<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FOR 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 1998.
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________________.
Commission file number: 0-21815
FIRST MARINER BANCORP
---------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1834860
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
1801 SOUTH CLINTON STREET, BALTIMORE, MD 21224 410-342-2600
- ---------------------------------------- ----- ------------
(Address of principal executive offices) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes /X/ No / /
The number of shares of common stock outstanding as of August 13, 1998
is 3,164,925 shares.
<PAGE>
FIRST MARINER BANCORP
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1998 (unaudited) and at December 31, 1997.........3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and June 30, 1997 (unaudited)...4
Consolidated Statements of Cash Flow for the
Six Months Ended June 30, 1998
and June 30, 1997 (unaudited)..............................5
Notes to Consolidated Financial Statements (unaudited).......6
Item 2 - Management's discussion and analysis of
financial condition and results of operations................8
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk.................................................13
PART II - OTHER INFORMATION
Item 1 - Legal proceedings...................................................15
Item 2 - Changes in securities and use of proceeds...........................15
Item 3 - Defaults on senior securities.......................................15
Item 4 - Submission of matters to a vote of security holders.................15
Item 5 - Other information...................................................15
Item 6 - Exhibits and reports on Form 8-K....................................15
Signatures....................................................................16
<PAGE>
Part 1
Item 1
First Mariner Bancorp and Subsidiary
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 20,688,402 $ 13,240,476
Interest-bearing deposits 20,334,020 32,676,735
Available-for-sale securities, at fair value 95,366,757 32,852,287
Investment securities, fair value of $6,525,703 and $8,642,595
respectively 6,503,234 8,600,621
Mortgage loans held for sale 13,578,014 16,895,062
Loans receivable 183,785,446 144,071,961
Allowance for loan losses (1,885,317) (1,613,621)
-------------------------------------
Loans, net 181,900,129 142,458,340
Other real estate owned 2,050,856 1,944,236
Federal Home Loan Bank of Atlanta stock, at cost 1,750,000 1,399,300
Property and equipment 6,219,822 4,775,512
Accrued interest receivable 1,747,921 1,433,529
Prepaid expenses and other assets 2,829,864 708,208
- ------------------------------------------------------------------------------------------------------------
Total assets $ 352,969,019 $256,984,306
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 222,725,310 $197,269,328
Federal Home Loan Bank advances 35,000,000 15,000,000
Other borrowings 41,469,091 15,330,935
Company-obligated mandatorily redeemable preferred
securities of a trust holding solely parent company
subordinated debt securities 20,000,000 -
Accrued expenses and other liabilities 6,370,365 2,418,387
- ------------------------------------------------------------------------------------------------------------
Total liabilities 325,564,766 230,018,650
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, $.05 par value; 20,000,000 shares
authorized; 3,164,925 and 3,136,719 shares issued
and outstanding respectively 158,246 156,836
Additional paid-in capital 34,374,715 34,088,589
Accumulated deficit (7,334,870) (7,608,912)
Accumulated other comprehensive income, net of taxes 206,162 329,143
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 27,404,253 26,965,656
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 352,969,019 $256,984,306
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
First Mariner Bancorp and Subsidiary
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 4,286,947 $ 2,722,112 $ 8,071,337 $ 5,247,200
Investments 1,111,539 438,207 1,988,199 817,505
- ------------------------------------------------------------------------------------------------------------------
Total interest income 5,398,486 3,160,319 10,059,536 6,064,705
- ------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 2,197,174 1,322,890 4,263,614 2,464,728
Borrowed funds and other 432,419 33,594 586,298 75,803
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 2,629,593 1,356,484 4,849,912 2,540,531
- ------------------------------------------------------------------------------------------------------------------
Net interest income 2,768,893 1,803,835 5,209,624 3,524,174
Provision for loan losses 217,000 100,762 369,467 235,762
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,551,893 1,703,073 4,840,157 3,288,412
- ------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of loans 347,491 80,613 584,319 152,416
Service fees on deposits 505,630 298,013 897,996 512,831
Gain on sale of securities 150,618 69,247 435,415 69,247
Other operating income 134,791 42,333 253,483 120,755
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,138,530 490,206 2,171,213 855,249
- ------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 1,591,219 1,019,474 3,062,402 1,896,150
Net occupancy 429,274 269,360 828,792 493,379
