entitled to receive out of the assets of the
Issuer Trust available for distribution to holders, after satisfaction of
liabilities to
56
<PAGE>
creditors of the Issuer Trust as provided by applicable law, an amount equal to,
in the case of holders of Preferred Securities, the aggregate of the Liquidation
Amount plus accumulated and unpaid Distributions thereon to the date of payment
(such amount being the "Liquidation Distribution"). If such Liquidation
Distribution can be paid only in part because the Issuer Trust has insufficient
assets available to pay in full the aggregate Liquidation Distribution, then the
amounts payable directly by the Issuer Trust on its Preferred Securities shall
be paid on a pro rata basis. The holders of the Common Securities will be
entitled to receive distributions upon any such liquidation pro rata with the
holders of the Preferred Securities, except that if a Debenture Event of Default
has occurred and is continuing as a result of any failure by the Company to pay
any amounts in respect of the Junior Subordinated Debentures when due, the
Preferred Securities shall have a priority over the Common Securities. See
"--Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior Subordinated
Debentures (i) the Preferred Securities will no longer be deemed to be
outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to Preferred Securities held by DTC or its nominee and
(iii) any certificates representing the Preferred Securities not held by DTC or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the stated Liquidation Amount of the
Preferred Securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on the Preferred Securities until
such certificates are presented to the security registrar for the Trust
Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior to
maturity and the Issuer Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Preferred Securities, the
Preferred Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution to
the holders of the Preferred Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Issuer Trust, may trade at a discount to the
price that the investor paid to purchase the Preferred Securities offered
hereby.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether it is voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures--Debenture Events of Default"); or
(ii) default by the Issuer Trust in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period of
30 days; or
(iii) default by the Issuer Trust in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trust in the Trust Agreement (other
than a covenant or warranty a default in the
57
<PAGE>
performance of which or the breach of which is dealt with in clause (ii) or
(iii) above), and continuation of such default or breach for a period of 60
days after there has been given, by registered or certified mail, to the
Issuer Trustees and the Company by the holders of at least 25% in aggregate
Liquidation Amount of the outstanding Preferred Securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the Trust Agreement;
or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee or all or substantially all of its property
if a successor Property Trustee has not been appointed within 90 days
thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing as a result
of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities will have a
preference over the Common Securities with respect to payments of any amounts in
respect of the Preferred Securities as described above. See "--Subordination of
Common Securities," "--Liquidation Distribution Upon Dissolution" and
"Description of Junior Subordinated Debentures-- Debenture Events of Default."
REMOVAL OF ISSUER TRUSTEES; APPOINTMENT OF SUCCESSORS
The holders of at least a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities may remove an Issuer Trustee for cause or, if a
Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Preferred Securities, the successor may be appointed by the holders of at least
25% in Liquidation Amount of Preferred Securities. If an Issuer Trustee resigns,
such Trustee will appoint its successor. If an Issuer Trustee fails to appoint a
successor, the holders of at least 25% in Liquidation Amount of the outstanding
Preferred Securities may appoint a successor. If a successor has not been
appointed by the holders, any holder of Preferred Securities or Common
Securities or the other Issuer Trustee may petition a court in the State of
Delaware to appoint a successor. Any Delaware Trustee must meet the applicable
requirements of Delaware law. Any Property Trustee must be a national or
state-chartered bank, and at the time of appointment have securities rated in
one of the three highest rating categories by a nationally recognized
statistical rating organization and have capital and surplus of at least
$50,000,000. No resignation or removal of an Issuer Trustee and no appointment
of a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any entity into which the Property Trustee or the Delaware Trustee may be
merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
58
<PAGE>
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE ISSUER TRUST
The Issuer Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the request
of the holders of the Common Securities and with the consent of the holders of
at least a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any State, so long as (i) such
successor entity either (a) expressly assumes all the obligations of the Issuer
Trust with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities have the same priority as the Preferred Securities with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) a
trustee of such successor entity, possessing the same powers and duties as the
Property Trustee, is appointed to hold the Junior Subordinated Debentures, (iii)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, if then rated, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, (v) such successor entity has
a purpose substantially identical to that of the Issuer Trust, (vi) prior to
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, the Issuer Trust has received an opinion from independent counsel
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Issuer Trust nor such successor entity will be
required to register as an investment company under the Investment Company Act,
and (vii) the Company or any permitted successor or assignee owns all the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Issuer Trust may not,
except with the consent of holders of 100% in aggregate Liquidation Amount of
the Preferred Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Issuer Trust or the successor entity to be taxable as a corporation for United
States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "--Removal of Issuer Trustees;
Appointment of Successors" and "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority of the Common Securities and the Property Trustee, without the consent
of the holders of the Preferred Securities, (i) to cure any ambiguity, correct
or supplement any provisions in the Trust Agreement that may be inconsistent
with any other provision, or to make any other provisions with respect to
matters or questions arising under the Trust Agreement, provided that any such
amendment does not adversely affect in any material respect the interests of any
holder of Trust Securities, or (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as may be necessary to ensure
that the Issuer Trust will not be taxable as a corporation for United States
federal income tax purposes at any time that any Trust Securities are
outstanding or to ensure that the Issuer Trust will not be required to register
as an "investment company" under the Investment Company Act, and any amendments
of the Trust Agreement will become
59
<PAGE>
effective when notice of such amendment is given to the holders of Trust
Securities. The Trust Agreement may be amended by the holders of a majority of
the Common Securities and the Property Trustee with (i) the consent of holders
representing not less than a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities and (ii) receipt by the Issuer Trustees of an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Issuer Trustees in accordance with such amendment will not
affect the Issuer Trust's not being taxable as a corporation for United States
federal income tax purposes or the Issuer Trust's exemption from status as an
"investment company" under the Investment Company Act, except that, without the
consent of each holder of Trust Securities affected thereby, the Trust Agreement
may not be amended to (i) change the amount or timing of any Distribution on the
Trust Securities or otherwise adversely affect the amount of any Distribution
required to be made in respect of the Trust Securities as of a specified date or
(ii) restrict the right of a holder of Trust Securities to institute suit for
the enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Issuer Trust,
the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to the
Junior Subordinated Debentures, (ii) waive any past default that is waivable
under Section 5.13 of the Junior Subordinated Indenture, (iii) exercise any
right to rescind or annul a declaration that the Junior Subordinated Debentures
shall be due and payable or (iv) consent to any amendment, modification or
termination of the Junior Subordinated Indenture or the Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of at least a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities, except that, if a
consent under the Junior Subordinated Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
will be given by the Property Trustee without the prior consent of each such
holder of the Preferred Securities. The Property Trustee may not revoke any
action previously authorized or approved by a vote of the holders of the
Preferred Securities except by subsequent vote of the holders of the Preferred
Securities. The Property Trustee will notify each holder of Preferred Securities
of any notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of the holders of the Preferred
Securities, before taking any of the foregoing actions, the Property Trustee
will obtain an opinion of counsel experienced in such matters to the effect that
the Issuer Trust will not be taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each registered holder of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
to redeem and cancel Preferred Securities in accordance with the Trust
Agreement.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned by the Company, the Issuer Trustees or any affiliate
of the Company or any Issuer Trustees, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
EXPENSES AND TAXES
In the Junior Subordinated Indenture, the Company, as borrower, has agreed
to pay all debts and other obligations (other than with respect to the Preferred
Securities) and all costs and expenses of the Issuer Trust (including costs and
expenses relating to the organization of the Issuer Trust, the fees and expenses
of the Trustees and the costs and expenses relating to the operation of the
Issuer Trust) and to pay any and all taxes and all costs and expenses with
respect thereto (other than United States withholding
60
<PAGE>
taxes) to which the Issuer Trust might become subject. The foregoing obligations
of the Company under the Junior Subordinated Indenture are for the benefit of,
and shall be enforceable by, any person to whom any such debts, obligations,
costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor
has received notice thereof. Any such Creditor may enforce such obligations of
the Company directly against the Company, and the Company has irrevocably waived
any right or remedy to require that any such Creditor take any action against
the Issuer Trust or any other person before proceeding against the Company. The
Company has also agreed in the Indenture to execute such additional agreements
as may be necessary or desirable to give full effect to the foregoing.
BOOK ENTRY, DELIVERY AND FORM
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is exchangeable
in whole or in part for the Preferred Securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of such Depository or a nominee of such successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. The Company expects that, upon the
issuance of a global security, DTC will credit, on its book-entry registration
and transfer system, the Participants' accounts with their respective interests
in the Preferred Securities represented by such global security. Ownership of
beneficial interests in such global security will be shown on, and the transfer
of such ownership interests will be effected only through, records maintained by
DTC (with respect to interests of Participants) and on the records of
Participants (with respect to interests of Persons held through Participants).
Beneficial owners will not receive written confirmation from DTC of their
purchase, but are expected to receive written confirmations from the
Participants through which the beneficial owner entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books of
Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Junior Subordinated Indenture. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners or holders thereof under the Junior
Subordinated Indenture. Accordingly, each person owning a beneficial interest in
such a global security must rely on the procedures of DTC and, if such person is
not a Participant, on the procedures of the Participant through which such
person owns its interest, to exercise any rights of a holder of Preferred
Securities under the Junior Subordinated Indenture. The Company understands
that, under DTC's existing practices, in the event that the Company requests any
action of holders, or an owner of a beneficial interest in such a global
security desires to take any action which a holder is entitled to take under the
Junior Subordinated Indenture, DTC would authorize the Participants holding the
relevant beneficial interests to take such action, and such Participants would
authorize beneficial owners owning through such Participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the Company understands that it is
DTC's existing practice to determine by lot the amount of the interest of each
Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Trustees, the Administrators, any Paying Agent or any
other agent of the Company or the Trustees will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the global security for
61
<PAGE>
such Preferred Securities or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. Disbursements of
Distributions to Participants shall be the responsibility of DTC. DTC's practice
is to credit Participants' accounts on a date on which payments are to be made
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payment on the date on which
payments are to be made. Payments by Participants to beneficial owners will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such Participant and not of
DTC, the Company, the Trustees, the Paying Agent or any other agent of the
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Trustees. If DTC notifies the Company that it is unwilling to
continue as such, or if it is unable to continue or ceases to be a clearing
agency registered under the Exchange Act and a successor depository is not
appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriters), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
SAME DAY SETTLEMENT AND PAYMENT
Settlement for the Preferred Securities will be made by the Underwriters in
immediately available funds.
Secondary trading in Preferred Securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Preferred Securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto as such address
appears on the securities register for the Trust Securities. The paying agent
(the "Paying Agent") initially will be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrators. The
Paying Agent will be permitted to resign as Paying Agent upon 30 days' written
notice
62
<PAGE>
to the Property Trustee and the Administrators. If the Property Trustee is no
longer the Paying Agent, the Property Trustee will appoint a successor (which
must be a bank or trust company reasonably acceptable to the Administrators) to
act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Issuer Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Issuer Trust will not be required to register or cause to be
registered the transfer of the Preferred Securities after the Preferred
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of an
Event of Default, undertakes to perform only such duties as are specifically set
forth in the Trust Agreement and, after such Event of Default, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Trust Agreement at the request of any holder of Preferred Securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
For information concerning the relationships between Wilmington Trust
Company, the Property Trustee, and the Company, see "Description of Junior
Subordinated Debentures--Information Concerning the Debenture Trustee."
