<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the fiscal year ended December 31, 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)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, par value $.05 per share
(Title of Class)
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 past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and disclosure will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 25, 1999 was
$29,550,000.
- --------------------------------------------------------------------------------
The number of shares of common stock outstanding as of March 25, 1999
was 3,166,813 shares.
- --------------------------------------------------------------------------------
1
<PAGE>
FIRST MARINER BANCORP
- --------------------------------------------------------------------------------
Documents Incorporated By Reference
Portions of First Mariner Bancorp's definitive Proxy Statement to be
filed with the Commission no later than 120 days after the close of the fiscal
year--Part III. First Mariner Bancorp's Annual report of Stockholders--Parts
II, IV.
Annual Report on Form 10-K
December 31, 1998
Table of Contents
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 Market for Common Stock and Related Stockholder Matters 13
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk 14
Item 8 Financial Statements and Supplementary Data 14
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 14
PART III
Item 10 Directors and Executive Officers of the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial Owners and Management 15
Item 13 Certain Relationships and Related Transactions 15
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
FORWARD-LOOKING STATEMENTS
Part I and Part II of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans and expectations, and unknown outcomes
including statements regarding growth strategies, new banking services, the year
2000 issue, and payment of dividends. 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, and are
described further in Exhibit 99 to this Form 10-K.
PART I
ITEM I BUSINESS
GENERAL
First Mariner Bancorp (the "Company") is a bank holding company formed in
Maryland in 1994 under the name MarylandsBank Corp. The business of the Company
is conducted through its wholly-owned subsidiary First Mariner Bank (the
"Bank"), whose deposits are insured by the Federal Deposit Insurance Corporation
("FDIC'). The Bank, which is headquartered in Baltimore City, serves the central
region of the State of Maryland through 24 full service branches and 37
Automated Teller Machines ("ATMs"). At December 31, 1998, the Company had total
assets of $497,487,000. The Company and its subsidiaries had approximately 290
full time and part time employees as of December 31, 1998.
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 lending services through its wholly
owned subsidiary, First Mariner Mortgage Corporation ("FMMC").
The Company's executive offices are located at 1801 South Clinton Street,
Baltimore, Maryland 21224 and its telephone number is (410) 342-2600.
BACKGROUND AND HISTORY
In early 1994, an investment group led by George H. Mantakos (the "Mantakos
Group"), the President of the Bank, acquired Farmers Bank, FSB, a federal
savings bank ("Farmers"), which operated two banks, one in Baltimore City and
one in Baltimore County. In July, 1994, the Mantakos Group also acquired a
controlling interest in Garibaldi Federal Savings Bank ("Garibaldi"), which
operated a thrift in nearby Baltimore County. In late 1994 Garibaldi changed its
name to MarylandsBank, FSB. In May, 1995, in a series of transactions, Farmers
and MarylandsBank, FSB were merged and became a wholly-owned subsidiary of the
Company, which changed its name to "First Mariner Bancorp."
In late 1994, the Company began negotiations with Edwin F. Hale, Sr. to
obtain an infusion of capital. These negotiations led to the transactions
described above and to the private offering by the Company of 500,000 shares of
its common stock at $10 per share, for an aggregate of $5,000,000. In connection
with that offering the Company issued warrants to purchase in the aggregate an
additional 416,664 shares at an exercise price of $10 per share. In this
offering, Mr. Hale purchased 300,000 shares for $3,000,000 and received warrants
to purchase an additional 300,000 shares. Mr. Hale was then elected as Chairman
and Chief Executive Officer of the Company, and Mr. Mantakos continued as
President of the Bank.
In August 1995, the Company issued an additional 500,000 shares of
its common stock in another private placement at $10 per share for $5,000,000 in
the aggregate. In connection with that offering, the Company issued warrants to
purchase in the aggregate an additional 206,659 shares at $10 per share. In this
offering, Mr. Hale purchased 60,000 shares for $600,000 and received warrants to
purchase an additional 60,000 shares. Mr. Hale subsequently purchased an
additional 31,687 shares and warrants to purchase an additional 21,672 shares in
privately negotiated transactions.
3
<PAGE>
Following Mr. Hale's election as Chairman and Chief Executive Officer, the
Company assembled a Board of Directors of well-known business and civic leaders
who have strong ties to the Company's market area and are committed to the
growth and success of the Company. Mr. Hale also recruited members of management
from other successful local financial institutions with knowledge of the local
market and experience in extending credit to small to mid-sized businesses. The
Company then embarked upon a business strategy and capitalization plan to
provide management with the tools used to optimize the market opportunities
created as a result of the consolidation of the banking industry. In December
1996, the Company sold 1,540,000 shares of common stock in an initial public
offering, raising its stockholders' equity by $15,249,000. In January 1997, the
Company sold an additional 231,000 shares of common stock as a result of the
over allotment of shares in the initial public stock offering raising
stockholders' equity an additional $2,344,000. During the year ended December
31, 1997, options and warrants were exercised for an additional 15,730 shares
increasing stockholders' equity by $143,000. During the year ended December 31,
1998, options and warrants were exercised for an additional 30,094 shares
increasing stockholders' equity by $275,000. In May 1998, a 10% stock dividend
was declared for stockholders on record and all share amounts are adjusted for
that stock dividend.
MARKET AREA AND MARKET STRATEGY
The Bank's core market is central Maryland, which consists primarily of
Baltimore City, Baltimore County, Harford County, Talbot County and Anne Arundel
County. This area contains a high concentration of population and businesses and
the local governments are committed to business development in the region. The
Company believes that its market area is economically stable and is largely
middle-class with a median family income of $44,000.
As an independent Maryland-based community bank, the Bank is engaged in the
general commercial banking business with particular emphasis on the needs of
individuals and small to mid-sized business. The Bank emphasizes personal
attention and professional service to its customers while delivering a range of
traditional and contemporary financial products and performing many of the
essential banking services offered by its larger competitors. The Bank offers
its customers access to local bank officers who are empowered to act with
flexibility to meet customers' needs in order to foster and develop long-term
loan and deposit relationships. The Company believes that individuals and
businesses in its market area are dissatisfied with the large out-of-state
banking institutions which have acquired local banks. Management believes that
the Bank has a window of opportunity to establish business ties with customers
who have been displaced by the consolidations and who are anxious to forge
banking relationships with locally owned and managed institutions. These
consolidations also benefit the Bank by making available experienced and
entrepreneurial managers from larger financial institutions and acquisition
opportunities from the remaining small independent banks in the Company's market
area.
GROWTH STRATEGIES
The Company's continuing strategy is to capture market share and build a
community franchise for its shareholders, customers and employees. To do so, the
Company intends to:
- Expand its existing network of traditional branches and ATMs to
ultimately operate a contiguous delivery system to accommodate
customers' needs for a continuum of essential banking services;
- Continue to attract highly experienced, entrepreneurial managers and
staff with in-depth knowledge of the Bank's customers and target
market;
- Acquire financial institutions or branches which offer compatible
products, marketing opportunities, potential cost savings or economies
of scale;
- Establish nontraditional joint ventures with retail establishments such
as Mars Super Market and other retail entities that have high traffic
patterns; and
- Invest in new products and technology.
To implement the strategy to create nontraditional joint ventures with
retail establishments the Bank has opened 7 full service branches and installed
14 ATMs in Mars Super Markets, a local supermarket chain ("Mars"), and may
increase its presence in such stores in the future. Mars currently operates 15
markets, all of which are in the Bank's market area. Christopher R. D'Anna, vice
president of Mars is a director 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
4
<PAGE>
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 business (generally up to $20 million in annual sales) and
such loans are usually accompanied by significant related deposits. Commercial
loan products include residential and commercial 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.
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 "Absolutely Free Checking." The Bank's services
include alternatives to bank accounts, such as mutual funds and annuities.
Consumer loan products offered by the Bank include home equity lines of credit,
fixed rate second mortgages, new and used auto loans, new and used boat loans,
overdraft protection, unsecured personal credit lines and the debit card.
MORTGAGE BANKING. The Bank's mortgage banking business is structured to
provide a source of fee income largely from the process of originating product
for sale on the secondary market. Mortgage banking capabilities include FHA/VA
origination; conventional and nonconforming mortgage underwriting; and
construction and permanent financing. The Bank intends to improve its
competitive position in this market by streamlining the mortgage underwriting
process through the introduction of advanced technology.
COMMUNITY REINVESTMENT ACT. The Bank has a strong commitment to its
responsibilities under the Community Reinvestment Act and actively searches for
opportunities to meet the development needs of all members of the community it
serves, including persons of low to moderate income in a manner consistent with
safe and sound banking practices. The Bank currently fulfills this commitment by
participating in loan programs sponsored or guaranteed by the SBA, FHA, VA,
Maryland Industrial Development Financing Authority, and the Settlement Expense
Loan Program.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At December 31, 1998, the Bank's loan portfolio
totaled $242.7 million representing approximately 48.8% of its total assets of
$497.5 million. The following table sets forth the Bank's loans by major
categories as of December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) Amount Percentage
------ ----------
<S> <C> <C>
Commercial $ 55,792 23.0%
Real Estate Construction-Consumer 17,706 7.3%
Real Estate Development and Construction 39,305 16.2%
Real Estate Mortgage:
Residential 63,371 26.1%
Commercial 46,193 19.0%
Consumer 20,358 8.4%
-------- -----
Total Loans $242,725 100.0%
-------- -----
-------- -----
</TABLE>
COMMERCIAL LOANS. The Bank originates secured and unsecured loans for
business purposes. Less than one percent of these loans are unsecured. Loans are
made to provide working capital to businesses in the form of lines of credit
which may be secured by real estate, accounts receivable, inventory, equipment
or other assets. The financial condition and cash flow of commercial borrowers
are closely monitored by the submission of corporate financial statements,
personal financial statements and income tax returns. The frequency of
submissions of required financial information depends on the size and complexity
of the credit and the collateral which secures the loan. It is the Bank's
general policy to obtain personal guarantees from the principals of the
commercial loan borrowers.