Deposit insurance premiums 30,949 17,011 58,356 30,036
Furniture, fixtures and equipment 186,374 103,289 334,871 201,288
Professional services 134,191 38,330 294,684 76,894
Advertising 182,487 138,171 352,979 254,571
Data processing 216,721 95,999 408,721 196,999
Other 765,613 447,639 1,365,628 906,262
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 3,536,828 2,129,273 6,706,433 4,055,579
- ------------------------------------------------------------------------------------------------------------------
Income before taxes 153,595 64,006 304,937 88,082
Provision for income taxes - - - -
- ------------------------------------------------------------------------------------------------------------------
Net income $ 153,595 $ 64,006 $ 304,937 $ 88,082
- ------------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.05 $ 0.02 $ 0.10 $ 0.03
Diluted $ 0.04 $ 0.02 $ 0.08 $ 0.03
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
First Mariner Bancorp and Subsidiary
Consolidated Statements of Cash Flow (Unaudited)
For the six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 304,937 $ 88,082
Adjustments to reconcile net income to net cash
used by operating activities:
Amortization of unearned loan fees, net (367,100) (351,493)
Amortization of premiums on deposits (10,649) (12,093)
Amortization of discounts on loans (28,506) (32,874)
Depreciation and amortization 402,943 290,579
Provision for loan losses 369,467 235,762
Gain on sale of securities (435,415) (69,247)
Gain on sale of residential mortgages (584,319) (152,416)
Change in mortgage loans held for sale 3,901,367 5,993,000
Increase (decrease) in accrued interest receivable (314,382) 336,377
Net increase in accrued expenses and other liabilities 3,951,978 1,107,509
Net increase in prepaids and other assets (2,081,751) (1,570,360)
- ------------------------------------------------------------------------------------------------
Net cash used in operating activities 5,108,570 5,862,826
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loan disbursements, net of principal repayments (39,851,160) (31,772,797)
Purchase of property and equipment (1,883,811) (1,158,517)
Purchases of Federal Home Loan Bank of Atlanta stock (350,700) (452,100)
Sale of available-for-sale securities 1,256,649 260,000
Purchase of available-for-sale securities (72,640,967) (14,893,970)
Maturity of available-for-sale securities 6,500,000 -
Maturity of investment securities 2,099,000 -
Purchase of investment securities - (2,000,000)
Principal repayments of available-for-sale securities 2,677,313 123,972
Construction disbursements-other real estate owned (137,049) -
Sale of other real estate owned 465,939 -
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (101,864,786) (49,893,412)
- ------------------------------------------------------------------------------------------------
Cash flows form financing activities:
Net increase in deposits 25,466,631 26,390,220
Proceeds from advances from Federal Home Loan Bank of Atlanta 30,000,000 10,000,000
Proceeds of other borrowings 26,138,156 5,189,449
Repayment of advances from Federal Home Loan Bank of Atlanta (10,000,000) (6,000,000)
Proceeds from stock issuance, net 256,640 2,343,600
Proceeds from trust preferred securities offering 20,000,000 -
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 91,861,427 37,923,269
- ------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (4,894,789) (6,107,317)
Cash and cash equivalents at beginning of period 45,917,211 32,510,060
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $41,022,422 $26,402,743
- ------------------------------------------------------------------------------------------------
Supplemental information:
Interest paid on deposits and borrowed funds $4,703,127 $ 2,416,196
Real estate acquired in satisfaction of loans 435,510 640,386
- ------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE 1 - BASIS OF PRESENTATION
The foregoing consolidated financial statements of First Mariner
Bancorp (the "Company") are unaudited; however, in the opinion of management,
all adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of the results of interim periods have been included. These
statements should be read in conjunction with the financial statements and
accompanying notes included in First Mariner Bancorp's Annual Report on Form
10-KSB for the year ended December 31, 1997. The results shown in this interim
report are not necessarily indicative of results to be expected for the full
year.
Certain reclassifications have been made to amounts previously reported
to conform with current classifications. Consolidation of financial information
has resulted in the elimination of all significant intercompany accounts and
transactions.
NOTE 2 - COMPREHENSIVE INCOME
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No. 130).
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
financial statements that are displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period of transactions
and other events and circumstances from nonowner sources. Comprehensive income
will thus represent the sum of net income and other accumulated comprehensive
income. The accumulated balance of other accumulated comprehensive income is
required to be displayed separately from retained earnings and additional
paid-in capital in the statement of financial position. The adoption of SFAS No.