MISCELLANEOUS
The Administrators and the Property Trustee are authorized and directed to
conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable as a corporation for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Issuer Trust or the Trust
Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect the interests of the
holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
The Issuer Trust may not borrow money or issue debt or mortgage or pledge
any of its assets.
GOVERNING LAW
The Trust Agreement will be governed by and construed in accordance with the
laws of the State of Delaware.
CERTAIN DEFINED TERMS
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions then due and payable by the Issuer Trust on the
outstanding Preferred Securities and Common Securities of the Issuer Trust will
not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result of
a Tax Event.
63
<PAGE>
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day on
which banking institutions in the State of Delaware or the State of Maryland are
authorized or required by law or executive order to remain closed, or (c) a day
on which the Property Trustee's Corporate Trust Office, the Delaware Trustee's
Corporate Trust Office or the Debenture Trustee's Corporate Trust Office is
closed for business.
"Capital Treatment Event" means the reasonable determination by the Company
that, as a result of the occurrence of any amendment to, or change (including
any announced prospective change) in, the laws (or any rules or regulations
thereunder) of the United States or any political subdivision thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or such pronouncement, action or decision
is announced on or after the date of issuance of the Preferred Securities, there
is more than an insubstantial risk that the Company will not be entitled to
treat an amount equal to the Liquidation Amount of the Preferred Securities as
"Tier 1 Capital" (or the then equivalent thereof), except as otherwise
restricted under the 25% Capital Limitation, for purposes of the risk-based
capital adequacy guidelines of the Federal Reserve, as then in effect and
applicable to the Company.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act, which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Preferred Securities.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Junior Subordinated Indenture,
allocated to the Common Securities and to the Preferred Securities based upon
the relative Liquidation Amounts of such classes and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Issuer Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of counsel
to the Company experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion, will not be, deductible by the Company, in
whole or in part, for United States federal income tax purposes or (iii) the
Issuer Trust is, or will be within 90 days of the delivery of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
If a Tax Event described in clause (i) or (iii) of the definition of Tax
Event above has occurred and is continuing and the Issuer Trust is the holder of
all the Junior Subordinated Debentures, the Company will pay Additional Sums (as
defined below), if any, on the Junior Subordinated Debentures.
64
<PAGE>
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Wilmington Trust Company is acting as
Debenture Trustee. This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Junior Subordinated Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Junior Subordinated Indenture, including the
definitions therein of certain terms. Whenever particular defined terms of the
Junior Subordinated Indenture (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of Junior Subordinated Indenture is available from the
Debenture Trustee upon request.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Issuer Trust
will invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in the Junior Subordinated Debentures issued
by the Company. The Junior Subordinated Debentures will bear interest, accruing
from the date of original issuance, at a rate equal to 8.3% per annum on the
principal amount thereof, payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (each, an "Interest Payment Date"),
commencing September 30, 1998, to the person in whose name each Junior
Subordinated Debenture is registered at the close of business on the March 15,
June 15, September 15 or December 15 (whether or not a Business Day) next
preceding such Interest Payment Date. It is anticipated that, until the
liquidation, if any, of the Issuer Trust, each Junior Subordinated Debenture
will be registered in the name of the Issuer Trust and held by the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
amount of interest payable for any period less than a full interest period will
be computed on the basis of a 360-day year of twelve 30-day months and the
actual days elapsed in a partial month in such period. The amount of interest
payable for any full interest period will be computed by dividing the rate per
annum by four. If any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (without any interest or other payment in respect of any such delay), with
the same force and effect as if made on the date such payment was originally
payable. Accrued interest that is not paid on the applicable Interest Payment
Date will bear additional interest on the amount thereof (to the extent
permitted by law) at a rate equal to 8.3% per annum, compounded quarterly and
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. The amount of additional
interest payable for any full interest period will be computed by dividing the
rate per annum by four. The term "interest" as used herein includes quarterly
interest payments, interest on quarterly interest payments not paid on the
applicable Interest Payment Date and Additional Sums (as defined below), as
applicable.
The Junior Subordinated Debentures will mature on June 30, 2028, subject to
the Maturity Adjustment (such date, as it may be shortened by the Maturity
Adjustment is referred to herein as the Stated Maturity). The Maturity
Adjustment represents the right of the Company to shorten the maturity date once
at any time to any date not earlier than June 30, 2003, subject to the Company
having received prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. In the event
the Company elects to shorten the Stated Maturity of the Junior Subordinated
Debentures, it will give notice to the registered holders of the Junior
Subordinated Debentures, the Debenture Trustee and the Issuer Trust of such
shortening no less than 90 days prior to the effectiveness thereof. The Property
Trustee must give notice to the holders of the Trust Securities of the
shortening of the Stated Maturity at least 30 but not more than 60 days before
such date.
The Junior Subordinated Debentures will be unsecured and rank junior and
subordinate in right of payment to all Senior Indebtedness of the Company. The
Junior Subordinated Debentures will not be subject to a sinking fund and are not
eligible as collateral for any loan made by the Bank. The Junior Subordinated
Indenture does not limit the incurrence or issuance of other secured or
unsecured debt by
65
<PAGE>
the Company, including Senior Indebtedness, whether under the Junior
Subordinated Indenture or any existing or other indenture or agreement that the
Company may enter into in the future or otherwise. See "--Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing, the
Company has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. At the end of such Extension
Period, the Company must pay all interest then accrued and unpaid (together with
interest thereon at a rate equal to 8.3% per annum, compounded quarterly and
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period, to the extent permitted by
applicable law). The amount of additional interest payable for any full interest
period will be computed by dividing the rate per annum by four. During an
Extension Period, interest will continue to accrue and holders of Junior
Subordinated Debentures (or holders of Preferred Securities while outstanding)
will be required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences--US Holders--Interest
Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank PARI PASSU in
all respects with or junior in interest to the Junior Subordinated Debentures,
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged, (d) any declaration of a dividend in
connection with any stockholder's rights plan, or the issuance of rights, stock
or other property under any stockholders rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of stock,
warrants, options or other rights where the dividend stock or the stock issuable
upon exercise of such warrants, options or other rights is the same stock as
that on which the dividend is being paid or ranks PARI PASSU with or junior to
such stock). Prior to the termination of any such Extension Period, the Company
may further defer the payment of interest, provided that no Extension Period may
exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of
the Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period subject to the above conditions. No interest shall be due
and payable during an Extension Period, except at the end thereof. The Company
must give the Issuer Trustees notice of its election of such Extension Period at
least one Business Day prior to the earlier of (i) the date the Distributions on
the Preferred Securities would have been payable but for the election to begin
such Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Preferred Securities of the record date or the date
such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
Company's election to begin a new
66
<PAGE>
Extension Period to the holders of the Preferred Securities. There is no
limitation on the number of times that the Company may elect to begin an
Extension Period.
REDEMPTION
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after June 30, 2003, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time within 90
days following the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined under
"Description of Preferred Securities--Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Issuer Trust to redeem the Preferred Securities.
The Federal Reserve's risk-based capital guidelines, which are subject to
change, currently provide that redemptions of permanent equity or other capital
instruments before stated maturity and that any organization considering such a
redemption, depending on the circumstances, either: (i) must obtain Federal
Reserve approval prior to redemption, or (ii) should consult with the Federal
Reserve before redeeming any equity or capital instrument prior to maturity if
such redemption could have a material effect on the level or composition of the
organization's capital base (unless the equity or capital instrument were
redeemed with the proceeds of, or replaced by, a like amount of a similar or
higher quality capital instrument and the Federal Reserve considers the
organization's capital position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debentures by the Company prior to
their Stated Maturity would constitute the redemption of capital instruments
under the Federal Reserve's current risk-based capital guidelines and may be
subject, as it currently is, to the prior approval of the Federal Reserve.
The redemption price for Junior Subordinated Debentures is the outstanding
principal amount of the Junior Subordinated Debentures plus accrued interest
(including any Additional Sums) thereon to but excluding the date fixed for
redemption.
ADDITIONAL SUMS
The Company has covenanted in the Junior Subordinated Indenture that, if and
for so long as (i) the Issuer Trust is the holder of all Junior Subordinated
Debentures and (ii) the Issuer Trust is required to pay any additional taxes,
duties or other governmental charges as a result of a Tax Event, the Company
will pay as additional sums on the Junior Subordinated Debentures such amounts
as may be required so that the Distributions payable by the Issuer Trust will
not be reduced as a result of any such additional taxes, duties or other
governmental charges. See "Description of Preferred Securities--Redemption."
REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the name
of the Issuer Trust. If the Junior Subordinated Debentures are distributed to
holders of Preferred Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities--Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global security
will be made to Cede & Co., the nominee for DTC, as the registered holder of the
Junior Subordinated Debentures, as
67
<PAGE>
described under "Description of the Preferred Securities--Book Entry, Delivery
and Form." If Junior Subordinated Debentures are issued in certificated form,
principal and interest will be payable, the transfer of the Junior Subordinated
Debentures will be registrable, and Junior Subordinated Debentures will be
exchangeable for Junior Subordinated Debentures of other authorized
denominations of a like aggregate principal amount, at the corporate trust
office of the Debenture Trustee in Wilmington, Delaware or at the offices of any
Paying Agent or transfer agent appointed by the Company, provided that payment
of interest may be made at the option of the Company by check mailed to the
address of the persons entitled thereto. However, a holder of $1 million or more
in aggregate principal amount of Junior Subordinated Debentures may receive
payments of interest (other than interest payable at the Stated Maturity) by
wire transfer of immediately available funds upon written request to the
Debenture Trustee not later than 15 calendar days prior to the date on which the
interest is payable.
The Junior Subordinated Debentures are issuable only in registered form
without coupons in integral multiples of $25. Junior Subordinated Debentures are
exchangeable for other Junior Subordinated Debentures of like tenor, of any
authorized denominations, and of a like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Debenture or at the office of any transfer agent designated
by the Company for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. The Company has appointed the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. The Company may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or then
held by the Company in trust, for the payment of the principal of (and premium,
if any) or interest on any Junior Subordinated Debenture and remaining unclaimed
for two years after such principal (and premium, if any) or interest has become
due and payable shall, at the request of the Company, be repaid to the Company
and the holder of such Junior Subordinated Debenture shall thereafter look, as a
general unsecured creditor, only to the Company for payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS; CERTAIN COVENANTS OF THE COMPANY
The Company has covenanted that it will not (i) declare or pay any dividends
or distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal of or interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Company that rank pari passu in all respects with or
junior in interest to the Junior Subordinated Debentures, (other than (a)
repurchases, redemptions or other acquisitions of shares of capital stock of the
Company in connection with any employment contract, benefit plan or other
similar arrangement with or for the benefit of any one or more employees,
officers, directors or consultants, in connection with a dividend reinvestment
or stockholder stock purchase plan or in connection with the issuance of capital
stock of the Company (or securities convertible into or exercisable for such
capital stock) as consideration in an acquisition transaction entered into prior
to the applicable Extension Period or other event referred to below, (b) as a
result of an exchange or conversion of any class or series
68
<PAGE>
of the Company's capital stock (or any capital stock of a subsidiary of the
Company) for any class or series of the Company's capital stock or of any class
or series of the Company's indebtedness for any class or series of the Company's
capital stock, (c) the purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks PARI PASSU with or junior to such stock), if at such time (i) there has
occurred any event (a) of which the Company has actual knowledge that with the
giving of notice or the lapse of time, or both, would constitute a Debenture
Event of Default and (b) that the Company has not taken reasonable steps to
cure, (ii) if the Junior Subordinated Debentures are held by the Issuer Trust,
the Company is in default with respect to its payment of any obligations under
the Guarantee or (iii) the Company has given notice of its election of an
Extension Period as provided in the Junior Subordinated Indenture and has not
rescinded such notice, or such Extension Period, or any extension thereof, is
continuing.