5
<PAGE>
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. The real estate development
and construction loan portfolio consisted of the following as of December 31,
1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(Dollars in thousands) Amount Percentage
------ ----------
<S> <C> <C>
Commercial Construction $25,626 65.2%
Commercial Acquisition and Construction 1,569 4.0%
Commercial Land Acquisition 1,602 4.1%
Residential Builders Construction 4,863 12.4%
Residential Builders Acquisition and Development 3,775 9.6%
Residential Builders Acquisition, Development and Construction 1,870 4.7%
------- -----
Total Real Estate - Development and Construction $39,305 100.0%
------- -----
------- -----
</TABLE>
- --------------------------------------------------------------------------------
The Bank provides interim real estate acquisition, development and
construction loans to builders, developers, and persons who will ultimately
occupy the single family dwellings. 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. Real estate development and
construction loan funds are disbursed periodically at pre-specified stages of
completion. Interest rates on these loans are generally adjustable. The Bank
carefully monitors these loans with on-site inspections and control of
disbursements.
Loans to individuals for the construction of their primary residences are
typically secured by the property under construction, frequently include
additional collateral (such as second mortgage on the borrower's present home),
and commonly have maturities of nine to twelve months.
Loans to residential builders are for the construction of residential homes
for which a binding sales contract exists and the prospective buyers have been
pre-qualified for permanent mortgage financing. Development loans are made only
to developers with a proven track record. Generally, these loans are extended
only when the borrower provides evidence that the lots under development will be
sold to builders satisfactory to the Bank.
Development and construction loans are secured by the properties under
development 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 borrowers' equity in the
project, independent appraisals, costs estimates and pre-construction sale
information.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. The Bank's wholly-owned subsidiary,
First Mariner Mortgage Corporation, originates adjustable and fixed-rate
residential mortgage loans. Such mortgage loans are generally originated under
terms, conditions and documentation acceptable to the secondary mortgage market.
The Bank will place some of these loans into its portfolio, although the
substantial majority are sold to investors.
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, 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 and boats. Home equity loans are typically made up to 80% of the
appraised value, less the amount of any existing prior liens on the property and
generally
6
<PAGE>
have a maximum term of 10 years, although the bank does offer a 90% loan to
value product. The interest rates on home equity loans 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 well defined credit process that includes credit evaluation of
borrowers, risk-rating of credits, establishment of lending limits and
application of lending procedures, including the holding of adequate collateral
and the maintenance of compensating balances, as well as procedures for on-going
identification and management of credit deterioration. Regular portfolio reviews
are performed to identify potential underperforming credits, estimate loss
exposure and to ascertain compliance with the Bank's policies. For significant
problem loans, management review consists of evaluation of the financial
strengths of the borrower and the guarantor, the related collateral and the
effects of economic conditions.
The Bank's loan approval policy provides for various levels of individual
lending authority. The maximum lending authority granted by the Bank to any one
individual is $250,000. A combination of approvals from certain officers may be
used to lend up to an aggregate of $500,000. The Board's Loan Committee is
authorized to approve loans up to the Bank's legal lending limit, which
approximates $5,350,000 as of December 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 and
international banking, which the Bank does not offer, and greater financial
resources or have substantially higher lending limits than does the Bank.
To compete with other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers and specialized services
tailored to meet its customers' needs. In those instances where the Bank is
unable to accommodate a customers needs, the Bank will arrange for those
services to be provided by other banks with which it has a relationship.
Recent changes in banking laws facilitate interstate branching and merger
activity among banks. Since September, 1995, certain bank holding companies are
authorized to acquire banks throughout the United States. In addition, on and
after June 1, 1997, certain banks have been permitted to merge with banks
organized under the laws of different states. Such changes will result in an
even greater degree of competition in the banking industry and the Company and
the Bank may be brought into competition with institutions with which it does
not presently compete. As a result, intense competition in the Bank's market
area may be expected to continue for the foreseeable future.
7
<PAGE>
SUPERVISION AND REGULATIONS
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 Board of Governors of the Federal Reserve System. 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. 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
permissable 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 subsidiaries on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs including funds for the payment of dividends,
interest and operating expenses. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, the Bank may not generally require a customer to
obtain other services from itself or the Company, and may not require that a
customer promise not to obtain other services from a competitor as a condition
to and extension of credit to the customer.
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 institutions insured
by the Federal Deposit Insurance Corporation (the "FDIC") can be held liable for
any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of, or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guaranty liabilities generally are
superior in priority to the obligations of the depository institution to its
shareholders due solely to their status as shareholders and obligations to other
affiliates.
STATE BANK HOLDING COMPANY REGULATION. As a Maryland bank holding company,
the Company is subject to various restrictions on its activities as set forth in
Maryland law, in addition to those restrictions set forth in federal law. Under
Maryland law, a bank holding company that desires to acquire a bank or bank
holding company that has its principal place of business in Maryland must obtain
approval from the Maryland Commissioner of Financial
8
<PAGE>
Regulation (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 Company's banking subsidiary is a
Maryland state-chartered trust company, with all the powers of a commercial
bank. regulated and examined by the Maryland Commissioner and the Federal
Deposit Insurance Corporation (the "FDIC'). The FDIC has extensive enforcement
authority over the institutions it regulates to prohibit or correct activities
which violate law, regulation or written agreement with the FDIC or which are
deemed to constitute unsafe or unsound practices. Enforcement actions may
include the appointment of a conservator or receiver, the issuance of a cease
and desist order, the termination of deposit insurance, the imposition of civil
money penalties on the institution, its directors, officers, employees and
institution-affiliated parties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the removal of or restrictions
on directors, officers, employees and institution-affiliated parties and the
enforcement of any such mechanisms through restraining orders or other court
actions.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
The Company's current ability to pay dividends is largely dependent upon
the receipt of dividends from its banking subsidiary, the Bank. Both federal and
state laws impose restrictions on the ability of the Bank to pay dividends.
Federal law prohibits the payment of a dividend by an insured depository
institution like the Bank if the depository institution is considered
"undercapitalized" or if the payment of the dividend would make the institution
"undercapitalized". See "____ "Capital Requirements" below. The Company does not
anticipate that such provisions will be applied 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 Commissioner,
from surplus in excess of 100% of required capital stock. It however, the
surplus of a Maryland bank is less than 100% of its required capital stock, cash
dividends may not be paid in excess of 90% of net earnings. 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 of
December 31, 1998, negative undivided profits (accumulated deficit). The Company
anticipates that such approval will be required for the foreseen futures.
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 the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels,
whether because of its financial condition or actual or anticipated growth. The
risk-based guidelines define a two-tier capital framework. Tier 1 capital
consists of common and qualifying preferred stockholders' equity, less certain
intangibles and other adjustments. Tier 2 capital consists of subordinated and
other qualifying debt, and the allowance for credit losses up to 1.25 percent of
risk-weighted assets. The sum of Tier 1 and Tier 2 capital less investments in
unconsolidated subsidiaries represents qualifying total capital, at least 50
percent of which consists of Tier 1 capital. Risk-based capital ratios are
calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets
and off-balance sheet exposures are assigned to one of four categories of
risk-weights, based primarily on relative credit risk. The minimum Tier 1
capital ratio is 4 percent and the minimum total capital ratio is 8 percent. At
December 31, 1998, the Company's ratio of Tier 1 to risk-weighted assets stood
at 12.2% and its ratio of total capital to risk-weighted assets stood at 13.1%.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3 percent, most
banking organizations are required to maintain ratios of at least 100 to 200
basis points above 3 percent. The Company's leverage ratio at December 31, 1998
was 7.2%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution
9
<PAGE>
is classified. Failure to meet the capital guidelines could also subject a
banking institution to capital raising requirements. An "undercapitalized" bank
must develop a capital restoration plan and its parent holding company must
guarantee that bank's compliance with the plan. The liability of the parent
holding company under any such guarantee is limited to the lesser of 5 percent
of the bank's assets at the time it became "undercapitalized" or the amount
needed to comply with the plan. Furthermore, in the event of the bankruptcy of
the parent holding company, such guarantee would take priority over the parent's
general unsecured creditors. In addition, FDICIA requires the various regulatory
agencies to prescribe certain non-capital standards for safety and soundness
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not meet
such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the revelant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6 percent, a total capital ratio of at
least 10 percent and a leverage ratio of at least 5 percent and not be subject
to a capital directive order. An "adequately capitalized' institution must have
a Tier 1 capital ratio of at least 4 percent, a total capital ratio of at least
8 percent and a leverage ratio of at least 4 percent, or a 3 percent in some
cases. Under these guidelines, the Bank is considered well capitalized. Banking
agencies have also adopted final regulations which mandate that regulators take
into consideration (I) concentrations of credit risk: (ii) interest rate risk
(when the interest rate sensitivity of an institution's assets does not match
the sensitivity of its liabilites or its off-balance-sheet position); and (iii)
risks from non-traditional activities, as well as an institution's ability to
manage those risks, when determining the adequacy of an institution's capital.
That evaluation will be made as a part of the institution's regular safety and
soundness examination. In addition, regulatory capital guidelines included a
measure for market risk.
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
the 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 laws 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.
LEGISLATION
In additon to extensive government regulation, laws and regulations
can change in unpredictable ways, often with significant effects on the way in
which financial institutions may conduct business. The enactment of banking
legislation such as the Financial Institution Reform, Recovery and Enforcement
Act of 1989 and FDICIA has affected the banking industry by, among other things,
broadening the powers of the federal banking agencies in a number of areas.
Subsequent banking legislation, such as the Riegle Community Development and
Regultory Improvement Act of 1994 and the Economic Growth and Regulatroy
Paperwork Reduction Act of 1996, have eased some of the regulatory burdens
imposed on banks and bank holding companies, including certain FDICIA
requirements, and are intended to make the bank regulatory system more
efficient. Other legislation that has been enacted in recent years has
substantially increased the level of competition among commercial banks, thrift
institutions and non-banking institutions, including insurance companies,
brokerage firms, mutual funds, investment banks and major retailers. The
enactment of the Riegle-Neal in 1994 has facilitated, and is expected to
continue to facilitate, consolidation within financial institutions that have
separate operations in two or more states and within the financial services
industry. See "Interstate Banking" above.
10
<PAGE>
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the states' legislatures, and
before the various bank regulatory agencies. Some of these proposals are
significant and, if adopted, could result in a fundamental restructuring of the
financial services industry. Although such legislation would likely have an
effect on the business of the Company and the Bank, the Company cannnot
accurately predict what that efect would be.