130 resulted primarily in the Company reporting unrealized gains and losses on
available-for-sale securities in other comprehensive income.
6
<PAGE>
Six months ended
June 30,
1998 1997
---- ----
Net income $ 304,937 $ 88,082
Changes in accumulated other comprehensive
income-unrealized gains (losses) on investments (122,981) 420,107
-----------------------
Total comprehensive income $ 181,956 $ 508,189
=======================
NOTE 3 - REDEEMABLE TRUST PREFERRED SECURITIES
Company-obligated mandatorily redeemable preferred securities of a
trust holding solely parent company subordinated debt securities (trust
preferred securities) consist of 2,000,000 securities with a liquidation
amount of $10 per security, which were issued in June 1998 by a statutory
business trust, Mariner Capital Trust. The trust is a wholly owned subsidiary
of the Company because the Company owns all of the securities of the trust
that possess general voting powers. The trust used the proceeds of the trust
preferred securities to purchase at par $20,600,000 of 8.3% junior
subordinated debentures of the Company due June 30, 2028. On July 24, 1998,
an additional 145,000 securities were issued by Mariner Capital Trust
pursuant to an option granted to the underwriter. The trust used these
proceeds to purchase at par $1,513,401 of 8.3% of junior subordinated
debentures of the Company due June 30, 2028. The junior subordinated
debentures are the sole assets of the trust.
Payments to be made by the trust on the trust preferred securities
are dependent on payments that the Company has undertaken to make,
particularly the payments to be made by the Company on the debentures.
Considered together, the obligations of the Company constitute a full and
unconditional guarantee of the trust's obligations under the trust preferred
securities.
Distributions on the trust preferred securities are payable from
interest payments received on the debentures and are due quarterly at a rate of
8.3% of the liquidation amount, subject to deferral for up to five years under
certain conditions. Distributions payable are included in operating expenses.
Redemptions of the trust preferred securities are payable at the liquidation
amount from redemption payments received on the debentures. The Company may
redeem the debentures at par at any time after June 30, 2003.
NOTE 4 - PER SHARE DATA
On May 12, 1998, the Board of Directors declared a 10% stock dividend
payable to shareholders of record on May 26, 1998. Average shares outstanding
and all per share amounts are based on the increased number of shares giving
retroactive effect to the stock dividend.
7
<PAGE>
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted EPS is computed after adjusting the numerator and denominator of the
basic EPS computation for the effects of all dilutive potential common shares
outstanding during the period. The dilutive effects of options, warrants and
their equivalents are computed using the "treasury stock" method.
Information relating to the calculation of earnings per common share is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income-basic and diluted $ 153,595 $ 64,006 $ 304,937 $ 88,082
------------------------------------------------------------
Weighted-average shares outstanding 3,159,000 3,120,989 3,150,749 3,092,912
Dilutive securities-options and warrants 430,244 209,350 439,168 230,827
------------------------------------------------------------
Adjusted weighted-average shares
outstanding-dilutive 3,589,244 3,330,339 3,589,917 3,323,739
------------------------------------------------------------
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion should be read and reviewed in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
In addition to historical information, this Form 10-Q contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans and expectations, and unknown outcomes. The
Company's actual results could differ materially from management's expectations.
Factors that could contribute to those differences include, but are not limited
to, changes in regulations applicable to the Company's business, 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.
THE COMPANY
The Company is a bank holding company formed in Maryland in 1994 under
the name MarylandsBank Corporation that later changed its name to First Mariner
Bancorp in May 1995. The business of the Company is conducted through its
wholly-owned subsidiary First Mariner Bank (the "Bank"), whose deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank, which
is headquartered in Baltimore City, serves the central region of the State of
Maryland through 18 full service branches and 33 Automated Teller Machines
("ATMs").
8
<PAGE>
The Bank is an independent community bank engaged in the general
commercial banking business with particular emphasis on the needs of individuals
and small to mid-sized businesses. The Bank emphasizes personal attention and
professional service to its customers while delivering a range of traditional
and contemporary financial products.
The Company's executive offices are located at 1801 South Clinton
Street, Baltimore, Maryland 21224 and its telephone number is (410) 342 - 2600.