The Company has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to the Company's ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, windup or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Preferred Securities in liquidation of the Issuer Trust or (b) in connection
with certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Issuer Trust to continue not to
be taxable as a corporation for United States federal income tax purposes.
MODIFICATION OF JUNIOR SUBORDINATED INDENTURE
From time to time, the Company and the Debenture Trustee may, without the
consent of any of the holders of the outstanding Junior Subordinated Debentures,
amend, waive or supplement the provisions of the Junior Subordinated Indenture
to: (1) evidence succession of another corporation or association to the Company
and the assumption by such person of the obligations of the Company under the
Junior Subordinated Debentures, (2) add further covenants, restrictions or
conditions for the protection of holders of the Junior Subordinated Debentures,
(3) cure ambiguities or correct the Junior Subordinated Debentures in the case
of defects or inconsistencies in the provisions thereof, so long as any such
cure or correction does not adversely affect the interest of the holders of the
Junior Subordinated Debentures in any material respect, (4) change the terms of
the Junior Subordinated Debentures to facilitate the issuance of the Junior
Subordinated Debentures in certificated or other definitive form, (5) evidence
or provide for the appointment of a successor Debenture Trustee, or (6) qualify,
or maintain the qualification of, the Junior Subordinated Indentures under the
Trust Indenture Act. The Junior Subordinated Indenture contains provisions
permitting the Company and the Debenture Trustee, with the consent of the
holders of not less than a majority in principal amount of the Junior
Subordinated Debentures, to modify the Junior Subordinated Indenture in a manner
affecting the rights of the holders of the Junior Subordinated Debentures,
except that no such modification may, without the consent of the holder of each
outstanding Junior Subordinated Debenture so affected, (i) change the Stated
Maturity of the Junior Subordinated Debentures, or reduce the principal amount
thereof, the rate of interest thereon or any premium payable upon the redemption
thereof, or change the place of payment where, or the currency in which, any
such amount is payable or impair the right to institute suit for the enforcement
of any Junior Subordinated Debenture or (ii) reduce the percentage of principal
amount of Junior Subordinated Debentures, the holders of which are required to
consent to any such modification of the Junior Subordinated Indenture.
Furthermore, so long as any of the Preferred Securities remain outstanding, no
such modification may be
69
<PAGE>
made that adversely affects the holders of such Preferred Securities in any
material respect, and no termination of the Junior Subordinated Indenture may
occur, and no waiver of any Debenture Event of Default or compliance with any
covenant under the Junior Subordinated Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities unless and until the principal of
(and premium, if any, on) the Junior Subordinated Debentures and all accrued and
unpaid interest thereon have been paid in full and certain other conditions are
satisfied.
DEBENTURE EVENTS OF DEFAULT
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated Debentures
when due and payable, and continuance of such default for a period of 30
days (subject to the deferral of any due date in the case of an Extension
Period); or
(ii) failure to pay any principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration of acceleration or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Junior Subordinated Indenture for 90 days after
written notice to the Company from the Debenture Trustee or the holders of
at least 25% in aggregate outstanding principal amount of the outstanding
Junior Subordinated Debentures; or
(iv) the occurrence of the appointment of a receiver or other similar
official in any liquidation, insolvency or similar proceeding with respect
to the Company or all or substantially all of its property; or a court or
other governmental agency shall enter a decree or order appointing a
receiver or similar official and such decree or order shall remain unstayed
and undischarged for a period of 60 days.
For purposes of the Trust Agreement and this Prospectus, each such Event of
Default under the Junior Subordinated Debenture is referred to as a "Debenture
Event of Default." As described in "Description of Preferred Securities--Events
of Default; Notice," the occurrence of a Debenture Event of Default will also
constitute an Event of Default in respect of the Trust Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Preferred Securities
shall have such right. The holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may annul such declaration and
waive the default if all defaults (other than the non-payment of the principal
of Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Preferred Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and
70
<PAGE>
principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Junior Subordinated Indenture cannot be modified or amended without
the consent of the holder of each outstanding Junior Subordinated Debenture
affected thereby. See "--Modification of Junior Subordinated Indenture." The
Company is required to file annually with the Debenture Trustee a certificate as
to whether or not the Company is in compliance with all the conditions and
covenants applicable to it under the Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Preferred Securities may institute a
legal proceeding directly against the Company for enforcement of payment to such
holder of an amount equal to the amount payable in respect of Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities held by such holder (a "Direct
Action"). The Company may not amend the Junior Subordinated Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all the Preferred Securities. The Company has the right under
the Junior Subordinated Indenture to set-off any payment made to such holder of
Preferred Securities by the Company in connection with a Direct Action.
The holders of the Preferred Securities would not be able to exercise
directly any remedies available to the holders of the Junior Subordinated
Debentures except under the circumstances described in the preceding paragraph.
See "Description of Preferred Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no Person
may consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i) if
the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets substantially as an entirety to any Person,
the successor Person is organized under the laws of the United States or any
state or the District of Columbia, and such successor Person expressly assumes
the Company's obligations in respect of the Junior Subordinated Debentures,
provided, however, that nothing in the Junior Subordinated Indenture shall be
deemed to restrict or prohibit, and no supplemental indenture shall be required
in the case of, the merger of a Principal Subsidiary Bank with and into a
Principal Subsidiary Bank or the Company, the consolidation of Principal
Subsidiary Banks into a Principal Subsidiary Bank or the Company, or the sale or
other disposition of all or substantially all of the assets of any Principal
Subsidiary Bank to another Principal Subsidiary Bank or the Company, if, in any
such case in which the surviving, resulting or acquiring entity is not the
Company, the Company would own, directly or indirectly, at least 80% of the
voting securities of the Principal Subsidiary Bank (and of any other Principal
Subsidiary Bank any voting securities of which are owned, directly or
indirectly, by such Principal Subsidiary Bank) surviving such merger, resulting
from such consolidation or acquiring such assets; (ii) immediately after giving
effect thereto, no Debenture Event of Default, and no event which, after notice
or lapse of time or both, would constitute a Debenture Event of Default, has
occurred and is continuing; and (iii) certain other conditions as prescribed in
the Junior Subordinated Indenture are satisfied.
71
<PAGE>
For purposes of clause (i) above, the term "Principal Subsidiary Bank" means
(i) the Bank, (ii) any other banking subsidiary of the Company, the consolidated
assets of which constitute 20% or more of the consolidated assets of the Company
and its consolidated subsidiaries, (iii) any other banking subsidiary designated
as a Principal Subsidiary Bank pursuant to a resolution of the Board of
Directors of the Company and set forth in an officers' certificate delivered to
the Debenture Trustee, and (iv) any subsidiary of the Company that owns,
directly or indirectly, any voting securities, or options, warrants or rights to
subscribe for or purchase voting securities, of any Principal Subsidiary Bank
under clause (i), (ii) or (iii), and in the case of clause (i), (ii), (iii) or
(iv) their respective successors (whether by consolidation, merger, conversion,
transfer of substantially all their assets and business or otherwise) so long as
any such successor is a banking subsidiary (in the case of clause (i), (ii) or
(iii) or a subsidiary (in the case of clause (iv)) of the Company.
The provisions of the Junior Subordinated Indenture do not afford holders of
the Junior Subordinated Debentures protection in the event of a highly leveraged
or other transaction involving the Company that may adversely affect holders of
the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Junior Subordinated Indenture provides that when, among other things,
all Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation (i) have become due and payable or (ii) will become due
and payable at the Stated Maturity within one year, and the Company deposits or
causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal (and premium, if any) and interest
to the date of the deposit or to the Stated Maturity, as the case may be, then
the Junior Subordinated Indenture will cease to be of further effect (except as
to the Company's obligations to pay all other sums due pursuant to the Junior
Subordinated Indenture and to provide the officers' certificates and opinions of
counsel described therein), and the Company will be deemed to have satisfied and
discharged the Junior Subordinated Indenture.
SUBORDINATION
The Junior Subordinated Debentures will be subordinate and junior in right
of payment, to the extent set forth in the Junior Subordinated Indenture, to all
Senior Indebtedness (as defined below) of the Company. If the Company defaults
in the payment of any principal, premium, if any, or interest, if any, or any
other amount payable on any Senior Indebtedness when the same becomes due and
payable, whether at maturity or at a date fixed for redemption or by declaration
of acceleration or otherwise, then, unless and until such default has been cured
or waived or has ceased to exist or all Senior Indebtedness has been paid, no
direct or indirect payment (in cash, property, securities, by set off or
otherwise) may be made or agreed to be made on the Junior Subordinated
Debentures, or in respect of any redemption, repayment, retirement, purchase or
other acquisition of any of the Junior Subordinated Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all or a
portion of the assets of the Company and whether or not contingent, (i) every
obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the
72
<PAGE>
type referred to in clauses (i) through (vi) of another person and all dividends
of another person the payment of which, in either case, the Company has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise. "Senior Indebtedness" shall not include (i) any obligations which, by
their terms, are expressly stated to rank PARI PASSU in right of payment with,
or to not be superior in right of payment to, the Junior Subordinated
Debentures, (ii) any Senior Indebtedness of the Company which when incurred and
without respect to any election under Section 1111(b) of the United States
Bankruptcy Code of 1978, as amended, was without recourse to the Company, (iii)
any Senior Indebtedness of the Company to any of its subsidiaries, (iv) Senior
Indebtedness to any executive officer or director of the Company, or (v) any
indebtedness in respect of debt securities issued to any trust, or a trustee of
such trust, partnership or other entity affiliated with the Company that is a
financing entity of the Company in connection with the issuance of such
financing entity of securities that are similar to the Preferred Securities.