ITEM 2 PROPERTIES
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 48,000 square feet of space leased
from Edwin F. Hale, Sr., Chairman and Chief Executive Officer of the Company.
Rental for this space is approximately $689,000 annually, of which $654,000 is
allocated for 35,830 square feet of office and $35,000 is allocated for 1,170
square feet of Bank branch space and drive-up banking and customer parking
facilities. Management believes that such terms are at least as favorable as
those that could be obtained from an unaffiliated third party lessor.
The Bank has branches at the following locations:
<TABLE>
<CAPTION>
Square Lease Renewal
Location Feet Annual Rent Expiration Options
-------- ------ ----------- ---------- -------
<S> <C> <C> <C> <C>
1801 South Clinton Street 1,170 $ 35,000 10/31/13 --
(Baltimore City)
115 East Joppa Road 2,750 Own building -- --
Towson (Baltimore County) (subject to $25 ground
rent)
8631 Loch Raven Boulevard 1,000 $ 14,100 Month- --
Towson (Baltimore County) to-
Month
9833 Liberty Road 2,800 Owns building -- --
(Baltimore County) (subject to $12,000
ground rent)
12 A. S. Bel Air Parkway 2,288 Owns building 6/30/17 --
Bel Air (Harford County) (subject to $35,000
ground rent)
16 South Calvert Street 2,515 $ 26,595 5/14/01 5 Years
(Baltimore City)
2375 Rolling Road (Mars Store) 667 $ 36,500 11/1/00 5 Years
Woodlawn (Baltimore County)
Chesapeake Center Drive (Mars 484 $ 36,500 5/1/00 5 Years
Store) Glen Burnie (Anne Arundel
County)
1013 Reisterstown Town 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 6/30/01 5 Years
Annapolis (Anne Arundel County)
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1401 Pulaski Highway (Mars Store) 484 $ 36,500 12/3/01 5 Years
Edgewood (Harford County)
1770 Merritt Blvd 2,500 $ 32,500 2/19/07 5 Years
Dundalk (Baltimore County)
1740 York Road 1,200 $ 36,000 4/30/12 15 Years
Lutherville (Baltimore County)
1018 Beards Hill Rd (Mars Store) 525 $ 36,500 5/20/02 5 Years
Aberdeen (Harford County)
15 E. Padonia Road (Mars Store) 276 $ 36,500 10/19/02 5 Years
Timonium (Baltimore County)
8433 Bel Air Road 2,050 Owns building -- --
Perry Hall (Baltimore County)
8133 Elliott Road 2,099 $ 31,485 3/31/03 5 Years
Easton (Talbot County) x2
8206 Pulaski Highway 6,500 $ 38,350 2/28/08 5 Years
Rosedale (Baltimore County) x2
360 Governor Ritchie Highway 2,200 $ 40,700 5/31/08 5 Years
Severna Park (Anne Arundel County) x2
7878 Wise Avenue (Mars Store) 450 $ 36,500 9/15/03 5 Years
Dundalk (Baltimore County)
8587 Ft. Smallwood Rd (Mars Store) 450 $ 36,500 10/31/03 5 Years
Pasadena (Anne Arundel County)
176 Carroll Island Road 1,800 $ 25,200 2/1/04 5 Years
Baltimore (Baltimore County)
</TABLE>
- --------------------------------------------------------------------------------
ITEM 3 LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the Company other than those arising in the ordinary course of
business. In the opinion of management no such proceeding will have a material
adverse effect on the financial position or results of operations of the
Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
PART II
12
<PAGE>
ITEM 5 MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Shares of First Mariner Bancorp trades on The Nasdaq Stock Market's
National Market under the trading symbol FMAR. For the period January 1, 1998
through December 31, 1998 the high and low prices as quoted on The Nasdaq Stock
Market were $16.425 and $12.250, respectively.
As of December 31, 1998, First Mariner Bancorp had approximately 3,225
stockholders of record. Since the inception of the Company no cash dividends
have been declared. On May 22, 1998, a 10% stock dividend was declared and stock
distributed to stockholders of record.
RECENT COMMON STOCK PRICES
The Company's Common Stock is traded on the National Association of
Securities Dealers' Automated Quotation System ("Nasdaq") National Market tier
of the Nasdaq Stock Market under the symbol "FMAR".
The following table illustrates high and low sale prices of the Company's
Common Stock for the periods indicated, as adjusted to give retroactive effect
to a 10% stock dividend declared in May, 1998.
<TABLE>
<CAPTION>
Low High
<S> <C> <C>
1998 QUARTER ENDED:
Fourth quarter $12.250 $14.625
Third quarter 12.750 16.000
Second quarter 15.000 15.975
First quarter 14.175 16.425
1997 QUARTER ENDED:
Fourth quarter 13.725 15.300
Third quarter 11.138 15.413
Second quarter 10.800 11.813
First quarter 11.138 12.375
</TABLE>
ITEM 6 SELECTED FINANCIAL DATA
(Dollars in thousands except for per share data)
<TABLE>
<CAPTION>
For Year ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 12,022 $ 7,753 $ 3,629 $ 1,292 $ 705
Provision For Loan Losses 1,212 472 1,040 190 59
Noninterest Income 5,595 2,351 1,074 197 75
Noninterest Expense 16,245 9,459 5,836 2,581 979
Net Income (Loss) 1,123 365 (2,173) (1,282) (241)
Net Income (Loss) Per Common Share -
Basic 0.36 0.12 (1.56) (1.71) (.97)
Total Assets $ 497,487 $ 256,984 $ 132,562 $ 52,798 $ 26,303
Loans Receivable, Net 240,049 142,458 90,822 29,559 19,785
Deposits 262,311 196,962 102,289 41,487 20,883
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Stockholders' Equity 28,488 26,966 23,796 10,702 1,997
Allowance For Loan Losses 2,676 1,614 1,242 376 245
Net Charge-offs 150 100 174 59 22
Non-Performing Assets To Total Assets 0.63% 1.36% 1.19% 1.20% 2.63%
Return in Average Assets .32% .21% ( 2.64%) ( 3.45%) ( .89%)
Return in Average Equity 4.07% 1.39% (21.67%) (19.62%) (13.57%)
Regulatory capital ratios
Leverage 8% 15% 19% 28% 10%
Tier 1 capital to risk weighted assets 14% 17% 18% 34% 12%
Total capital to risk weighted assets 19% 18% 19% 35% 13%
</TABLE>
ITEM 7 THE INFORMATION REQUIRED BY THIS ITEM 7 IS INCORPORATED BY REFERENCE
HEREIN FROM THE ANNUAL REPORT OF STOCKHOLDERS ATTACHED AS EXHIBIT 13.
ITEM 7A 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") and other borrowing. Interest
rate risk arises from mismatches (i.e., the interest sensitivity gap) between
the dollar amount of repricing or maturing assets and liabilities and is
measured in terms of the ratio of the interest rate sensitivity gap to total
assets. More assets repricing or maturing than liabilities over a given time
period is considered asset-sensitive and is reflected as a positive gap, and
more liabilities repricing or maturing than assets over a give time period is
considered liability-sensitive and is reflected as negative gap. An
asset-sensitive position (i.e., a positive gap) will generally enhance earnings
in a rising interest rate environment and will negatively impact earnings in a
falling interest rate environment, while a liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and negatively impact earnings in a rising interest rate
environment. Fluctuations in interest rates are not predictable or controllable.
The Company has attempted to structure its asset and liability management
strategies to mitigate the impact on net interest income of changes in market
interest rates. However, there can be no assurance that the Company will be able
to manage interest rate risk so as to avoid significant adverse effects on net
interest income. At December 31, 1998, the Company had a one year cumulative
negative gap of approximately $76,463 million or 15% of total assets.
ITEM 8 FINANCIAL STATEMENTS AND RELATED NOTES REQUIRED BY THIS ITEM 8
IS INCORPORATED BY REFERENCE HEREIN FROM THE ANNUAL REPORT OF STOCKHOLDERS
ATTACHED AS EXHIBIT 13.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information relating to directors and executive officers of the
Company and Section 16(a) beneficial ownership reporting compliance is
incorporated by reference herein from the Company's proxy statement in
connection with its Annual Meeting of Stockholders to be held May 4, 1999, which
proxy statement will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year.
ITEM 11 EXECUTIVE COMPENSATION
Certain information relating to directors and executive officers
compensation, the Compensation Committee Report on Executive Compensation, and
stock performance is incorporated by reference herein from the Company's
definitive proxy statement in connection with its Annual Meeting of Stockholders
to be held on May 4, 1999, which proxy statement will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain Information relating to security ownership of directors, director
nominees, 5% beneficial owners and management is incorporated by reference
herein from the Company's definitive proxy statement in connection with its
Annual Meeting of Stockholders to be held on May 4, 1999, which proxy statement
will be filed with the Securities and Exchange Commission no later than 120 days
after the close of the fiscal year.
ITEM 13 CERTAIN REALTIONSHIPS AND RELATED TRANSACTIONS
Certain information relating to certain relationships and related
transactions is incorporated by reference herein from the Company's definitive
proxy statement in connection with its Annual Meeting of Stockholders to be held
May 4, 1999, which proxy statement will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1), (2) FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Statements of Financial Condition as of December 31,
1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements as of December 31, 1998,
1997 and 1996
(a)(3) Exhibits Required to be Filed by Item 601 of Regulation S-K
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of First Mariner
Bancorp (Incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form SB-2, as amended, file no. 333-16011
(the "1996 Registration Statement")
3.2 Amended and Restated Bylaws of First Mariner Bancorp
(Incorporated by reference to Exhibit 3.2 of the 1996 Registration
Statement)
10.1 1996 Stock Option Plan of First Mariner Bancorp (Incorporated by
reference to Exhibit 10.1 of the 1996 Registration Statement)
10.2 Employment Agreement dated May 1, 1995 between First Mariner
Bancorp and First Mariner Bank and George H. Mantakos (Incorporated
by reference to Exhibit 10.2 of the 1996 Registration Statement)
10.3 Lease Agreement dated March 1, 1996 between First Mariner Bank
and Mars Super Markets, Inc. (Incorporated by reference to Exhibit
10.4 of the 1996 Registration Statement)
15
<PAGE>
10.4 Lease Agreement dated November 1, 1997 between Edwin F. Hale,
Sr. And First Mariner Bank (Incorporated by reference to Exhibit 10.4
of Pre-Effective Amendment Number 1 to Form S-1, file no.