FINANCIAL CONDITION
The Company's total assets were $352,969,019 at June 30, 1998, compared
to $256,984,306 at December 31, 1997, increasing $95,984,713 or 37.35% for the
six months of 1998. Earning assets increased $84,821,505 or 35.87% to
$321,317,471 from $236,495,966, primarily due to purchases of available-for-sale
securities.
The investment portfolio, consisting of available-for-sale and
held-to-maturity securities increased $60,417,083 from December 31, 1997 as the
Company engaged in a leverage strategy as a result of the completion of the
issuance of $20 million of trust preferred securities of Mariner Capital Trust,
a trust established by the Company for financing purposes. These trust preferred
securities are classified as long term borrowings for balance sheet purposes,
but a portion of the proceeds qualify as Tier 1 Capital for regulatory purposes.
Interest bearing deposits as of June 30, 1998 fell $12,342,715 to $20,334,020
when compared to the December 31, 1997 balance of $32,676,735. Investment
securities designated as available-for-sale and interest-bearing deposits
represent a significant source of liquidity as of June 30, 1998.
The investment portfolio at carrying value consists of the following:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. Treasury securities and agency
notes $ 2,005,443 $ 6,500,000 $ 6,503,234 $ 8,600,621
Mortgage backed securities 86,385,747 24,122,529 - -
Other securities 6,639,688 1,693,521 - -
Unrealized gains 335,879 536,237 - -
---------------------------------------------------------------------
Total investment securities $ 95,366,757 $ 32,852,287 $ 6,503,234 $ 8,600,621
---------------------------------------------------------------------
</TABLE>
Total loans receivable increased $39,713,485 or 27.57% to $183,785,446
for the first six months of 1998. The majority of the increase was real estate
secured loans. Mortgage loans held for sale decreased $3,317,048 from
$16,895,062 at December 31, 1997 to $13,578,014 at June 30, 1998, reflecting an
accelerated pace of delivery of residential mortgages to investors by the Bank's
mortgage banking subsidiary, First
9
<PAGE>
Mariner Mortgage Corporation. First Mariner Mortgage Corporation originated
$93,704,000 of residential mortgages during the first six months of 1998 in
comparison to approximately $27,460,000 during the first six months of 1997.
The loan portfolio was comprised of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
<S> <C> <C> <C> <C>
TYPE OF LOANS
Commercial $ 26,263,722 14.27% $ 24,118,724 16.69%
Commercial real estate
and construction (1) 100,340,784 54.51% 81,039,474 56.06%
Residential real estate 46,384,838 25.20% 34,396,190 23.80%
Consumer and other 11,081,902 6.02% 4,992,111 3.45%
------------------------------------------------------------
Total loans 184,071,246 100.00% 144,546,499 100.00%
Add:
Unamortized loan premiums 106,690 139,564
Less:
Unearned income 392,490 614,102
------------- -------------
Net loans $ 183,785,446 $ 144,071,961
------------- -------------
</TABLE>
(1) Net of undisbursed principal
CREDIT RISK MANAGEMENT
The second quarter provision for loan losses in 1998 was $217,000
resulting in a year-to-date provision for loan losses of $369,467, which
compares to $235,762 for the six month period ended June 30, 1997. The allowance
for loan losses stands at $1,885,317 at June 30, 1998 compared to $1,613,621 at
December 31, 1997. As of June 30, 1998 the provision for loan losses is 1.03% of
outstanding loans as compared to 1.22% at June 30, 1997.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Allowance for loan losses, beginning of period $ 1,613,621 $ 1,241,663
----------------------------------
Loans charged off:
Commercial (25,000) -
Real estate (70,000) -
Consumer (4,167) -
----------------------------------
Total loans charged off (99,167) -
----------------------------------
Recoveries
Commercial - -
Real estate - -
Consumer 1,396 -
----------------------------------
Total recoveries 1,396 -
----------------------------------
10
<PAGE>
Net chargeoffs (97,771) -
----------------------------------
Provision for loan losses 369,467 235,762
----------------------------------
Allowance for loan losses, end of period $ 1,885,317 $ 1,477,425
==================================
Loans (net of premiums and discounts)
Period-end balance 183,785,446 117,573,476
Average balance during period 162,173,000 105,921,000
Allowance as percentage of period-end loan balance 1.03% 1.22%
Percent of average loans:
Provision for loan losses (annualized) 0.46% 0.45%
Net chargeoffs (annualized) 0.12% 0.00%
</TABLE>
Non-performing assets, expressed as a percentage of total assets,
decreased to 0.81% at June 30, 1998 from 1.36% at December 31, 1997, reflecting
the decrease in loans on nonaccrual basis. Nonaccrual loans were $793,000 at
June 30, 1998 compared to $1,550,000 at December 31, 1997 as the result of
payments received on these loans. Non-performing assets were as follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Loans on nonaccrual basis $ 793,000 $ 1,550,000 $ 2,473,000
Real estate acquired by foreclosure 2,051,000 1,944,000 640,000
----------------------------------------------
Total non-performing assets $ 2,844,000 $ 3,494,000 $ 3,113,000
===============================================
Loans past-due 90 days or more $ 49,000 $ 276,000 $ 1,558,000
===============================================
</TABLE>
At June 30, 1998, the allowance for loan losses represented 237.7%
of nonaccruing loans compared to 104.1% at December 31, 1997. Management
believes the allowance for loan losses at June 30, 1998 is adequate.