In the event of (i) certain events of bankruptcy, dissolution or liquidation
of the Company or the holder of the Common Securities, (ii) any proceeding for
the liquidation, dissolution or other winding up of the Company, voluntary or
involuntary, whether or not involving insolvency or bankruptcy proceedings,
(iii) any assignment by the Company for the benefit of creditors or (iv) any
other marshaling of the assets of the Company, all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) shall first be paid in full before any payment or distribution,
whether in cash, securities or other property, shall be made on account of the
Junior Subordinated Debentures. In such event, any payment or distribution on
account of the Junior Subordinated Debentures, whether in cash, securities or
other property, that would otherwise (but for the subordination provisions) be
payable or deliverable in respect of the Junior Subordinated Debentures will be
paid or delivered directly to the holders of Senior Indebtedness in accordance
with the priorities then existing among such holders until all Senior
Indebtedness (including any interest thereon accruing after the commencement of
any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums owing
with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be paid
from the remaining assets of the Company the amounts at the time due and owing
on the Junior Subordinated Debentures and such other obligations before any
payment or other distribution, whether in cash, property or otherwise, will be
made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention of
any of the terms hereof and before all the Senior Indebtedness has been paid in
full, such payment or distribution or security will be received in trust for the
benefit of, and must be paid over or delivered and transferred to, the holders
of the Senior Indebtedness at the time outstanding in accordance with the
priorities then existing among such holders for application to the payment of
all Senior Indebtedness remaining unpaid to the extent necessary to pay all such
Senior Indebtedness in full. By reason of such subordination, in the event of
the insolvency of the Company, holders of Senior Indebtedness may receive more,
ratably, and holders of the Junior Subordinated Debentures may receive less,
ratably, than the other creditors of the Company. Such subordination will not
prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
73
<PAGE>
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee, other than during the occurrence and continuance of a
default by the Company in performance of its obligations under the Junior
Subordinated Debenture, undertakes to perform only such duties as are
specifically set forth in the Junior Subordinated Debenture and, after such
event of default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Debenture Trustee is under no obligation to exercise any
of the powers vested in it by the Junior Subordinated Indenture at the request
of any holder of Junior Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities that might
be incurred thereby. The Debenture Trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties if the Debenture Trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it.
The Debenture Trustee may serve from time to time as trustee under other
indentures or trust agreements with the Company or its subsidiaries relating to
other issues of their securities. In addition, the Company and certain of its
affiliates may have other banking relationships with Wilmington Trust Company
and its affiliates.
GOVERNING LAW
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
Maryland.
74
<PAGE>
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance of Preferred Securities by the Issuer Trust for the benefit of
the holders from time to time of the Preferred Securities. Wilmington Trust
Company will act as Guarantee Trustee under the Guarantee. This summary of
certain provisions of the Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions of
the Guarantee, including the definitions therein of certain terms. A copy of the
form of Guarantee is available upon request from the Guarantee Trustee. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Preferred Securities, as and when due, regardless of any defense,
right of set-off or counterclaim that the Issuer Trust may have or assert other
than the defense of payment. The following payments with respect to the
Preferred Securities, to the extent not paid by or on behalf of the Issuer Trust
(the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on such Preferred
Securities, to the extent that the Issuer Trust has funds on hand available
therefor at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption, to the extent that the Issuer Trust has funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution of the Issuer Trust (unless the Junior Subordinated
Debentures are distributed to holders of the Preferred Securities), the lesser
of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid
Distributions to the date of payment, to the extent that the Issuer Trust has
funds on hand available therefor at such time, and (b) the amount of assets of
the Issuer Trust remaining available for distribution to holders of the
Preferred Securities on liquidation of the Issuer Trust. The Company's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Company to the holders of the Preferred Securities or by
causing the Issuer Trust to pay such amounts to such holders.
The Guarantee is an irrevocable guarantee on a subordinated basis of the
Issuer Trust's obligations under the Preferred Securities, but applies only to
the extent that the Issuer Trust has funds sufficient to make such payments, and
is not a guarantee of collection.
If the Company does not make payments on the Junior Subordinated Debentures
held by the Issuer Trust, the Issuer Trust will not be able to pay any amounts
payable in respect of the Preferred Securities and will not have funds legally
available therefor. The Guarantee ranks subordinate and junior in right of
payment to all Senior Indebtedness of the Company. See "--Status of the
Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that the Company
may enter into in the future or otherwise.
The Company believes that it has, through the Guarantee, the Trust
Agreement, the Junior Subordinated Debentures and the Junior Subordinated
Indenture, taken together, fully, irrevocably and unconditionally guaranteed all
the Issuer Trust's obligations under the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Guarantee."
75
<PAGE>
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Preferred Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. The manner of obtaining any such approval will
be as set forth under "Description of the Preferred Securities--Voting Rights;
Amendment of Trust Agreement." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee.
Any registered holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer Trust,
the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after the
occurrence of an event of default with respect to the Guarantee, must exercise
the same degree of care and skill as a prudent person would exercise or use in
the conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of the Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
For information concerning the relationship between Wilmington Trust
Company, the Guarantee Trustee, and the Company, see "Description of Junior
Subordinated Debentures--Information Concerning the Debenture Trustee."
76
<PAGE>
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Preferred Securities, upon full payment
of the amounts payable with respect to the Preferred Securities upon liquidation
of the Issuer Trust or upon distribution of Junior Subordinated Debentures to
the holders of the Preferred Securities. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under the
Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Maryland.
77
<PAGE>
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Issuer Trust has funds available for such payment) are
irrevocably guaranteed by the Company as and to the extent set forth under
"Description of Guarantee." Taken together, the Company's obligations under the
Junior Subordinated Debentures, the Junior Subordinated Indenture, the Trust
Agreement and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of Distributions and other amounts due on
the Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all the other documents constitutes such guarantee.
It is only the combined operation of these documents that has the effect of
providing a full, irrevocable and unconditional guarantee of the Issuer Trust's
obligations in respect of the Preferred Securities. If and to the extent that
the Company does not make payments on the Junior Subordinated Debentures, the
Issuer Trust will not have sufficient funds to pay Distributions or other
amounts due on the Preferred Securities. The Guarantee does not cover payment of
amounts payable with respect to the Preferred Securities when the Issuer Trust
does not have sufficient funds to pay such amounts. In such event, the remedy of
a holder of the Preferred Securities is to institute a legal proceeding directly
against the Company for enforcement of payment of the Company's obligations
under Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Preferred Securities held by such holder.
The obligations of the Company under the Junior Subordinated Debentures and
the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the Junior Subordinated Debentures,
such payments will be sufficient to cover Distributions and other payments
distributable on the Preferred Securities, primarily because (i) the aggregate
principal amount of the Junior Subordinated Debentures will be equal to the sum
of the aggregate stated Liquidation Amount of the Preferred Securities and
Common Securities; (ii) the interest rate and interest and other payment dates
on the Junior Subordinated Debentures will match the Distribution rate,
Distribution Dates and other payment dates for the Preferred Securities; (iii)
the Company will pay for all and any costs, expenses and liabilities of the
Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited purposes
of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Issuer Trust
or any other person or entity. See "Description of Guarantee."
A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default in respect of the Preferred
Securities. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness of the Company, the subordination provisions of the Junior
Subordinated Indenture provide that no payments may be made in respect of the
Junior Subordinated Debentures until such Senior Indebtedness has been paid in
full or any payment default
78
<PAGE>
thereunder has been cured or waived. See "Description of Junior Subordinated
Debentures-- Subordination."
LIMITED PURPOSE OF ISSUER TRUST
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Issuer Trust, and the Issuer Trust exists for the sole
purpose of issuing its Preferred Securities and Common Securities and investing
the proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Preferred Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Company payments on Junior Subordinated Debentures
held, while a holder of Preferred Securities is entitled to receive
Distributions or other amounts distributable with respect to the Preferred
Securities from the Issuer Trust (or from the Company under the Guarantee) only
if and to the extent the Issuer Trust has funds available for the payment of
such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Preferred Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of Preferred Securities--Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Issuer Trust, as registered holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture to pay for all costs, expenses and liabilities of the
Issuer Trust (other than the Issuer Trust's obligations to the holders of the
Trust Securities), the positions of a holder of the Preferred Securities and a
holder of such Junior Subordinated Debentures relative to other creditors and to
stockholders of the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Ober, Kaler, Grimes & Shriver in its capacity as special
tax counsel to the Company ("Tax Counsel"), the discussion of United States
federal income taxation which follows summarizes the expected material United
States federal income tax consequences of the purchase, ownership and
disposition of the Preferred Securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Tax Counsel
are not binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge.
Except as otherwise stated, this summary deals only with the Preferred
Securities held as a capital asset by a holder who or which (i) purchased the
Preferred Securities upon original issuance at their original offering price and
(ii) is a US Holder (as defined below). This summary does not address all the
79
<PAGE>
tax consequences that may be relevant to a US Holder, nor does it address the
tax consequences, except as stated below, to holders that are not US Holders
("Non-US Holders") or to holders that may be subject to special tax treatment
(such as banks, thrift institutions, real estate investment trusts, regulated
investment companies, insurance companies, brokers and dealers in securities or
currencies, other financial institutions, tax-exempt organizations, persons
holding the Preferred Securities as a position in a "straddle," as part of a
"synthetic security," "hedging," "conversion" or other integrated investment,
persons having a functional currency other than the U.S. Dollar and certain
United States expatriates). Further, this summary does not address (a) the
income tax consequences to shareholders in, or partners or beneficiaries of, a
holder of the Preferred Securities, (b) the United States federal alternative
minimum tax consequences of the purchase, ownership or disposition of the
Preferred Securities, or (c) any state, local or foreign tax consequences of the
purchase, ownership and disposition of Preferred Securities.
A "US Holder" is a holder of the Preferred Securities who or which is (i) a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for income tax purposes, (ii) a corporation or
partnership created or organized (or treated as created or organized for income
tax purposes) in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is includible in its
gross income for United States federal income tax purposes without regard to its
source, or (iv) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and (b) one or
more United States trustees have the authority to control all substantial
decisions of the trust.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE PREFERRED
SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION OF
PREFERRED SECURITIES--REDEMPTION."
US HOLDERS
CHARACTERIZATION OF THE ISSUER TRUST
In connection with the issuance of the Preferred Securities, Tax Counsel
will render its opinion generally to the effect that, under then current law and
based on the representations, facts and assumptions set forth in this
Prospectus, and assuming full compliance with the terms of the Trust Agreement
(and other relevant documents), and based on certain assumptions and
qualifications referenced in the opinion, the Issuer Trust will be characterized
for United States federal income tax purposes as a grantor trust and will not be
characterized as an association taxable as a corporation. Accordingly, for
United States federal income tax purposes, each holder of the Preferred
Securities generally will be considered the owner of an undivided interest in
the Junior Subordinated Debentures owned by the Issuer Trust, and each US Holder
will be required to include all income or gain recognized for United States
federal income tax purposes with respect to its allocable share of the Junior
Subordinated Debentures on its own income tax return.
CHARACTERIZATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company and the Issuer Trust will agree to treat the Junior Subordinated
Debentures as indebtedness for all United States federal income tax purposes. In
connection with the issuance of the Junior Subordinated Debentures, Tax Counsel
will render its opinion generally to the effect that, under then current law and
based on the representations, facts and assumptions set forth in this
Prospectus, and assuming full compliance with the terms of the Indenture (and
other relevant documents), and based on certain assumptions and qualifications
referenced in the opinion, the Junior Subordinated Debentures will be
characterized for United States federal income tax purposes as debt of the
Company.
80
<PAGE>
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under the terms of the Junior Subordinated Debentures, the Company has the
ability to defer payments of interest from time to time by extending the
interest payment period for a period not exceeding 20 consecutive quarterly
periods, but not beyond the maturity of the Junior Subordinated Debentures.
Treasury regulations under Section 1273 of the Code provide that debt
instruments like the Junior Subordinated Debentures will not be considered
issued with original issue discount ("OID") by reason of the Company's ability
to defer payments of interest if the likelihood of such deferral is "remote."