333-53789-01)
10.5 1998 Stock Option Plan of First Mariner Bancorp (Incorporated by
reference to Exhibit 10.5 of Pre-Effective Amendment Number 1 to Form
S-1, file no. 333-53789-01)
10.6 Employee Stock Purchase Plan of First Mariner Bancorp
(Incorporated by reference to Exhibit 10.6 of Pre-Effective Amendment
Number 1 to Form S-1, file no. 333-53789-01)
10.7 Lease Agreement dated as of June 1, 1998 between Building #2,
L.L.C. and First Mariner Bank (Incorporated by reference to Exhibit
10.7 of Pre-Effective Amendment Number 1 to Form S-1, file no.
333-53789-01)
13 1998 Annual Report of Stockholders filed herewith
21 Subsidiaries of Registrant filed herewith
23 Consent of KPMG LLP filed herewith
27 Financial Data Schedule for the 12 Months Ended December 31, 1998,
filed electronically herewith.
99 Risk Factors filed herewith.
(b) Reports on Form 8-K
On October 19, 1998, the Company filed a Current Report on Form
8-K pursuant to Item 5 to announce that the Company acquired 207,548
shares of the common stock of Glen Burnie Bancorp in a private
transaction for their aggregate price of $4,509,936.07. The Company
announced additionally that it owns approximately 19.4% of the
outstanding common stock of Glen Burnie Bancorp.
On November 17, 1998, the Company filed a Current Report on Form
8-K pursuant to Items 5 and 7 to announce that the Company sold to
Glen Burnie Bancorp all of the 213,169 shares of common stock of Glen
Burnie Bancorp held by the Company, for a purchase price of
$5,580,764. The Company announced that in addition, the Company and
Glen Burnie Bancorp entered into an agreement pursuant to which,
among other things, the parties agreed to dismiss all pending
litigation between them and the Company agreed not to purchase Glen
Burnie Bancorp stock or attempt to influence Glen Burnie Bancorp's
affairs, directly or indirectly, for a 10-year period. The Company
announced that Glen Burnie Bancorp will pay the Company $675,000 as
consideration for the agreement, payable over 5 years. A press
release regarding the transaction was attached as an exhibit to the
Form 8-K.
(c) Exhibits required by Item 601 of Regulation S-K
See the Exhibits described in Item 14(a)(3) above.
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: March 30, 1999 By: /s/ Edwin F. Hale Sr.
------------- ----------------------------
Edwin F. Hale Sr.
Chairman and Chief Executive Officer
Date: March 30, 1999 By: /s/ Joseph A. Cicero
------------- ----------------------------
Joseph A. Cicero
President & Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant in
their capacities as Director on the 30 day of March, 1999.
/s/ /s/
Bondroff, Barry B. Lynch, Michael J.
/s/ /s/
Brown, Edith B. Mantakos, George H.
/s/ /s/
Cernack, Rose M. Matricciani, Jay J.
/s/ /s/
Cicero, Joseph A. McManus, Walter L. Jr.
/s/ /s/
D'Anna, Christopher P. O'Conor, James P.
/s/ /s/
Hale, Edwin F. Sr. Oliver, John J. Jr.
/s/ /s/
Hoffman, Bruce H. Sibel, Hanan Y.
/s/ /s/
Kabik, Melvin S. Stoler, Leonard
/s/
Larkin, R. Andrew Watson, Michael R.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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 subsidiaries for the years ended December 31,
1998, 1997 and 1996. This discussion should be read in conjunction with the
accompanying financial statements and related notes as well as statistical
information included in the report.
First Mariner Bancorp ("The Company") through its wholly owned subsidiary,
First Mariner Bank ("the Bank"), offers consumer and commercial banking services
throughout central Maryland. The Bank offers mortgage lending services through
its wholly-owned subsidiary, First Mariner Mortgage Corporation ("FMMC").
OVERVIEW
The Company is a bank holding company incorporated under the laws of
Maryland and registered under the Bank Holding Company Act of 1956, as amended.
The Company was organized in 1994 and has implemented a strategy of building a
branch network in its core market area. This strategy is intended to position
the Bank to optimize the opportunities that management believes have been
created by dislocations caused by the widespread consolidations among local
banks with large out-of-state acquirers.
The Company recorded net income of $1,123,000 for 1998, a 208% increase over
the $365,000 recorded in 1997. The 1998 results continue to reflect the cost of
the Company's expansion strategy as the Bank has grown to twenty-two retail
banking branches, and four residential mortgage lending offices. The results
also reflect tax benefits realized during 1998. Basic net income per share for
the year ended December 31, 1998 was $0.36 per share compared to $0.12 in 1997
and a net loss of $1.56 per share for the year ended December 31, 1996. 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.
NET INTEREST INCOME/MARGINS - The primary source of earnings for the Company
is net interest income, which is the difference between income earned on
interest-earning assets, such as loans and investment securities, and interest
expense incurred on the interest-bearing sources of funds, such as deposits and
borrowings. The level of net interest income is determined primarily by the
average balances ("volume") and the rate spreads between the interest-earning
assets and the Company's funding sources.
Net interest income increased to $12,022,000 for 1998, a 55.1% increase from
the net interest income of $7,753,000 earned for 1997. Earning assets averaged
$326,261,000 for 1998, a 98.6% increase as compared to $164,312,000 for 1997.
The increase in net interest income was due to the growth of the loan and
investment portfolios. Average loans increased by 60.1% to $199,761,000 and
average investments and interest-bearing bank balances increased by 212.4% to
$116,737,000. The increase in loans reflects the Company's expansion of its
commercial and real estate lending activities among middle market borrowers in
the Baltimore-Washington area, the growth of the Bank's mortgage banking
subsidiary, FMMC and increased emphasis on consumer lending. The increase in
investments was primarily the result of the Bank's adoption of a leverage
strategy after issuing $21.45 million of trust preferred securities in mid 1998.
This strategy consisted of increasing the Bank's investment portfolio,
especially mortgage backed securities, which were funded primarily with long
term borrowings and FHLB advances. This asset growth was funded by an increase
in average deposits of $81,918,000 or 57.9% and an 1,241.8% increase in average
borrowings or $87,811,000. The increase in deposits was due to the aggressive
expansion of the Company's retail banking network to
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
twenty-two branches and the introduction of new checking, money market and
certificate of deposit products.
Interest income on loans increased to $18,165,000 for 1998 which represents
an increase of $6,211,000 or 52.0% from $11,954,000 for 1997. Interest income on
investments and interest-bearing bank balances increased to $8,156,000 for 1998
which represents an increase of $5,792,000 or 245.0% from $2,364,000. Interest
expense on deposits increased to $9,081,000 for 1998, an increase of $2,939,000
or 47.8% from $6,142,000 for 1997. Interest expense on borrowings increased to
$5,218,000 for 1998, an increase of $4,795,000 or 1,133.6% from $423,000 for
1997. The increase in borrowings was primarily to fund the Bank's leverage
strategy and the increase in the investment portfolio.
Despite a lower interest rate spread (which is the difference between the
yield on earning assets and the cost of interest-bearing liabilities) and net
interest margin for the Company, net interest income improved in 1998 due to the
overall increase in average earning assets.
The key performance measure for net interest income is the "net interest
margin", or net interest income divided by average earning assets. The Company's
net interest margin is affected by loan pricing, mix of earning assets, and the
distribution and pricing of deposits and borrowings. The Company's net interest
margin was 3.68% for the year ended December 31, 1998 as compared to 4.72% for
1997. The net margin decreased primarily due to increased borrowings and
investments by the Company as it implemented its leverage strategy. These
investments and borrowings have a lower spread than the loan and deposit
portfolios. The net margin also decreased due to a decrease in average loans as
a percentage of total average earning assets from 75.9% in 1997 to 61.2% in 1998
and the decline in yield on the loan portfolio.
Table 1: "Comparative Average Balances-Yields and Rates" below indicates the
Company's average volume of interest-earning assets and interest-bearing
liabilities and average yields and rates. Changes in net interest income from
period to period result from increases or decreases in the volume and mix of
interest-earning assets and interest-bearing liabilities, increases or decreases
in the average rates earned and paid on such assets and liabilities and the
availability of particular sources of funds, such as noninterest bearing
deposits.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 1: COMPARATIVE AVERAGE BALANCES (1) YIELDS AND RATES
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (net of unearned income) (1) $ 199,761 $ 18,165 9.09% $ 124,794 $ 11,954 9.58%
Mortgage-backed securities available for sale 91,762 6,089 6.64% 7,527 521 6.92%
Interest-bearing bank balances 9,513 471 4.95% 21,137 1,212 5.73%
Treasury notes and agencies held to maturity 7,836 468 5.97% 8,704 535 6.15%
Trust preferred securities 7,626 644 8.44%
Other earning assets 9,763 484 4.96% 2,150 96 4.47%
- ------------------------------------------------------------------------------------------------------------------
Total earning assets 326,261 26,321 8.07% 164,312 14,318 8.71%
- ------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (1,923) (1,441)
Other assets 23,346 13,412
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 347,684 $ 176,283
- ------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Deposits:
Passbook/Savings $ 10,427 281 2.69% $ 7,194 195 2.71%
NOW/MMDA 96,297 3,993 4.15% 35,242 1,311 3.72%
Certificates 85,895 4,807 5.60% 82,552 4,636 5.62%
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 192,619 9,081 4.71% 124,988 6,142 4.91%
Other borrowed funds 94,882 5,218 5.50% 7,071 423 5.98%
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 287,501 14,299 4.97% 132,059 6,565 4.97%
Noninterest-bearing demand deposits 30,661 16,374
Other liabilities 1,915 1,533
Stockholders' equity 27,607 26,317
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 347,684 $ 176,283
- ------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.10% 3.74%
(Average yield less average rate)
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 12,022 $ 7,753
(Interest income less interest expense)
- ------------------------------------------------------------------------------------------------------------------
Net Interest Margin 3.68% 4.72%
(Net interest income/total earning assets)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
1996
---------------------------------
AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Loans (net of unearned income) (1) $ 64,706 $ 6,177 9.55%
Mortgage-backed securities available for sale - - -
Interest-bearing bank balances 8,878 525 5.91%
Treasury notes and agencies held to maturity 88 5 5.68%
Other earning assets 798 29 3.63%
- -----------------------------------------------------------------------------------------------------------
Total earning assets 74,470 6,736 9.05%
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses (670)
Other assets 8,514
- -----------------------------------------------------------------------------------------------------------
Total assets $ 82,314
- -----------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Deposits:
Passbook/Savings $ 4,635 139 3.00%
NOW/MMDA 12,588 353 2.80%
Certificates 43,391 2,507 5.78%
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 60,614 2,999 4.95%
Other borrowed funds 1,950 108 5.54%
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 62,564 3,107 4.97%
Noninterest-bearing demand deposits 7,753
Other liabilities 1,967
Stockholders' equity 10,030
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 82,314
- -----------------------------------------------------------------------------------------------------------
Interest rate spread 4.08%
(Average yield less average rate)
- -----------------------------------------------------------------------------------------------------------
Net interest income $ 3,629
(Interest income less interest expense)
- -----------------------------------------------------------------------------------------------------------
Net Interest Margin 4.87%
(Net interest income/total earning assets)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loans on non-accrual status are included in the calculation of average
balances.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
Table 2: "Rate/Volume Variance" below indicates the changes in the Company's
net interest income as a result of changes in volume and rates. Changes in
interest income and interest expense can result from variances in both volume
and rates. The Company has an asset and liability management policy designed to
provide a proper balance between rate sensitive assets and rate sensitive
liabilities to attempt to optimize interest margins and to provide adequate
liquidity for anticipated needs.