Deposits were $222,725,310 as of June 30, 1998, increasing
$25,455,982 or 12.90% from the December 31, 1997 balance of $197,269,328. The
increase in deposits is attributable to activity generated by an advertising
campaign and the expanding branch network. Since January 1997, the Company
has opened six branch banking offices, two of which have been in supermarket
locations. Federal Home Bank of Atlanta advances and other borrowings
increased by $46,138,156 as of June 30, 1998 from $30,330,935 as of December
31, 1997 to $76,469,091 at June 30, 1998. The Company's offering of Trust
Preferred securities was completed on June 30, 1998 in the amount of
$20,000,000. The increase in borrowings was part of the Company's leverage
strategy whereby these funds were used primarily to purchase
available-for-sale mortgage backed securities at a positive net interest
margin.
11
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME. Second quarter net interest income before
provision for loan losses was $2,768,893 in the second quarter of 1998, an
increase of 53.50% over $1,803,835 in the second quarter of 1997, reflecting
primarily an increase of $87,788,000 in average earning assets. The increase in
average earning assets was comprised of an increase of $42,082,000 in average
loans and $45,706,000 in average investments, primarily available-for-sale
mortgage backed securities. For the six month period ended June 30, net interest
income before provision for loan losses was $5,209,624 in 1998 compared to
$3,524,174 in 1997 reflecting an increase of 47.83%. The net yield on earning
assets was 4.41% for the first six months of 1998 as compared to 5.18% for the
comparable period of 1997.
NONINTEREST INCOME AND EXPENSES-Noninterest income increased
$648,324 or 132.26% for the second quarter of 1998 to $1,138,530 from
$490,206 in the second quarter of 1997. For the six month period in 1998,
noninterest income was $2,171,213 compared to $855,249 for the six month
period of 1997, an increase of $1,315,964 or 153.87%. The principal reasons
were gains on sale of securities, gains on sale of loans and an increase in
deposit related fees. The increase in service charge on deposits was a result
of an increase in the number of ATMs from 26 at June 30, 1997 to 33 at June
30, 1998 and an increase in overdraft fees relating to a greater number of
transaction account holders. The increase in the gains on sale of loans was a
result of the greater volume of residential mortgage loans originated and
sold by First Mariner Mortgage Corporation.
Second quarter noninterest expense increased $1,407,555 or 66.10% to
$3,536,828 in 1998 from $2,129,273 in 1997. For the six month period ended
June 30, 1998, noninterest expense was $6,706,433 compared to the six month
period ended June 30, 1997 of $4,055,579, an increase of $2,650,854 or
65.36%. Increases in almost all areas were incurred to support the
substantially increased asset base and the expanding branch network.
INCOME TAXES- The Company did not recognize any income tax benefit or
expense for the six months ended June 30, 1998 or 1997 due to the availability
of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity increased $438,597 or 1.63% in the first six
months of 1998 to $27,404,253 from $26,965,656 as of December 31, 1997. No cash
dividends have been declared by the Company since its inception. A ten percent
stock dividend was declared on May 12, 1998 and paid to stockholders of record
on May 26, 1998.