The Company has concluded, and this discussion assumes, that, as of the date
of this Prospectus the likelihood of deferring payments of interest under the
terms of the Junior Subordinated Debentures is "remote" within the meaning of
the applicable Treasury regulations, in part because exercising that option
would prevent the Company from declaring dividends on its stock and would
prevent the Company from making any payments with respect to debt securities
that rank PARI PASSU with or junior to the Junior Subordinated Debentures.
Therefore, the Junior Subordinated Debentures should not be treated as issued
with OID by reason of the Company's deferral option. Consequently, stated
interest on the Junior Subordinated Debentures will generally be taxable to a US
Holder as ordinary income when paid or accrued in accordance with that holder's
method of accounting for income tax purposes. It should be noted, however, that
it is possible that the IRS could take a position contrary to the interpretation
of the Treasury Regulations described herein in future issued rulings or other
published documents.
In the event the Company exercises its option to defer payments of interest,
the Junior Subordinated Debentures would be treated as reissued for OID purposes
and the sum of the remaining interest payments (and any DE MINIMIS OID) on the
Junior Subordinated Debentures would thereafter be treated as OID, which would
accrue, and be includible in a US Holder's taxable income, on an economic
accrual basis (regardless of the US Holder's method of accounting for income tax
purposes) over the remaining term of the Junior Subordinated Debentures
(including any period of interest deferral), without regard to the timing of
payments under the Junior Subordinated Debentures. (Subsequent distributions of
interest on the Junior Subordinated Debentures generally would not be taxable.)
The amount of OID that would accrue in any period would generally equal the
amount of interest that accrued on the Junior Subordinated Debentures in that
period at the stated interest rate. Consequently, during any period of interest
deferral, US Holders will include OID in gross income in advance of the receipt
of cash, and a US Holder which disposes of a Preferred Security prior to the
record date for payment of distributions on the Junior Subordinated Debentures
following that period will be subject to income tax on OID accrued through the
date of disposition (and not previously included in income), but will not
receive cash from the Issuer Trust with respect to such OID.
If the possibility of the Company's exercise of its option to defer payments
of interest was deemed not remote, the Junior Subordinated Debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any DE MINIMIS OID) over the term of the Junior Subordinated
Debentures. That OID would generally be includible in a US Holder's taxable
income, over the term of the Junior Subordinated Debentures, on an economic
accrual basis.
CHARACTERIZATION OF INCOME
Because the income underlying the Preferred Securities will not be
characterized as dividends for income tax purposes, corporate holders of the
Preferred Securities will not be entitled to a dividends-received deduction for
any income recognized with respect to the Preferred Securities.
MARKET DISCOUNT AND BOND PREMIUM
U.S. Holders of Preferred Securities may be considered to have acquired
their undivided interests in the Junior Subordinated Debentures with market
discount or acquisition premium (as each phrase is
81
<PAGE>
defined for United States federal income tax purposes). The Preferred Securities
will, however, initially be acquired at par.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE ISSUER
TRUST
Under certain circumstances described herein (See "Description of the
Preferred Securities--Liquidation Distribution Upon Dissolution"), the Issuer
Trust may distribute the Junior Subordinated Debentures to holders in exchange
for the Preferred Securities and in liquidation of the Issuer Trust. Except as
discussed below, such a distribution would not be a taxable event for United
States federal income tax purposes, and each US Holder would have an aggregate
adjusted basis in its Junior Subordinated Debentures for United States federal
income tax purposes equal to such holder's aggregate adjusted basis in its
Preferred Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Issuer Trust would include the period during which the
Preferred Securities were held by the holder. If, however, the relevant event is
a Tax Event which results in the Issuer Trust being treated as an association
taxable as a corporation, the distribution would likely constitute a taxable
event to US Holders of the Preferred Securities for United States federal income
tax purposes. In addition, the dollar amount of such distribution could be less
than in a Non-Tax Event distribution because of federal income taxes which could
be imposed on the Issuer Trust.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder generally would recognize gain or
loss as if it had sold the Preferred Securities for cash. See "--Sales of
Preferred Securities" below.
SALES OF PREFERRED SECURITIES
A US Holder that sells Preferred Securities will recognize gain or loss
equal to the difference between its adjusted basis in the Preferred Securities
and the amount realized on the sale of such Preferred Securities. A US Holder's
adjusted basis in the Preferred Securities generally will be its initial
purchase price, increased by OID previously included (or currently includible)
in such holder's gross income to the date of disposition, and decreased by
payments received on the Preferred Securities (other than any interest received
with respect to the period prior to the effective date of the Company's first
exercise of its option to defer payments of interest). Any such gain or loss
generally will be capital gain or loss, and generally will be a long-term
capital gain or loss if the Preferred Securities have been held for more than
one year prior to the date of disposition.
A holder who disposes of his Preferred Securities between record dates for
payments of distributions thereon will be required to include accrued but unpaid
interest (or OID) on the Junior Subordinated Debentures through the date of
disposition in its taxable income for United States federal income tax purposes
(notwithstanding that the holder may receive a separate payment from the
purchaser with respect to accrued interest), and to deduct that amount from the
sales proceeds received (including the separate payment, if any, with respect to
accrued interest) for the Preferred Securities (or as to OID only, to add such
amount to such holder's adjusted tax basis in its Preferred Securities). To the
extent the selling price is less than the holder's adjusted tax basis (which
will include accrued but unpaid OID, if any), a holder will recognize a capital
loss. Capital losses may be used to offset other recognized capital gains of a
holder, but subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
82
<PAGE>
NON-US HOLDERS
The following discussion applies to a Non-US Holder.
Payments to a holder of a Preferred Security which is a Non-US Holder will
generally not be subject to withholding of income tax, provided that (a) the
beneficial owner of the Preferred Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (b) the beneficial
owner of the Preferred Security is not a controlled foreign corporation that is
related to the Company through stock ownership, and (c) either (i) the
beneficial owner of the Preferred Securities certifies to the Issuer Trust or
its agent, under penalties of perjury, that it is a Non-US Holder and provides
its name and address, or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution"), and holds the Preferred
Security in such capacity, certifies to the Issuer Trust or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or by another Financial Institution between it and the
beneficial owner in the chain of ownership, and furnishes the Issuer Trust or
its agent with a copy thereof.
A Non-US Holder of a Preferred Security will generally not be subject to
withholding of income tax on any gain realized upon the sale or other
disposition of a Preferred Security.
A Non-US Holder which holds the Preferred Securities in connection with the
active conduct of a United States trade or business will be subject to income
tax on all income and gains recognized with respect to its proportionate share
of the Junior Subordinated Debentures.
INFORMATION REPORTING
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the Preferred Securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the Preferred Securities to or
through the United States office of a broker are subject to information
reporting unless the holder thereof certifies as to its non-United States status
or otherwise establishes an exemption from information reporting and backup
withholding. See "--Backup Withholding." Taxable income on the Preferred
Securities for a calendar year is required by the IRS to be reported to US
Holders on the appropriate form by January 31st of the year following its
receipt or accrual.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification or exemption requirements. Any amounts so withheld
will be allowed as a credit against the holder's income tax liability, or
refunded, provided the required information is provided to the IRS.
The preceding discussion is only a summary and does not address the
consequences to a particular holder of the purchase, ownership and disposition
of the Preferred Securities. Potential holders of the Preferred Securities are
urged to contact their own tax advisors to determine their particular tax
consequences.
83
<PAGE>
CERTAIN ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered a
"party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or a "disqualified person" within the
meaning of Section 4975 of the Internal Revenue Code of 1986, as amended (the
"Code") with respect to certain pension, profit-sharing or other employee
benefit plans, or certain individual retirement accounts or Keogh plans,
("Plans") that are subject to ERISA. The purchase of the Preferred Securities by
a Plan that is subject to the fiduciary responsibility provisions of ERISA or
the prohibited transaction provisions of Section 4975(e)(1) of the Code and with
respect to which the Company, or any affiliate of the Company is a service
provider (or otherwise is a party in interest or a disqualified person) may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless the Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption. Due to the complexity of the rules and
exemptions issued by the Department of Labor relating to "plan assets" and the
penalties that may be imposed upon persons involved in non-exempt prohibited
transactions, it is particularly important that fiduciaries or other persons
considering the purchase of Preferred Securities on behalf of or with "plan
assets" of any plan consult with their counsel regarding the potential
consequences if the assets of the Issuer Trust were deemed to be "plan assets"
and regarding the availability of exemptive relief.
84
<PAGE>
SUPERVISION AND REGULATION
The Company and the Bank are extensively regulated under federal and state
law. Generally, these laws and regulations are directed at safe and sound
operation of financial institutions and their holding companies and are not
intended to protect 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 Federal Reserve. The Company is required to
file annual and quarterly reports with the Federal Reserve and to provide the
Federal Reserve with such additional information as the Federal Reserve may
require. The Federal Reserve may conduct examinations of the Company and its
subsidiaries.
With certain limited exceptions, the Company is required to obtain prior
approval from the Federal Reserve 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. In acting on applications for such approval,
the Federal Reserve must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in the relevant
geographical and product markets, each party's financial condition and
management resources and record of performance under the Community Reinvestment
Act ("CRA"). Additionally, with certain exceptions any person proposing to
acquire control through direct or indirect ownership of 25% or more of any
voting securities of the Company is required to give 60 days written notice of
the acquisition to the Federal Reserve, 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 Federal Reserve, the Company may acquire more than 5% of the assets or
outstanding shares of a company engaging in nonbank activities determined by the
Federal Reserve to be closely related to the business of banking or of managing
or controlling banks. Under current Federal Reserve regulations, such
permissible nonbank activities include mortgage banking, equipment leasing,
securities brokerage and consumer and commercial finance company operations.
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 other 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 it or from the Company, and may not require that a
customer promise not to obtain other services from a competitor as a condition
to an extension of credit to the customer. The Federal Reserve has ended the
anti-tying rules for bank holding companies and their nonbanking subsidiaries.
Such rules were retained for banks.
Under Federal Reserve 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 Federal Reserve 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
85
<PAGE>
institutions insured by the FDIC can be held liable for any losses incurred by,
or reasonably anticipated to be incurred by, the FDIC in connection with the
default of, or assistance provided to, a commonly controlled FDIC-insured
depository institution. Accordingly, in the event that any insured subsidiary of
the Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are superior in
priority to the obligations of the depository institution to its stockholders
due solely to their status as stockholders 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 prior approval from the
Maryland 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 Maryland Commissioner.
FEDERAL AND STATE BANK REGULATION
The Bank is a Maryland state-chartered trust company, with all the powers of
a commercial bank, regulated and examined by the Maryland Commissioner and 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 stockholders 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 CRA requires that, in connection with the examination of financial
institutions within their jurisdictions, the FDIC evaluate the record of the
financial institutions in meeting the credit needs of their 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,
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
86
<PAGE>
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 Maryland Commissioner and FDIC approval. The total
investment in bank buildings including branch offices and furnishings cannot
exceed, with certain exceptions, 50% of the Bank's unimpaired capital and
surplus.
DEPOSIT INSURANCE
As an 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, or bank and trust companies
that have acquired SAIF deposits. The Bank is a converted federal savings bank
and, therefore, its deposits are insured through SAIF. Mergers or transfers of
assets between SAIF and BIF members generally are permitted with the assuming or
resulting depository institution making payments of SAIF assessments on the
portion of liabilities attributable to the SAIF-insured institution.