TABLE 2: RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
COMPARED TO
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
VARIANCE
DUE TO CHANGES IN
------------------------ NET
AVERAGE AVERAGE INCREASE/
(DOLLARS IN THOUSANDS) VOLUME RATE (DECREASE)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans (net of unearned income) $ 6,817 $ (606) $ 6,211
Mortgage-backed securities available for sale 5,590 (22) 5,568
Interest-bearing bank balances (576) (165) (741)
Treasury notes and agencies held to maturity (52) (15) (67)
Trust preferred securities 644 - 644
Other earning assets 377 11 388
Total interest income (1) 13,065 (1,062) 12,003
Interest expense:
Passbook/Savings 87 (1) 86
NOW/MMDA 2,532 150 2,682
Certificates 187 (16) 171
Other borrowed funds 4,829 (34) 4,795
Total interest expense (1) 7,731 3 7,734
- -------------------------------------------------------------------------------------------------------
Change in net interest income (1) 5,334 (1,065) $ 4,269
- -------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
COMPARED TO
YEAR ENDED DECEMBER 31, 1996
-------------------------------------
VARIANCE
DUE TO CHANGES IN
------------------------
NET
AVERAGE AVERAGE INCREASE/
(DOLLARS IN THOUSANDS) VOLUME RATE (DECREASE)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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:
Passbook/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>
(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. Noninterest income for year ended December 31, 1998
was $5,595,000 as compared to $2,351,000 for the year ended December 31, 1997,
an increase of $3,244,000 or 138.0%. The increase was due primarily to increased
service fees on deposits and gain on sale of residential mortgage loans. Gain on
sale of loans increased $1,014,000 or 235.8% from the year ended December 31,
1997 to December 31 1998. This was largely the result of an increase in
residential mortgage production to $239,400,000 in 1998 from $79,600,000 in 1997
and the sale of most of the originations to investors in the secondary market.
Deposit services charges rose 183.7% over the prior year primarily due to a
66.1% increase in demand deposits accounts and increases in pricing. These
increases in activity are the result of the expanding branch network and
continued promotion and sales efforts for the new retail deposit products.
In addition, a net gain of $738,000 was realized on the sales of securities
in 1998 compared to a net gain of $479,000 for 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 3: NONINTEREST INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of loans $ 1,444 $ 430 $ 303
Service fees on deposits 2,454 865 337
Gain on securities, net 738 479 330
Other operating income 959 577 104
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 5,595 $ 2,351 $ 1,074
- -------------------------------------------------------------------------------------------------------------------
Noninterest income as a percent of average total assets 1.6% 1.3% 1.3%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE - Noninterest expense totaled $16,245,000 for the year
ended December 31, 1998 as compared to $9,459,000 for 1997, an increase of
$6,786,000 or 71.7%. This increase reflects management's continued emphasis on
growth through branching as well as significant increases in loans, deposits and
mortgage banking activities.
Salaries and benefits increased $3,261,000 or 74.6% primarily due to
additional staffing as a result of the branch and mortgage banking expansion
programs. Also, additional employees were hired to support the loan, deposit and
branch growth. Occupancy costs grew for 1998 by $587,000 or 46.3% when compared
to the prior year. This increase is due to the additional branches as well as
additional space requirements at the headquarters facilities. Furniture and
fixtures expense increased for the year ended 1998 by $429,000 or 118.8% due to
the addition of new branches and mortgage offices and increases in technology
costs.
The increase in other expense was primarily due to additional branch
locations, expansion of FMMC and higher volume of loans, deposits and
transactions. While total noninterest expense increased $6,786,000, noninterest
expense as a percent of average total assets continues to decrease. Noninterest
expense as a percent of average total assets was 4.7% in 1998 as compared to
5.4% in 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 4: NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $ 7,632 $ 4,371 $ 2,744
Net occupancy 1,856 1,269 787
Deposit insurance premiums 122 77 229
Furniture, fixtures and equipment 790 361 253
Professional services 605 380 136
Advertising 683 574 380
Data processing 884 533 452
ATM servicing expenses 427 241 149
Office supplies 255 149 48
Cleaning & maintenance 418 190 41
OREO expense 157 - -
Other 2,416 1,314 618
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 16,245 $ 9,459 $ 5,837
- ------------------------------------------------------------------------------------------------------------
Noninterest expense as a percent of average total assets 4.7% 5.4% 7.1%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
INCOME TAXES
In assessing the realizability of the deferred tax asset, management
determined that the valuation allowance of $918,000 was no longer necessary.
Management believes that all of the deferred tax asset will be realized based on
expected future taxable income.
The amount of the net operating loss carryforward for federal income tax
purposes at December 31, 1998 approximates $1,108,000. As a result of ownership
changes in 1997 and 1996, utilization of a portion of the net operating loss
carryforward is subject to an annual limitation.
FINANCIAL CONDITION
At December 31, 1998, the Company's total assets were $497,487,000 as
compared to $256,984,000 at December 31, 1997, an increase of 93.6%. This
increase was primarily due to the continued growth in the branching network,
marketing of deposit and loan products and the adoption of a leverage strategy
which increased investments and borrowings. The Bank's overall asset size and
customer base, both individual and commercial, increased significantly during
1997 and this growth continued through 1998.
Loans at December 31, 1998 were $242,725,000 as compared to $144,072,000 on
December 31, 1997, which represents an increase of $98,653,000 or 68.5%.
Total deposits were $262,311,000 at December 31, 1998, which is an increase
of 33.2% from $196,962,000 at December 31, 1997. Total investments increased by
$151,746,000 at December 31, 1998 compared to $41,453,000 at December 31, 1997.
This increase was primarily in mortgage backed securities as a result of a
leverage strategy adopted to utilize the capital acquired through the issuance
of $21.4 million of trust preferred securities in mid 1998. These investments
were primarily funded by the increase in short and long term borrowings,
repurchase agreements and FHLB advances which increased $150,833,000 to
$181,164,000 at December 31, 1998 compared to $30,331,000 at year end, 1997.
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.
Loans held for sale increased $4,426,000 at December 31, 1998 from
$16,895,000 at December 31, 1997, reflecting the growth of mortgage banking
activity in the Bank's mortgage banking subsidiary, First Mariner Mortgage
Corporation. First Mariner Mortgage Corporation sold approximately $235,000,000
of residential mortgages during the year ended December 31, 1998.
During 1998 average loans were $199,761,000 and constituted 61.2% of average
earning assets and 57.5% of total average assets for the same period. This
average loan balance represents an increase of $74,967,000 or 60.1% over 1997.
During the year ended December 31, 1997, average loans were $124,794,000 and
constituted 75.9% of average earning assets and 70.8% of average total assets.
At December 31, 1998 the loan to deposit ratio was 92.5% compared to 73.1% as of
December 31, 1997.
The Bank's loan portfolio composition as of December 31, 1998 reflects a
concentration in commercial real estate and construction loans although at a
lower percentage of the total portfolio than at December 31, 1997. The following
table sets forth the composition of the Bank's loan portfolio.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 5: LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Type of Loans:
Commercial $ 55,792 $ 24,119 $ 17,097 $ 869 $ 887
Commercial real estate and construction (1) 103,439 81,039 55,888 11,475 799
Residential real estate 63,330 34,396 17,140 16,216 16,887
Consumer 20,418 4,992 2,566 1,451 1,327
- ------------------------------------------------------------------------------------------------------
Total loans 242,979 144,546 92,691 30,011 19,900
Add:
Unamortized loan premiums 108 140 205 284 376
Less:
Unearned income 362 614 833 360 246
- ------------------------------------------------------------------------------------------------------
Loans receivable $ 242,725 $ 144,072 $ 92,063 $ 29,935 $ 20,030
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of undisbursed principal
Approximately 41% of the Bank's loans have adjustable rates as of December
31, 1998 and approximately 60% at December 31, 1997, the majority of which are
indexed to the prime rate. Interest rates on variable rate loans adjust to the
current interest rate environment, whereas fixed rates do not allow this
flexibility. If interest rates were to increase in the future, the interest
earned on the variable rate loans would improve, and if rates were to fall the
interest earned would decline, thus impacting the Company's income. See also the
discussion under "Liquidity and Interest Rate Sensitivity" below. The following
table sets forth the maturity distribution, classified according to sensitivity
to changes in interest rate, for the Bank's loan portfolio at December 31, 1998,
1997 and 1996. Some of the loans may be renewed or repaid prior to maturity.