12
<PAGE>
Banking regulatory authorities have implemented strict capital
guidelines directly related to the credit risk associated with an institution's
assets. Banks and bank holding companies are required to maintain capital levels
based on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
The Bank has exceeded its capital adequacy requirements to date. The
Company regularly monitors its capital adequacy ratios to assure that the Bank
exceeds its regulatory capital requirements. The regulatory capital ratios are
listed below:
At June 30,
-------------------------
(unaudited)
1998 1997
Regulatory capital ratios
Leverage
Consolidated 13.2% 9.6%
The Bank 11.9% 11.0%
Tier 1 capital to risk weighted assets
Consolidated 16.3% 13.7%
The Bank 14.8% 11.5%
Total capital to risk weighted assets
Consolidated 22.2% 14.5%
The Bank 15.7% 12.5%
The Bank's principal sources of liquidity are cash and cash
equivalents, which are cash on hand, amounts due from financial institutions,
federal funds sold, stock investments, money market mutual funds, interest
bearing deposit and available-for-sale securities. The levels of such assets are
dependent on the Bank's operating, financing and investment activities at any
given time and are influenced by anticipated deposit flows and loan growth.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS), DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION No. 131. No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial statements issued to shareholders. No. 131 is effective
for financial statements periods beginning after December 15, 1997.
Management intends to adopt its provision during 1998.
13
<PAGE>
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. Initial
application of this Statement should be as of the beginning of an entity's
fiscal quarter, on that date, hedging relationships must be designated as new
and documented pursuant to the provisions of SFAS No. 133. Earlier application
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of SFAS No. 133. It should not be applied
retroactively to financial statements of prior periods. Management is in the
process of evaluating the potential impacts of this new accounting standard.
YEAR 2000 ACTION PLAN
In 1997, the Company adopted a Year 2000 Action Plan (the "Plan").
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.
14
<PAGE>
ITEM 3 - Quantitative and qualitative disclosures about market risk
Results of operations for financial institutions, including the
Company, may be materially and adversely affected by changes in prevailing
economic conditions, including declines in real estate values, rapid changes in
interest rates and the monetary and fiscal policies of the federal government.
The profitability of the Company is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities (net interest income), including advances
from Federal Home Loan Bank of Atlanta ("FHLB"). Interest rate risk arises from
mismatches (i.e., the interest sensitivity gap) between the dollar amount of
repricing or maturing assets and liabilities and is measured in terms of the
ratio of the interest rate sensitivity gap to total assets. More assets
repricing or maturing than liabilities over a given time period is considered
asset-sensitive and is reflected as a positive gap, and more liabilities
repricing or maturing than assets over a give time period is considered
liability-sensitive and is reflected as negative gap. An asset-sensitive
position (i.e., a positive gap) will generally enhance earnings in a rising
interest rate environment and will negatively impact earnings in a falling
interest rate environment, while a liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and negatively impact earnings in a rising interest rate
environment. Fluctuations in interest rates are not predictable or controllable.
The Company has attempted to structure its asset and liability management
strategies to mitigate the impact on net interest income of changes in market
interest rates. However, there can be no assurance that the Company will be able
to manage interest rate risk so as to avoid significant adverse effects on net
interest income. At June 30, 1998, the Company had a one year cumulative
negative gap of approximately $36.6 million or 10.4% of total assets.
15
<PAGE>
PART II - Other Information
Item 1 - Legal proceedings - None
Item 2 - Changes in securities and use of proceeds - None
Item 3 - Defaults on senior securities - None
Item 4 - Submission of matters to a vote of security holders - None
Item 5 - Other information
On June 30, 1998, the Registrant's subsidiary, Mariner Capital
Trust, closed a public offering of its 8.3% Trust Preferred Securities.
Gross proceeds were $20,000,000. The Registrant sold $20,600,000 of its
8.3% Junior Subordinated Debentures Due June 30, 2028 to the Trust in
connection with the transaction.
A stock dividend of 10% was declared on May 12, 1998 payable to
stockholders of record on May 26, 1998.
Item 6 - Exhibits and reports on Form 8-K
(a) Exhibit Number
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MARINER BANCORP
Date: 8/14/98 By: /s/ Edwin F. Hale Sr.
------- -----------------------------------
Edwin F. Hale Sr.
Chairman and Chief Executive Officer
Date: 8/14/98 By: /s/ Kevin M. Healey
------- -----------------------------------
Kevin M. Healey
Controller (Financial Chief Officer)
17
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