The FDIC is required to establish the semi-annual assessments for BIF- and
SAIF-insured depository institutions at a rate determined to be appropriate to
maintain or increase the reserve ratio of the respective deposit insurance funds
at or above 1.25% 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.
This recapitalization has lowered the semi-annual assessments paid by the
Bank as a SAIF member. Assessments are made on a risk-based premium system with
nine risk classifications based on certain capital and supervisory measures.
Financial institutions with higher levels of capital and involving a low degree
of supervisory concern are assessed lower premiums than financial institutions
with lower levels of capital or involving a higher degree of supervisory
concern. Before the recapitalization, the rates assessable on SAIF-insured
deposits ranged from $.23 per $100 of domestic deposits to $.31 per $100 of
domestic deposits; the Bank's assessment stood at $.23 per $100. Rates
assessable to BIF members have been significantly lower at a range of $.03 to
$.27 per $100, with the highest rated BIF institutions paying the statutory
minimum of $2,000 per year. With recapitalization of SAIF, the assessment ranges
for both BIF and SAIF institutions have 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 the Bank. Both federal and state laws impose
restrictions on the ability of the Bank to pay dividends. Federal law prohibits
the payment of a dividend by an insured depository institution like the Bank if
the
87
<PAGE>
depository institution is considered "undercapitalized" or if the payment of the
dividend would make the depository institution "undercapitalized." See
"--Federal Deposit Insurance Corporation Improvement Act of 1991" below. The
Company does not anticipate that such provisions will be applicable to the Bank.
The Federal Reserve 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 Maryland 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. The Bank must obtain approval of the Maryland Commissioner
to pay dividends to the Company for so long as the Bank's statement of financial
condition reflects, as it did at March 31, 1998, negative undivided profits
(accumulated deficit). The Company anticipates that such approvals will be
required for the foreseeable future. Approvals are in the discretion of the
Maryland Commissioner. In addition to these specific restrictions, bank
regulatory agencies, in general, also have the ability to prohibit proposed
dividends by a financial institution which would otherwise be permitted under
applicable regulations if the regulatory body determines that such distribution
would constitute an unsafe or unsound practice.
CAPITAL REQUIREMENTS
The Federal Reserve 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 statement of
financial condition 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 is 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 11.0% 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
88
<PAGE>
regulatory agencies have been assessing IRR on an informal basis for several
years. For these reasons, the Company does not expect the addition of IRR
evaluation to the agencies' capital guidelines to result in significant changes
in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could adversely 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, and 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
89
<PAGE>
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.
FINANCIAL SERVICES MODERNIZATION LEGISLATION
On May 13, 1998, the United States House of Representatives approved the
Financial Services Act of 1998 (the "FSA"). The FSA contains provisions that
provide for fundamental changes in the banking and financial services
industries. The FSA repeals the Glass-Steagall Act which generally has separated
the commercial and investment banking industries. FSA also would allow banks and
insurance companies to affiliate. Bank holding companies would be barred from
conducting nonfinancial activities, with certain nonfinancial activities being
grandfathered for ten years.
The FSA also provides that national bank subsidiaries may conduct certain
activities including insurance, securities and travel agency services, but may
not engage in underwriting, merchant banking or real estate development
activities. National banks would also be permitted to underwrite revenue bonds
directly. The FSA preserves the thrift charter provisions, but bars new unitary
thrift holding companies that have not filed applications with the Office of
Thrift Supervision by March 31, 1998.
It is not currently possible to predict whether or when the FSA will be
enacted into law, or if it is enacted into law, whether it will remain in the
form approved by the House of Representatives. It also is not possible to
predict what impact the FSA will have on the Company or the Bank. One
consequence may be increased competition from large financial services companies
that, under the FSA, would be permitted to provide many types of financial
services to customers. Neither the Company nor the Bank currently conducts any
nonfinancial activities. While the Bank is a Maryland-chartered commercial bank,
certain provisions of the FSA may affect the Bank due to a Maryland law that
gives, with approval of the Maryland Commissioner, Maryland-chartered commercial
banks the authority to engage in activities in which a national bank may engage.
INTERSTATE BANKING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") was enacted into law on September 29, 1994. Riegle-Neal
authorized federal banking agencies to approve interstate bank merger
transactions even if such transactions are prohibited by the laws of a state. An
exception to such authorization arises if the home state where one of the banks
which is a party to the merger transaction is located opted out of the merger
provisions of Riegle-Neal by adopting a law after the date of the enactment of
Riegle-Neal and prior to June 1, 1997. These laws must apply equally to all-out-
of-state banks and expressly prohibit merger transactions involving out-of-state
banks. Riegle-Neal also permits interstate branch acquisitions if the law of the
state where the branch is located permits interstate branch acquisitions. The
interstate merger and branch acquisitions permitted by Riegle-Neal are subject
to nationwide and statewide insured deposit limitations as described in
Riegle-Neal.
Riegle-Neal also authorizes the federal banking agencies to approve DE NOVO
interstate branching by national and state banks in states which specifically
allow for such branching. Only two states, Texas and Montana, have opted out of
the Riegle-Neal provisions relating to interstate mergers, acquisitions of
branches and establishment of de novo branches. The Company anticipates that
Riegle-Neal may increase competition within the market in which the Company
operates although the Company cannot predict the timing or the extent of such
increased competition.
90
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), dated June 25, 1998, Ferris, Baker Watts,
Incorporated (the "Underwriters") has agreed to purchase from the Issuer Trust
$20,000,000 aggregate Liquidation Amount of Preferred Securities at the public
offering price.
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the Preferred Securities offered hereby if any of such Preferred
Securities are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Preferred Securities to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $0.22 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.15 per Preferred Security to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Underwriters.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which an Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Issuer Trust. In such a
case, to cover all or part of the short position, the Underwriters may purchase
Preferred Securities in the open market following completion of the initial
offering of the Preferred Securities. The Underwriters also may engage in
stabilizing transactions in which they bid for, and purchase, Preferred
Securities at a level above that which might otherwise prevail in the open
market for the purpose of preventing or retarding a decline in the market price
of the Preferred Securities. The Underwriters also may reclaim any selling
concessions allowed to a dealer if the Underwriters repurchase shares
distributed by that dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Company nor the
Underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriters are not required to engage
in any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriters' arranging the investment therein of such
proceeds an amount of $0.37 per Preferred Security (or $740,000 in the
aggregate) for the account of the Underwriters, assuming that the Underwriters'
over-allotment option is not exercised.
The Company and the Issuer Trust have granted the Underwriters an option
exercisable not later than 30 days after the effective date of the Underwriting
Agreement, to purchase up to an additional $3,000,000 aggregate Liquidation
Amount of the Preferred Securities at the public offering price. To the extent
that the Underwriters exercise such option, the Issuer Trust will be obligated,
pursuant to the option, to sell such Preferred Securities to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Preferred Securities offered hereby. If
purchased, the Underwriters will offer such additional Preferred Securities on
the same terms as those on which the $20,000,000 aggregate Liquidation Amount of
the Preferred Securities are being offered.
91
<PAGE>
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities are a new issue of securities with no established
trading market. The Company and the Issuer Trust have been advised by the
Underwriters that they intend to make a market in the Preferred Securities.
However, the Underwriters are not obligated to do so and such market making may
be interrupted or discontinued at any time without notice at the sole discretion
of the Underwriters. The Preferred Securities have been approved for listing on
The Nasdaq National Market. The Nasdaq National Market maintenance standards
require the existence of two market makers for continued listing, and the
presence of such market makers cannot be assured. Accordingly, no assurance can
be given as to the development or liquidity of any market for the Preferred
Securities.
The Company and Issuer Trust have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act.
The Underwriters or their affiliates have in the past performed and may in
the future perform various services to the Company, including investment banking
services, for which they have or may receive customary fees for such services.
Ferris, Baker Watts, Incorporated served as the managing underwriter of the
Company's initial public offering of Common Stock in 1996.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Issuer Trust will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and the Issuer Trust. The validity of the Guarantee and
the Junior Subordinated Debentures will be passed upon for the Company by Ober,
Kaler, Grimes & Shriver, counsel to the Company, and for the Underwriters by
Venable Baetjer and Howard, LLP. Ober, Kaler, Grimes & Shriver and Venable
Baetjer and Howard, LLP will rely as to certain matters of Delaware law on the
opinion of Richards, Layton & Finger.