Therefore, the following table should not be used as a forecast of future cash
collections.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 6: MATURITY SCHEDULE OF SELECTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------
UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10 +
(DOLLARS IN THOUSANDS) YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate $ 1,055 $ 3,256 $ 769 $ 58,250 $ 63,330
Commercial real estate
and construction 57,779 26,742 15,069 3,849 103,439
Commercial 18,202 24,056 11,398 2,136 55,792
Consumer 1,081 4,302 10,668 4,367 20,418
- ------------------------------------------------------------------------------------------------------
Total $ 78,117 $ 58,356 $ 37,904 $ 68,602 $ 242,979
- ------------------------------------------------------------------------------------------------------
Fixed interest rate $ 29,853 $ 52,695 $ 22,480 $ 39,332 $ 144,360
Variable interest rate 48,264 5,661 15,424 29,270 98,619
- ------------------------------------------------------------------------------------------------------
Total $ 78,117 $ 58,356 $ 37,904 $ 68,602 $ 242,979
- ------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10 +
(DOLLARS IN THOUSANDS) YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate $ 2,568 $ 2,008 $ 1,811 $ 28,009 $ 34,396
Commercial real estate
and construction 41,499 25,658 12,628 1,254 81,039
Commercial 9,111 8,303 6,303 402 24,119
Consumer 696 970 3,254 72 4,992
- ------------------------------------------------------------------------------------------------------
Total $ 53,874 $ 36,939 $ 23,996 $ 29,737 $ 144,546
- ------------------------------------------------------------------------------------------------------
Fixed interest rate $ 9,633 $ 26,984 $ 14,711 $ 11,942 $ 63,270
Variable interest rate 44,241 9,955 9,285 17,795 81,276
- ------------------------------------------------------------------------------------------------------
Total $ 53,874 $ 36,939 $ 23,996 $ 29,737 $ 144,546
- ------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
UP TO MORE THAN 5 YEARS
ONE 1 YEAR TO 10 +
(DOLLARS IN THOUSANDS) YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate $ 1,810 $ 3,512 $ 2,475 $ 9,343 $ 17,140
Commercial real estate
and construction 21,240 26,446 6,176 2,026 55,888
Commercial 12,159 4,594 344 - 17,097
Consumer 21 2,482 63 - 2,566
- ------------------------------------------------------------------------------------------------------
Total $ 35,230 $ 37,034 $ 9,058 $ 11,369 $ 92,691
- ------------------------------------------------------------------------------------------------------
Fixed interest rate $ 9,070 $ 25,056 $ 3,835 $ 7,844 $ 45,805
Variable interest rate 26,160 11,978 5,223 3,525 46,886
- ------------------------------------------------------------------------------------------------------
Total $ 35,230 $ 37,034 $ 9,058 $ 11,369 $ 92,691
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
The scheduled repayments as shown above are reported in the maturity
category in which the payment is due.
LOAN QUALITY
The Bank attempts to manage the risk characteristics of its loan portfolio
through various control processes, such as credit evaluation of borrowers,
establishment of lending limits and application of lending procedures, including
the holding of adequate collateral and the maintenance of compensating balances.
However, the Bank seeks to rely primarily on the cash flow of its borrowers' as
the principal source of repayment. Although credit policies are designed to
minimize risk, management recognizes that loan losses will occur and the amount
of these losses will fluctuate depending on the risk characteristics of the loan
portfolio as well as general and regional economic conditions.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan loss is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on 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 the guarantor, the related
collateral, and the effects of economic conditions. Specific reserves against
the remaining loan portfolio are based on analysis of historical loan loss
ratios, loan 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. Table 8: "Allowance for Loan Loss Allocation,"
which is set forth below, indicates the specific reserves allocated by loan type
and also the general reserves included in the allowance for loan losses.
As of December 31, 1998 the Company had approximately $1,520,000 in
nonaccrual loans as compared with $1,550,000 at December 31, 1997. The Company
held other real estate owned of $1,633,000 at December 31, 1998 compared to
$1,944,000 at December 31, 1997.
The provision for loan losses is a charge to earnings in the current period
to maintain the allowance at a level management has determined to be adequate
based upon factors noted above. The Company provided $1,212,000 for loan losses
for the year ended December 31, 1998, as compared to $472,000 for the year ended
December 31, 1997.
As of December 31, 1998 the allowance for loan losses was $2,676,000, as
compared with the December 31, 1997 balance of $1,614,000, an increase of
$1,062,000 or 65.8%. Net charge-offs of $150,000 and $100,000 were recognized
for 1998 and 1997, respectively. The growth in the reserve was warranted by the
growth and risk profile in the loan portfolio. The allowance for loan losses at
December 31, 1998 represented 1.10% of outstanding loans as compared with 1.12%
as of December 31, 1997. The decrease in the percentage was based on
management's evaluation of the loan portfolio as of December 31, 1998 including
the addition of residential real estate loans which traditionally require a
lower allowance for loan losses. Residential real estate loans represented 26.1%
of the loan portfolio at year end 1998 versus 23.8% in 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
The following table summarizes the allowance activities.
TABLE 7: ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $ 1,614 $ 1,242 $ 376 $ 245 $ 207
- ------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial (88) - (157) (9) -
Real estate (70) (100) (49) (47) (15)
Consumer (23) - (42) (4) (7)
- ------------------------------------------------------------------------------------------------------
Total loans charged off (181) (100) (248) (60) (22)
- ------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 9 - 63 - -
Real estate 17 - - - -
Consumer 5 - 11 1 -
- ------------------------------------------------------------------------------------------------------
Total recoveries 31 - 74 1 -
- ------------------------------------------------------------------------------------------------------
Net chargeoffs (150) (100) (174) (59) (22)
- ------------------------------------------------------------------------------------------------------
Provision for loan losses 1,212 472 1,040 190 60
- ------------------------------------------------------------------------------------------------------
Allowance for loan losses, end of year $ 2,676 $ 1,614 $ 1,242 $ 376 $ 245
- ------------------------------------------------------------------------------------------------------
Loans (net of premiums and discounts)
Period-end balance $ 242,725 $ 144,072 $ 92,064 $ 29,935 $ 20,030
Average balance during period, excluding
loans held for sale 188,156 124,794 64,706 22,699 19,865
Allowance as percentage of period-end loan
balance 1.10% 1.12% 1.35% 1.26% 1.22%
Percent of average loans:
Provision for loan losses 0.64% 0.38% 1.61% 0.84% 0.30%
Net chargeoffs 0.08% 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 its 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 following
table summarizes the allocation of allowance by loan type.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 8: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- --------------------------------------- ------------------------
PERCENT PERCENT OF PERCENT PERCENT OF PERCENT
OF LOANS TO OF LOANS TO OF
AMOUNT TOTAL TOTAL LOANS AMOUNT TOTAL TOTAL LOANS AMOUNT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $ 1,073 40.1% 68.6% $ 918 56.9% 79.8% $ 793 63.9%
Commercial 622 23.3% 23.0% 205 12.7% 16.7% 75 6.1%
Consumer 68 2.5% 8.4% 14 0.8% 3.5% 9 0.7%
Unallocated 913 34.1% - 477 29.6% - 365 29.3%
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 2,676 100.0% 100.0% $ 1,614 100.0% 100.0% $ 1,242 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PERCENT OF
LOANS TO
TOTAL LOANS
- -----------------
<S> <C>
Real estate 78.8%
Commercial 18.4%
Consumer 2.8%
Unallocated -
- -----------------
Total 100.0%
- -----------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------------------- ---------------------------------------
PERCENT PERCENT OF PERCENT PERCENT OF
OF LOANS TO OF LOANS TO
AMOUNT TOTAL TOTAL LOANS AMOUNT TOTAL TOTAL LOANS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate $ 92 24.5% 92.3% $ 158 64.5% 88.8%
Commercial 44 11.7% 2.9% 5 2.0% 4.5%
Consumer 28 7.5% 4.8% 9 3.5% 6.7%
Unallocated 212 56.3% - 73 30.0% --
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 376 100.0% 100.0% $ 245 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
As a result of management's ongoing review of the loan portfolio, loans are
classified as nonaccrual even though the presence of collateral or the borrowers
financial strength may be sufficient to provide for ultimate repayment. Interest
on nonaccrual loans is recognized only when received.
TABLE 9: NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans on nonaccrual basis $ 1,520 $ 1,550 $ 1,574
Real estate acquired by foreclosure 1,633 1,944 -
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,153 $ 3,494 $ 1,574
- ----------------------------------------------------------------------------------------------------------
Loans past-due 90 days or more and accruing $ 126 $ 276 (1)
</TABLE>
(1) Data not available
Nonperforming assets, expressed as a percentage of total assets, decreased
to 0.63% at December 31, 1998 from 1.36% at December 31, 1997, reflecting the
decrease in real estate acquired by foreclosure and the increase in total
assets. Nonaccrual loans were $1,520,000 at December 31, 1998 compared to
$1,550,000 at December 31, 1997. At December 31, 1998, the allowance for loan
losses represented 176.1% of nonaccrual loans compared to 104.1% at December 31,
1997. Management believes that the allowance for loan losses is adequate.
At December 31, 1998, impaired loans which are included in nonaccrual loans
amounted to $1,039,000. These impaired loans are classified as collateral
dependent and, accordingly are recorded at the lower of cost or fair value of
the collateral. The real estate acquired by foreclosure consists of a land
development project consisting of 199 residential building lots with a carrying
value of approximately $1,122,000. The land development project is being
completed under the direction of the Company. Currently, 112 lots are under
contract, for settlement through March 2001. In addition, three condominiums
units with a carrying value of $142,000 and eleven single family lots with a
carrying value of $369,000 were also include in other real estate owned. Two
condominium units and four of the single family lots were sold after December
31, 1998, and currently, the remaining condominium unit is under contract.
CAPITAL RESOURCES
Stockholders' equity was $28,488,000 as of December 31, 1998 as compared to
$26,966,000 as of December 31, 1997. The increase of $1,522,000 was primarily
the result of the exercising of warrants and options (approximately 23,000 and
1,900, respectively) and increased by the 1998 income of $1,123,000. No cash
dividends have been declared by the Company since its inception.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks and bank holding companies are required to maintain capital levels based
on their "risk adjusted" assets so that categories of assets with higher
"deemed" credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
To date, the Company has provided its capital requirements mainly through
the funds received from its stock offerings. In the future, the Company may
consider raising capital from time to time through an offering of common stock
or other securities. As reflected in Table 10 "Capital Ratios," the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
Bank exceeded its capital adequacy requirements as of December 31, 1998 and 1997
and meets the requirement for "well capitalized" under Federal Banking
Regulation. The Company continually monitors its capital adequacy ratios to
assure that the Bank exceeds regulatory capital requirements.