EXPERTS
The consolidated financial statements of First Mariner Bancorp as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997, have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
92
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Financial Condition as of March 31, 1998 (unaudited) and as of December 31, 1997
and 1996................................................................................................. F-3
Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 (unaudited) and
for the years ended December 31, 1997, 1996 and 1995..................................................... F-4
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1998 (unaudited) and
the years ended December 31, 1997, 1996 and 1995......................................................... F-5
Consolidated Statements of Cash Flow for the three months ended March 31, 1998 and 1997 (unaudited) and for
the years ended December 31, 1997, 1996 and 1995......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Mariner Bancorp:
We have audited the accompanying consolidated statements of financial
condition of First Mariner Bancorp and subsidiary (the Company) as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1997. 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 First
Mariner Bancorp and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Baltimore, MD
February 27, 1998
F-2
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Assets
Cash and due from banks......................................... $ 16,572,596 $ 13,240,476 $ 5,323,984
Interest-bearing deposits....................................... 21,336,504 32,676,735 27,186,076
Available-for-sale securities, at fair value (note 3)........... 33,772,843 32,852,287 324,875
Investment securities, fair value of $6,642,650, $8,642,595 and
$1,097,438, respectively (note 3)............................. 6,602,985 8,600,621 1,099,000
Loans held for sale............................................. 15,729,757 16,895,062 3,072,163
Loans receivable (notes 4 and 8)................................ 160,530,522 144,071,961 92,064,073
Allowance for loan losses....................................... (1,672,484) (1,613,621) (1,241,663)
-------------- -------------- --------------
Loans, net...................................................... 158,858,038 142,458,340 90,822,410
Other real estate owned (note 5)................................ 2,419,946 1,944,236 --
Federal Home Loan Bank of Atlanta stock, at cost (note 8)....... 1,000,000 1,399,300 480,800
Property and equipment, net (note 6)............................ 5,331,642 4,775,512 2,671,018
Accrued interest receivable..................................... 1,395,659 1,433,529 712,614
Prepaid expenses and other assets............................... 788,614 708,208 868,606
-------------- -------------- --------------
Total assets.................................................... $ 263,808,584 $ 256,984,306 $ 132,561,546
-------------- -------------- --------------
-------------- -------------- --------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7)............................................. $ 204,017,844 $ 197,269,328 $ 102,289,146
Short-term borrowings (note 8)................................ 32,166,466 30,330,935 6,000,000
Accrued expenses and other liabilities........................ 420,133 2,418,387 476,398
-------------- -------------- --------------
Total liabilities............................................... 236,604,443 230,018,650 108,765,544
-------------- -------------- --------------
Stockholders' equity (notes 9, 12 and 13):
Common stock, $.05 par value; 20,000,000 shares authorized;
2,869,063, 2,851,563 and 2,627,263 shares issued and
outstanding, respectively................................... 143,453 142,578 131,363
Additional paid-in capital.................................... 29,999,628 29,825,503 27,350,118
Accumulated deficit........................................... (3,180,226) (3,331,568) (3,696,904)
Accumulated other comprehensive income........................ 241,286 329,143 11,425
-------------- -------------- --------------
Total stockholders' equity...................................... $ 27,204,141 26,965,656 23,796,002
-------------- -------------- --------------
Commitments and contingencies (notes 4 and 6)
-------------- -------------- --------------
Total liabilities and stockholders' equity...................... $ 263,808,584 $ 256,984,306 $ 132,561,546
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest income:
Loans........................................... $3,784,390 $2,525,088 $11,953,680 $6,177,495 $1,981,588
Investments..................................... 465,164 379,298 1,839,664 558,950 403,201
Available-for-sale securities................... 411,496 -- 524,657 -- 176,650
---------- ---------- ---------- ---------- ----------
Total interest income............................. 4,661,050 2,904,386 14,318,001 6,736,445 2,561,439
---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits........................................ 2,066,440 1,141,838 6,142,487 2,999,102 1,176,436
Borrowed funds and other (note 8)............... 153,879 42,209 422,947 108,234 93,184
---------- ---------- ---------- ---------- ----------
Total interest expense............................ 2,220,319 1,184,047 6,565,434 3,107,336 1,269,620
---------- ---------- ---------- ---------- ----------
Net interest income............................... 2,440,731 1,720,339 7,752,567 3,629,109 1,291,819
Provision for loan losses (note 4)................ 152,467 135,000 471,959 1,039,636 190,051
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses.......................................... 2,288,264 1,585,339 7,280,608 2,589,473 1,101,768
---------- ---------- ---------- ---------- ----------
Noninterest income:
Gain on sale of loans........................... 236,828 143,906 430,353 303,353 84,173
Service fees on deposits........................ 392,366 260,419 864,533 336,662 94,918
Gain on sale of securities...................... 284,797 13,500 479,360 330,030 8,970
Other operating income.......................... 118,692 39,480 577,442 103,898 8,953
---------- ---------- ---------- ---------- ----------
Total noninterest income.......................... 1,032,683 457,305 2,351,688 1,073,943 197,014
---------- ---------- ---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits.................. 1,471,183 960,721 4,370,685 2,744,057 1,189,172
Net occupancy................................... 399,518 232,236 1,269,291 786,825 275,660
Deposit insurance premiums...................... 27,407 13,025 76,880 229,293 79,783
Furniture, fixtures and equipment............... 148,497 97,999 360,407 253,394 82,968
Professional services........................... 160,493 38,564 380,124 135,811 233,448
Advertising..................................... 170,492 116,400 574,308 379,566 147,549
Data processing................................. 192,000 101,000 533,244 452,090 156,101
Other (note 11)................................. 600,015 458,623 1,894,021 855,699 416,730
---------- ---------- ---------- ---------- ----------
Total noninterest expenses........................ 3,169,605 2,018,568 9,458,960 5,836,735 2,581,411
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax benefit........... 151,342 24,076 173,336 (2,173,319) (1,282,629)
Income tax benefit (note 10)...................... -- -- (192,000) -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................. $ 151,342 $ 24,076 $ 365,336 $(2,173,319) $(1,282,629)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share (note 1):
Basic........................................... $ 0.05 $ 0.01 $ 0.13 $ (1.72) $ (1.88)
Diluted......................................... 0.04 0.01 0.12 (1.72) (1.88)
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATED
SHARES OF ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT INCOME EQUITY
---------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ 225,813 $ 11,291 $ 2,206,280 $ (240,956) $ -- $ 1,976,615
Common stock issued............... 1,000,800 50,040 9,957,960 -- -- 10,008,000
Net loss.......................... -- -- -- (1,282,629) -- (1,282,629)
---------- ---------- ------------- ------------- ------------- -------------
Balance at December 31, 1995........ 1,226,613 61,331 12,164,240 (1,523,585) -- 10,701,986
Common stock issued, net of costs
of issuance..................... 1,400,650 70,032 15,185,878 -- -- 15,255,910
Net loss.......................... -- -- -- (2,173,319) -- (2,173,319)
Other comprehensive income........ -- -- -- -- 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
Other comprehensive income........ -- -- -- -- 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
Exercise of stock options and
warrants........................ 17,500 875 174,125 -- -- 175,000
Net income........................ -- -- -- 151,342 -- 151,342
Other comprehensive income........ -- -- -- -- (87,857) (87,857)
---------- ---------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 1998........... 2,869,063 $ 143,453 $ 29,999,628 $ (3,180,226) $ 241,286 $ 27,204,141
---------- ---------- ------------- ------------- ------------- -------------
---------- ---------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 151,342 $ 24,076 $ 365,336 $(2,173,319) $(1,282,629)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Amortization of unearned loan fees, net... (197,839) (214,803) (174,629) (587,549) (139,713)
Amortization of premiums and discounts on
mortgage-backed securities, net......... 172 -- (16,778)
Amortization of premiums on deposits...... (6,237) (7,008) (24,186) (28,033) (74,632)
Amortization of premiums on loans......... (16,437) (16,437) 21,766 78,615 83,973
Depreciation and amortization............. 217,085 146,180 541,911 417,760 189,755
Gain on sale of securities................ (284,797) (13,500) (479,360) (330,030) (8,970)
Provision for loan losses................. 152,467 135,000 471,959 1,039,636 190,051
Increase in accrued interest receivable... 37,870 (166,433) (720,915) (510,910) (57,182)
Change in mortgage loans held for sale.... 1,165,305 (614,837) (13,822,899) (3,072,163) --
Net increase (decrease) in accrued
expenses and other liabilities.......... (1,953,463) 899,071 1,734,895 (133,320) 479,629
Net (increase) decrease in prepaids and
other assets............................ (115,505) (874,120) 160,398 (94,204) (518,461)
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities......... (850,209) (702,811) (11,925,552) (5,393,517) (1,154,957)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Loan disbursements, net of principal
repayments................................ (16,786,719) (11,767,313) (53,553,970) (61,794,502) (10,141,583)
Purchase of property and equipment.......... (754,484) (140,238) (2,646,405) (1,216,889) (904,637)
Purchases (redemption) of Federal Home Loan
Bank of Atlanta stock..................... 399,300 (452,100) (918,500) (179,800) --
Sales of available-for-sale securities...... 931,478 (677,013) 5,043,851 -- 2,630,929
Purchase of available-for-sale securities... (5,140,045) -- (43,383,388) (2,153,787) (2,339,505)
Maturities of available-for-sale
securities................................ 2,500,000 -- -- -- --
Maturities of investment securities......... 2,000,000 -- 6,000,000 2,170,367 491,000
Purchase of investment securities........... -- (12,000,000) (7,491,719) (1,000,000) --
Proceeds from securities sold............... -- -- -- 2,337,625 --
Construction disbursements other real estate
owned..................................... (19,842) -- (345,292) -- --
Principal repayments of available-for-sale
securities................................ 947,126 -- 806,223 -- 294,273
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (15,923,186) (25,036,664) (96,489,200) (61,836,986) (9,969,523)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net increase in deposits.................... 6,754,753 16,607,219 95,004,368 60,830,538 20,461,329
Net increase in other borrowings............ (3,164,469) -- 15,330,935 -- --
Proceeds from Federal Home Loan Bank of
Atlanta advances.......................... 15,000,000 10,000,000 9,000,000 6,000,000 --
Repayments of Federal Home Loan Bank of
Atlanta advances.......................... (10,000,000) (6,000,000) -- -- (3,150,000)
Proceeds of stock options and warrants...... 175,000 -- 143,000 -- --
Proceeds from stock issuance, net........... -- 2,343,600 2,343,600 15,255,910 10,008,000
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities..... 8,765,284 22,950,819 121,821,903 82,086,448 27,319,329
----------- ----------- ----------- ----------- -----------
Increase in cash and cash equivalents......... (8,008,111) (2,788,656) 13,407,151 14,855,945 16,194,849
Cash and cash equivalents at beginning of
period...................................... 45,917,211 32,510,060 32,510,060 17,654,115 1,459,266
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period.... $37,909,100 $29,721,404 $45,917,211 $32,510,060 $17,654,115
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental information:
Interest paid on deposits and borrowed
funds..................................... $ 2,221,033 $ 1,067,047 $ 6,440,215 $ 2,938,407 $ 1,216,424
Real estate acquired in satisfaction of
loans..................................... 455,868 -- 1,598,944 -- --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(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 Bank's allowance for losses on loans. Such agencies may
require the Bank 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
F-7
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 in other comprehensive income.
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 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 OWNED
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
F-8
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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
an annual financial statement that is 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.
F-9
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's components of comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------
1998 1997 1997 1996 1995
---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net income (loss)............................... $ 151,342 $ 24,076 $ 365,336 $ (2,173,319) $ (1,282,629)
Changes in accumulated other comprehensive
income--unrealized gains and losses on
investments................................... (87,857) 39,125 317,718 11,425 --
---------- --------- ---------- ------------- -------------
Total comprehensive income (loss)............... $ 63,485 $ 63,201 $ 683,054 $ (2,161,894) $ (1,282,629)
---------- --------- ---------- ------------- -------------
---------- --------- ---------- ------------- -------------
</TABLE>
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
On May 12, 1998, the Board of Directors declared a 10% stock dividend.
Average shares outstanding and all per share amounts are based on the increased
number of shares giving retroactive effect to the stock dividend.
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.
F-10
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Information relating to the calculations of earnings per common share is
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
BASIC DILUTED BASIC DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income used in EPS computation....................... $ 151,342 $ 151,342 $ 24,076 $ 24,076
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted-average shares outstanding...................... 3,142,433 3,142,433 3,061,956 3,061,956
Dilutive securities-options and warrants................. -- 455,208 -- 261,304
------------ ------------ ------------ ------------
Adjusted weighted-average shares used in EPS
computation............................................. 3,142,433 3,597,641 3,061,956 3,323,260
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996
-------------------------- ----------------------------
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..................... 3,151,145 3,151,145 1,391,355 1,391,355
Dilutive securities--stock options and warrants......... -- 300,136 -- --
------------ ------------ ------------- -------------
Adjusted weighted-average shares used in EPS
computation........................................... 3,151,145 3,451,281 1,391,355 1,391,355
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
--------------------------
BASIC DILUTED
------------ ------------
<S> <C> <C>
Net loss used in EPS computation...................................................... $ 1,282,629 $ 1,282,629
------------ ------------
------------ ------------
Weighted-average shares outstanding................................................... 750,082 750,082
Dilutive securities--stock options and warrants....................................... -- --
------------ ------------
Adjusted weighted-average shares used in EPS computation.............................. 750,082 750,082
------------ ------------
------------ ------------
</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 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.
On May 12, 1998, the Board of Directors declared a 10% stock dividend. All
stock option activity is based on the increased number of shares giving
retroactive effect to the stock dividend.
F-11
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 1995 and 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
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Government Agency--due after one 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 after one year through five years................ 99,000 -- -- 99,000
------------- ----------- ----------- -------------
Total held to maturity investment securities............... $ 8,600,621 $ 41,974 $ -- $ 8,642,595
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Available for sale 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 one year or less........... 99,000 -- -- 99,000
------------- ----------- ----------- -------------
Total held to maturity investment securities............... $ 1,099,000 $ -- $ 1,562 $ 1,097,438
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-12
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(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....................................................................... 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)
-------------- -------------
Total loans receivable............................................................ $ 144,071,961 $ 92,064,073
-------------- -------------
-------------- -------------
</TABLE>
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 under the original terms
of loans in nonaccrual status at December 31, 1997, 1996 and 1995, respectively,
was approximately $85,000, $32,000 and $65,000, respectively. The actual
interest income recorded on these loans in 1997, 1996 and 1995 was approximately
$77,000, $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 in fair value of the
F-13
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(4) LOANS RECEIVABLE (CONTINUED)
collateral. There were no impaired loans at December 31, 1997 and 1996 with an
allocated valuation allowance, and in 1995 there were no impaired loans.
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 1995
------------ ------------ ----------
<S> <C> <C> <C>
Balance at beginning of year.............................................. $ 1,241,663 $ 376,287 $ 244,847
Provisions for loan losses................................................ 471,959 1,039,636 190,051
Chargeoffs, net of recoveries............................................. (100,001) (174,260) (58,611)
------------ ------------ ----------
Balance at end of year.................................................... $ 1,613,621 $ 1,241,663 $ 376,287
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
Commitments to extend credit are agreements to lend to customers, provided
that terms and conditions established in the related contracts are met. At
December 31, 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, $1,276,000 and $623,000 at December 31, 1997, 1996,
and 1995, respectively. During 1997, $4,458,000 of new loans 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
F-14
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(5) OTHER REAL ESTATE OWNED (CONTINUED)
building with a carrying value of approximately $890,000. The land development
project is being completed under the direction of the Company. At December 31,
1997, 107 lots were under contract for settlement through July 2000, and the
remainder of the project was being marketed for sale.
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
1997 1996 USEFUL 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 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, 1996 and 1995 was
approximately $771,000, $423,000 and $118,000, respectively.
The Company and the Bank occupy space leased from the Chairman and CEO of
the Company, who is paid $566,988 annually for office and branch space. The term
of the lease is five years. Management believes that such terms are at least as
favorable as those that could be obtained from a third party lessor.
The Bank has opened a full-service branch in five Mars Super Markets, and
has installed ATMs in thirteen 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>
F-15
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(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%
Noninterest-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>
% OF TOTAL % OF TOTAL
------------ ------------
<S> <C> <C> <C> <C>
Scheduled certificates of deposit maturities:
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.
F-16
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(8) SHORT-TERM BORROWINGS (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.
F-17
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(9) EMPLOYEE BENEFIT PLANS (CONTINUED)
Information with respect to stock options is as follows for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........................ 198,660 $ 10.00 16,500 $ 10.00
Granted................................................. -- -- 182,930 10.00
Exercised............................................... (4,180) -- -- --
Forfeited............................................... (1,650) -- (770) --
--------- ------ --------- ------
Outstanding at end of year.............................. 192,830 $ 10.00 198,660 $ 10.00
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding at beginning of year...................................................... -- --
Granted............................................................................... 16,500 $ 10.00
Exercised............................................................................. -- --
Forfeited............................................................................. -- --
--------- ------
Outstanding at end of year............................................................ 16,500 $ 10.00
--------- ------
--------- ------
</TABLE>
The weighted average remaining life of options outstanding at December 31,
1997 was 8.6 years.
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 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C> <C>
Net loss As reported............................................ $ 2,173,319 $ 1,282,629
Pro forma.............................................. 2,908,319 1,348,625
Net loss per share--basic As reported............................................ 1.72 1.88
Pro forma.............................................. 2.30 1.98
</TABLE>
The weighted average fair values of options granted during 1996 and 1995
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 used for grants in 1996 and 1995: risk-free
interest rate of 6.01%; no expected votality; and expected lives of ten years.
The weighted average fair value of options granted was $4.30 for both years.
F-18
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(9) EMPLOYEE BENEFIT PLANS (CONTINUED)
WARRANTS
Warrants to acquire 888,605, 900,155 and 214,500 shares of common stock of
$10.00 per share were outstanding and exercisable at December 31, 1997, 1996 and
1995, respectively.
(10) INCOME TAXES
Income tax benefit consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <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 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) at federal corporate rate..................... $ 59,000 $ (739,000) $ 436,000
Nondeductible expenses..................................................... 12,000 (9,000) (3,000)
Change in valuation allowance.............................................. (216,000) 776,000 (433,000)
Other...................................................................... (47,000) (28,000) --
----------- ----------- -----------
$ (192,000) $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-19
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(10) INCOME TAXES (CONTINUED)
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities relate to the following at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for losses on loans......................................... $ 518,000 $ 300,000 $ 107,000
Excess of fair value of liabilities acquired over cost................ -- 13,000 25,000
Net operating loss carryforwards...................................... 821,000 1,076,000 407,000
Interest and fees on loans............................................ 59,000 43,000 119,000
Other................................................................. -- -- 3,000
------------ ------------- -----------
Total gross deferred assets............................................. 1,398,000 1,432,000 661,000
Less valuation allowance................................................ (918,000) (1,341,000) (565,000)
------------ ------------- -----------
Net deferred tax assets................................................. 480,000 91,000 96,000
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 12,000
Excess of fair value of assets acquired over cost..................... 54,000 79,000 84,000
------------ ------------- -----------
Total gross deferred tax liabilities.................................... 288,000 91,000 96,000
------------ ------------- -----------
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 more likely than not to be realized. During 1997, the Company
reduced the valuation allowance by $423,000, of which $207,000 was attributable
to the unrealized gains on available for sale securities. The net deferred tax
asset of $192,000 represents the amount of tax benefit that management believes
is more likely than not to be realized because of future operating profits.
Because of uncertainty regarding the extent of future profitability, due to
expenses related to branch network expansion, a valuation allowance has been
established for the remaining net deferred tax asset. Management will continue
to assess the required valuation allowance on an ongoing basis.
F-20
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(11) OTHER EXPENSES
Other expense is comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Service and maintenance.................................................... $ 190,194 $ 122,080 $ 31,338
Office supplies............................................................ 148,624 148,400 121,252
Amortization of cost of intangible assets.................................. 74,927 74,927 64,463
Cost of ATM network........................................................ 240,637 145,207 38,670
Printing................................................................... 192,057 129,849 32,242
Corporate insurance........................................................ 153,535 53,058 20,691
Other (a).................................................................. 894,047 182,178 108,074
------------ ---------- ----------
Total other expenses....................................................... $ 1,894,021 $ 855,699 $ 416,730
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
- ------------------------
(a) No single item included in this category exceeded one percent of total
income.
(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 at 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
F-21
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(13) REGULATORY MATTERS (CONTINUED)
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.
Regulatory capital amounts and ratios for the Company and the Bank as of
December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS TO BE WELL
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................................... 26,426,515 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
F-22
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(13) REGULATORY MATTERS (CONTINUED)
loans, 0.3% 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.
(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>
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.
F-23
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 residential 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.
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 deposits, interest-bearing now accounts, money market and
statement savings accounts, is deemed to equal to the carrying amounts. The fair
value of certificates of deposit is 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. Not included was any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. These estimates also
include judgements regarding future economic conditions, expected loss and risk
assessments. Changes in assumptions could significantly affect estimates.
F-24
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(15) FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of First Mariner Bancorp (parent
company only):
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
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
------------- -------------
$ 27,535,108 $ 24,534,257
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity:
Other liabilities................................................................ $ 569,452 $ 738,255
Stockholders' equity............................................................. 26,965,656 23,796,002
------------- -------------
$ 27,535,108 $ 24,534,257
------------- -------------
------------- -------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Income:
Interest income...................................................... $ 294,488 $ 42,689 $ 40,537
Gain on sale of securities........................................... 455,279 330,030 --
Other income......................................................... 20,158 -- 241
----------- ------------- -------------
Total income........................................................... 769,925 372,719 40,778
----------- ------------- -------------
Expenses:
Salaries and employee benefits....................................... 523,616 239,950 215,000
Amortization of intangibles.......................................... 7,272 7,263 7,272
Professional services................................................ 52,134 -- 56,414
Other expenses....................................................... 15,946 15,116 12,432
----------- ------------- -------------
Total expenses......................................................... 598,968 262,329 291,118
----------- ------------- -------------
Income (loss) before income tax benefit................................ 170,957 110,390 (250,340)
Income tax benefit..................................................... (192,000) -- --
----------- ------------- -------------
Income (loss) before equity in undistributed net income (loss) of the
Bank................................................................. 362,957 110,390 (250,340)
Equity in undistributed net income (loss) in the Bank.................. 2,379 (2,283,709) (1,032,289)
----------- ------------- -------------
Net income (loss)...................................................... $ 365,336 $ (2,173,319) $ (1,282,629)
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-25
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997, 1996 AND 1995
(15) FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income before equity in undistributed net income of the Bank..... $ 362,957 $ 110,390 $ (250,340)
Depreciation and amortization.................................... 7,272 7,263 7,272
Increase (decrease) in other liabilities......................... (168,803) 696,224 42,031
Increase in other assets......................................... (27,266) (7,243) (26,055)
Gain on sale of securities....................................... (455,279) (330,030) --
Other............................................................ (90) (3,947) (8,997)
------------- -------------- -------------
Net cash provided by (used in) operating activities................ (281,209) 472,657 (236,089)
------------- -------------- -------------
Net cash flows from investing activities:
Investment in subsidiaries....................................... -- (10,500,000) (8,989,516)
Purchase of available for sale securities........................ (2,111,704) (2,153,787) --
Sale of available for sale securities............................ 1,045,557 2,170,367 --
------------- -------------- -------------
Net cash flows from investing activities........................... (1,066,147) (10,483,420) (8,989,516)
------------- -------------- -------------
Net cash provided by financing activities--proceeds from stock
issuance options and warrants exercised, net..................... 2,486,600 15,255,910 10,008,000
------------- -------------- -------------
Net increase in cash and temporary investments..................... 1,139,244 5,245,147 782,395
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 $ 782,395
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THE ISSUER TRUST SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AND OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 7
Mariner Capital Trust.......................... 17
Use of Proceeds................................ 17
Capitalization................................. 18
Ratio of Earnings to Fixed Charges............. 19
Accounting Treatment........................... 19
Selected Consolidated Financial Data........... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 38
Management..................................... 45
Securities Ownership of Certain Beneficial
Owners and Management........................ 50
Description of Preferred Securities............ 52
Description of Junior Subordinated
Debentures................................... 65
Description of Guarantee....................... 75
Relationship Among the Preferred Securities,
the Junior Subordinated Debentures and the
Guarantee.................................... 78
Certain Federal Income Tax Consequences........ 79
Certain ERISA Considerations................... 84
Supervision and Regulation..................... 85
Underwriting................................... 91
Validity of Securities......................... 92
Experts........................................ 92
Index to Financial Statements.................. F-1
</TABLE>
$20,000,000
AGGREGATE LIQUIDATION AMOUNT
MARINER CAPITAL TRUST
8.3% PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10
PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
TO THE EXTENT DESCRIBED HEREIN, BY
FIRST MARINER BANCORP
---------------------
PROSPECTUS
---------------------
FERRIS, BAKER WATTS
Incorporated
JUNE 26, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