Capital is classified as Tier 1 (common stockholders' equity less certain
intangible assets plus a portion of the trust preferred securities) and Total
Capital (Tier 1 plus the allowed portion of the allowance for loan losses and
the portion of trust preferred securities not included in Tier 1 capital).
Minimum required levels must at least equal 4% for Tier 1 capital and 8% for
Total Capital. In addition, institutions must maintain a minimum of 4% leverage
capital ratio (Tier 1 capital to average total assets for the previous quarter).
The Bank's capital position is presented in the following Table:
TABLE 10: CAPITAL RATIOS
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
DECEMBER 31, REQUIREMENTS CAPITALIZED UNDER
------------------------------------------- FOR CAPITAL PROMPT CORRECTIVE
1998 1997 1996 ADEQUACY PURPOSES ACTION PROVISION
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total capital to risk weighted
assets 13.1% 12.0% 14.2% 8.0% 10.0%
Tier 1 capital to risk weighted
assets 12.2% 11.1% 13.3% 4.0% 6.0%
Tier 1 capital leverage ratio 7.2% 10.2% 14.7% 4.0% 5.0%
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary objective of asset/liability management is to ensure the steady
growth of the Company's primary earnings component, net interest income. Net
interest income can fluctuate with significant interest rate movements. To
lessen the impact of these rate swings, management endeavors to structure the
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 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
interest rates. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Bank.
The interest rate sensitivity position as of December 31, 1998 is presented
in Table 11: "Rate Sensitivity Analysis." The difference between rate-sensitive
assets and rate-sensitive liabilities or the interest rate sensitivity gap, is
shown at the bottom of the table. As of December 31, 1998, the Company's
interest sensitive assets exceeded interest sensitive liabilities within a one
year period of $76,463,000 or 15% of assets. Assets and liabilities are
scheduled based on maturity or repricing data except for mortgage loans and
mortgage backed securities which are based on prevailing prepayments assumptions
and core deposits which are based on core deposit studies done for banks in the
Mid-Atlantic region. The Company would generally benefit from increasing market
rates of interest when it is asset sensitive and would benefit from decreasing
market rates of interest when it is liability sensitive. This suggests that if
interest rates should increase over this period, the net interest margin would
improve; and if interest rates should decrease, the net interest margin would
decline. Since all interest rates and yields do not adjust at the same velocity,
the gap is only a general indicator of interest rate sensitivity. The analysis
presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration the fact that changes in
interest rates do not affect all assets and liabilities equally. Net interest
income may be impacted by other significant factors in a given interest rate
environment including changes in the volume and mix of earning assets and
interest-bearing liabilities. The Company believes that, as of December 31,
1998, its interest rate exposure is less than 27% of capital, in a plus or minus
2% rate shock scenario.
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, 1998 and 1997. The Bank seeks to rely primarily on core
deposits from customers to provide stable and cost-effective sources of funding
to support loan growth. The Bank also seeks to augment such deposits with longer
term and higher yielding certificates of deposit. CD's of $100,000 or more are
summarized by maturity in Table 12: "Maturity of Time Deposits $100,000 or
More." Other sources of funds available to the Bank include short-term and long
term borrowings, primarily in the form of Federal Home Loan Bank collateralized
borrowings and repurchase agreements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
TABLE 11: RATE SENSITITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------------------------------------------
LONGER THAN
10 YEARS
180 DAYS 181 DAYS - ONE-FIVE FIVE-TEN OR NON-
(DOLLARS IN THOUSANDS) OR LESS ONE YEAR YEARS YEARS SENSITIVE TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 7,246 $ - $ - $ - $ - $ 7,246
Investment securities 21,765 18,499 78,328 45,250 29,357 193,199
Loans held for sale 21,321 - - - 21,321
Loans 114,402 18,929 73,929 23,793 11,672 242,725
- ---------------------------------------------------------------------------------------------------------------
Total interest-earnings assets $ 164,734 $ 37,428 $ 152,257 $ 69,043 $ 41,029 $ 464,491
- ---------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings $ 530 $ 537 $ 4,576 $ 6,474 $ - $ 12,117
NOW accounts 1,809 1,821 14,990 19,841 - 38,460
Money market accounts 9,140 9,338 82,354 - - 100,832
Certificates 32,880 13,481 40,388 99 - 86,848
Borrowings 41,714 14,450 71,450 75,000 - 202,614
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 86,073 $ 39,627 $ 213,758 $ 101,414 $ - $ 440,871
- ---------------------------------------------------------------------------------------------------------------
Interest rate sensitive gap $ 78,661 $ (2,199) $ (61,501) $ (32,371) $ 41,029 $ 23,620
- ---------------------------------------------------------------------------------------------------------------
Cumulative interest rate gap $ 78,661 $ 76,463 $ 14,962 $ (17,409) $ 23,620
- ---------------------------------------------------------------------------------------------------------------
Ratio of rate sensitive assets to rate
sensitive liabilities 191% 94% 71% 68%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
The Bank uses deposits as the primary source of funding of its loans. The
following table describes the maturity of time deposits of $100,000 or more at
the dates indicated.
TABLE 12: MATURITY OF TIME DEPOSITS $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Under 3 months $ 2,988 $ 6,774 $ 1,056
3 to 6 months 4,508 8,046 3,245
6 to 12 months 2,840 4,170 2,760
Over 12 months 7,790 3,117 4,266
- -------------------------------------------------------------------------------------------------------
Total $ 18,126 $ 22,107 $ 11,327
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Bank offers individuals and businesses a wide variety of accounts. These
accounts include checking, savings, money market and CD's and are obtained
primarily from communities which the Bank serves. The Bank holds no brokered
deposits. The following table details the average amount,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
the average rate paid and the percentage of each category to total deposit for
the years ended December 31, 1998, 1997 and 1996.
TABLE 13: AVERAGE DEPOSIT COMPOSITION AND COST
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------
AVERAGE AVERAGE PERCENT
(DOLLARS IN THOUSANDS) BALANCE RATE OF TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW & money market savings deposits $ 96,297 4.15% 43.1%
Regular savings deposits 10,427 2.69% 4.7%
Time deposits 85,895 5.60% 38.5%
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 192,619 4.71% 86.3%
- -----------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits 30,661 - 13.7%
- -----------------------------------------------------------------------------------------------------------
Total deposits $ 223,280 4.07% 100.0%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW & money market savings deposits $ 35,242 3.72% 24.9%
Regular savings deposits 7,194 2.71% 5.1%
Time deposits 82,552 5.62% 58.4%
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 124,988 4.91% 88.4%
- -----------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits 16,374 - 11.6%
- -----------------------------------------------------------------------------------------------------------
Total deposits $ 141,362 4.64% 100.0%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW & money market savings deposits $ 12,588 2.80% 18.4%
Regular savings deposits 4,635 3.00% 6.8%
Time deposits 43,391 5.78% 63.5%
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 60,614 4.95% 88.7%
- ----------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits 7,753 - 11.3%
- ----------------------------------------------------------------------------------------------------------
Total deposits $ 68,367 4.39% 100.0%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Total deposits as of December 31, 1998 were $262,311,000 compared to
$196,962,000 as of December 31, 1997, an increase of $65,349,000. While the main
source of the increase was money market accounts, other types of deposits
increased as well, including savings accounts, certificates of deposit, interest
bearing demand deposits, and non-interest bearing demand deposits. These
increases reflect management's growth strategy which includes significant
marketing and promotion and the development of a branching network.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
INVESTMENT SECURITIES
The following table presents the composition of the Company's securities
portfolio as of December 31, 1998, 1997 and 1996:
TABLE 14: INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities--available for sale:
Mortgage-backed securities $ 163,099 $ 24,255 $ -
Trust preferred securities 20,725 - -
FHLB bonds - 6,433 -
Other bonds 100 - -
Equity securities 3,773 2,164 325
- -------------------------------------------------------------------------------------------------------
Total investment securities--available for sale 187,697 32,852 325
- -------------------------------------------------------------------------------------------------------
Investment securities--held to maturity:
U.S. Treasury securities 5,502 8,502 1,000
Certificates of deposit - 99 99
- -------------------------------------------------------------------------------------------------------
Total investment securities--held to maturity 5,502 8,601 1,099
- -------------------------------------------------------------------------------------------------------
Total investment securities $ 193,199 $ 41,453 $ 1,424
- -------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the maturity distribution of held to maturity
debt securities as of December 31, 1998:
TABLE 15: MATURITY OF DEBT INVESTMENT SECURITIES
<TABLE>
<CAPTION>
UP TO 1 YEAR OVER
(DOLLARS IN THOUSANDS) ONE YEAR TO 5 YEARS 5 YEARS TOTAL
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 5,502 $ - $ - $ 5,502
- ----------------------------------------------------------------------------------------------------------------
Total investment securities--held to maturity $ 5,502 $ - $ - $ 5,502
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
SHORT-TERM BORROWINGS
Short-term borrowings consist of short-term promissory notes issued to
certain qualified investors, short-term repurchase agreements and borrowings
from FHLB. The short-term promissory notes were in the form of commercial paper,
which repriced daily and had maturities of 270 days or less. Short-term
repurchase agreements were priced at origination and are payable in one year or
less. Borrowings from FHLB outstanding during 1998 and 1997 had maturities of
one year or less and can be prepaid without penalty.
Certain information regarding short-term borrowings are as follows:
TABLE 16: SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year-end:
FHLB short-term advances $ 19,700 $ 15,000 $ 6,000
Short-term promissory notes 22,014 15,331 -
Short-term repurchase agreements 14,450 - -
Weighted average interest rates at year-end:
FHLB short-term advances 4.95% 6.50% 6.95%
Short-term promissory notes 3.72% 4.83% -
Short-term repurchase agreements 5.62% - -
Maximum outstanding at any month-end:
FHLB short-term advances $ 19,700 $ 15,000 $ 6,000
Short-term promissory notes 32,030 15,461 -
Short-term repurchase agreements 14,450 - -
Average outstanding:
FHLB short-term advances 4,615 1,904 1,950
Short-term promissory notes 11,149 4,128 -
Short-term repurchase agreements 5,396 - -
Weighted average interest rates during the year:
FHLB short-term advances 5.61% 6.05% 5.50%
Short-term promissory notes 3.96% 5.47% -
Short-term repurchase agreements 5.97% - -
- --------------------------------------------------------------------------------------------------------
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES - The consolidated financial
statements and notes thereto presented elsewhere herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
YEAR 2000 ACTION PLAN
In 1997, the Company adopted a Year 2000 Action Plan (the "Plan"). This Plan
is consistent with the mandates and guidelines set forth by the FDIC and FFIEC.
As part of the Plan the Company has established a senior management committee to
address the issue of computer programs and embedded computer chips being unable
to distinguish between the year 1900 and the year 2000. In developing the Plan
the committee identified five phases: Awareness, Assessment, Renovation,
Validation,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
and Implementation. The last four phases consist of (1) inventorying Year 2000
affected items, (2) assigning priorities to identified items, (3) assessing the
Year 2000 compliance of items determined to be material to the company; (4)
repairing or replacing material items that are determined not to be Year 2000
compliant; (5) testing material items; and (6) designing and implementing
contingency and business continuation plans for items identified as critical.
The awareness phase is a continuing effort to educate employees, customers,
business partners and vendors of the impact of the Year 2000 issues. The effort
is well under way through communication with the appropriate constituencies and
required training for all employees.
During the assessment phase which has been completed, an inventory database
was created that details all hardware, software, facilities equipment, and
vendors. Each item was assigned a priority based on its importance to the
operations of the Company and the risk associated with non compliance. The
critical areas were identified as the core banking system of deposits and loans,
(outsourced to NCR), and the telephone switches at each location. In addition,
the Company has assessed non-information technology systems as well including
the alarm systems at the various locations of the Company.
The validation phase has been completed for our major mission critical
processor NCR, including many of the systems that surround it. On May 9, 1998, a
Year 2000 test was conducted to validate the changes made to the NCR system. The
test was considered a success although future testing to assure integration with
other key systems of the Bank is anticipated for 1999. All the Company's ATM's
have been upgraded to be Year 2000 compliant. The validation and renovation, if
necessary, of other mission critical and material operating and support systems
will continue through June 1999. As these systems are found to be non compliant
they will be renovated, modified or replaced with validation tests conducted to
assure future compliance. Contingency planning for all mission critical
functions is underway and will be completed by June 1999.
The reasonably likely worst case scenario that management believes at this
time may occur would be that the branch banking network, including deposit
processing could be off-line immediately following year end, 1999. This off-line
processing would have minimal impact if the length of time that this condition
existed is limited. To plan for this scenario, the Company will provide every
branch with the necessary data to process transactions at their locations. In
addition, to accommodate all branches, the customer call center located at
headquarters will have a complete trial balance of all accounts for all branch
locations.
COSTS
Total costs associated with the Plan will primarily include costs incurred
to upgrade the existing software and hardware not currently Year 2000 compliant.
The Company expects that these costs would be incurred in the normal course of
business as software and hardware is ordinarily upgraded to keep pace with
technological advances. To date, the Company has not spent any funds on
consultants; however, the Company has spent approximately $40,000 on making its
ATM's Year 2000 compliant and approximately $1,500 on education and training
seminars for Company personnel. The Company does not track internal costs for
personnel devoted the Year 2000 issues; however, one individual has spent a
significant amount of time overseeing the project and many other individuals
have spent numerous hours to ensure the Company will be compliant. Actual costs
are not expected to exceed $200,000 over a period of eighteen months.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
No. 133"). SFAS No. 133 established
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
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
condition 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 the Statement should be as of the beginning of an entity's fiscal
quarter. On that date, hedging relationships must be designated anew and
documented pursuant to the provision of SFAS No. 133. Earlier application is
encouraged. While the Company has not completed its analysis of SFAS NO. 133 and
has not made a decision regarding timing of adoption, management does not
believe that adoption will have a material effect on the financial position or
results of operations since the Bank is not currently using derivative
instruments.
FINANCIAL REVIEW 1997/1996
For the year ended December 31, 1997, the Company recorded net income of
$365,000 or $.12 per share, compared to a loss of $2,173,000 or $1.56 loss per
share in 1996. The per share amounts have been adjusted for the ten percent
stock dividend paid in May 1998. This improvement in earnings was attributable
to strong asset growth and increased net interest income and noninterest income.
Net interest income for 1997 increased $4,124,000, or 114% from 1996 and
average earning assets grew $89,800,000 or 121% over the prior year. The
increase in net interest income was due to this growth in average earning
assets, especially the loan portfolio and to a lesser extent increases in the
yield on the loan portfolio. Average loans increased by 93% to $124,794,000 and
average deposits grew by 107% to $141,362,000. 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
86.9% in 1996 to 75.9% in 1997.
The provision for loan losses decreased from $1,040,000 in 1996 to $472,000
in 1997. 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. Net chargeoffs
were $100,000 in 1997 compared to $174,000 in 1996.
Total noninterest income increased 119% to $2,400,000. The major reason for
the increase was a 157% increase in service fees on deposits as a result of 161%
increase in demand deposits. Other operating income increased 456% due primarily
to the expansion of the ATM network and increased pricing. Gain on sale of loans
increased 42% as a result of the expansion of mortgage banking activities and
increased origination and sales.
The Company's noninterest expense increased 62% to $9,500,000 in 1997.
Salaries and benefits increased 59% to $4,400,000 as a result of additional
staffing in the retail branches and mortgage banking offices due to the Bank's
expansion programs. Also, additional employee were added to support the loan and
deposit growth. Occupancy cost grew by 61% or $482,000. This increase was due to
the additional branches as well as additional space requirements at the
headquarters building due to staff expansion. Advertising expense grew by
$194,000 or 51% because of management's decision to increase public awareness
through television, radio and print media. The increase in other expenses is
primarily due to additional branch locations, expansion of the mortgage company
and higher volume of loans, deposits and transactions.
The Company recorded an income tax benefit of $192,000 in 1997 while no tax
benefit was recorded in 1996.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
[LETTERHEAD]
The Board of Directors and Stockholders
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, 1998 and 1997 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, 1998. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Mariner Bancorp and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Baltimore, MD
February 7, 1999
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
- ----------------------------------------------------------------------------------------------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,193 13,240
Interest-bearing deposits 7,246 32,677
Available-for-sale securities, at fair value (note 3) 187,697 32,852
Investment securities, fair value of $5,547 and $8,643, respectively
(note 3) 5,502 8,601
Loans held for sale 21,321 16,895
Loans receivable (notes 4 and 8) 242,725 144,072
Allowance for loan losses (note 4) (2,676) (1,614)
- ----------------------------------------------------------------------------------------------
Loans, net 240,049 142,458
Other real estate owned (note 5) 1,633 1,944
Federal Home Loan Bank of Atlanta stock, at cost (notes 8 and 12) 3,235 1,399
Property and equipment, net (note 6) 7,530 4,776
Accrued interest receivable 2,655 1,434
Prepaid expenses and other assets 3,426 708
- ----------------------------------------------------------------------------------------------
Total assets $ 497,487 256,984
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7) $ 262,311 196,962
Borrowings (note 8) 86,714 30,331
Repurchase agreements (note 8) 94,450 -
Company-obligated manditorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company (note 9) 21,450 -
Accrued expenses and other liabilities 4,074 2,725
- ----------------------------------------------------------------------------------------------
Total liabilities 468,999 230,018
- ----------------------------------------------------------------------------------------------
Stockholders' equity (notes 9, 13 and 14):
Common stock, $.05 par value; 20,000,000 shares authorized; 3,166,813
and 3,136,719 shares issued and outstanding, respectively 158 157
Additional paid-in capital 34,394 34,120
Accumulated deficit (6,517) (7,640)
Accumulated other comprehensive income 453 329
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 28,488 26,966
- ----------------------------------------------------------------------------------------------
Commitments and contingencies (notes 5, 6 and 8)
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 497,487 256,984
- ----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Loans $ 18,165 11,954 6,177
Investments 8,156 2,364 559
- ---------------------------------------------------------------------------------------------------
Total interest income 26,321 14,318 6,736
- ---------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 7) 9,081 6,142 2,999
Borrowed funds and other (note 8) 5,218 423 108
- ---------------------------------------------------------------------------------------------------
Total interest expense 14,299 6,565 3,107
- ---------------------------------------------------------------------------------------------------
Net interest income 12,022 7,753 3,629
Provision for loan losses (note 4) 1,212 472 1,040
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,810 7,281 2,589
- ---------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of loans 1,444 430 303
Service fees on deposits 2,454 865 337
Gain on securities, net 738 479 330
Other 959 577 104
- ---------------------------------------------------------------------------------------------------
Total noninterest income 5,595 2,351 1,074
- ---------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 7,632 4,371 2,744
Net occupancy 1,856 1,269 787
Deposit insurance premiums 122 77 229
Furniture, fixtures and equipment 790 361 253
Professional services 605 380 136
Advertising 683 574 380
Data processing 884 533 451
Other (note 12) 3,673 1,894 856
- ---------------------------------------------------------------------------------------------------
Total noninterest expenses 16,245 9,459 5,836
- ---------------------------------------------------------------------------------------------------
Income (loss) before income tax benefit 160 173 (2,173)
Income tax benefit (note 10) (963) (192) -
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 1,123 365 (2,173)
- ---------------------------------------------------------------------------------------------------
Net income (loss) per common share (note 1):
Basic $ 0.36 0.12 (1.56)
Diluted 0.32 0.10 (1.56)
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATED
SHARES OF ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT INCOME EQUITY
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 as
previously reported 1,226,613 $ 62 12,164 (1,524) - 10,702
10% stock dividend 122,661 6 4,302 (4,308) - -
- --------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 as
adjusted 1,349,274 68 16,466 (5,832) - 10,702
Common stock issued, net of
costs of issuance 1,540,715 77 15,179 - - 15,256
Net loss - - - (2,173) - (2,173)
Other comprehensive income - - - - 11 11
- --------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1996 2,889,989 145 31,645 (8,005) 11 23,796
Common stock issued, net of
costs of issuance and
exercise of common stock
options and warrants 246,730 12 2,475 - - 2,487
Net income - - - 365 - 365
Other comprehensive income - - - - 318 318
- --------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 3,136,719 157 34,120 (7,640) 329 26,966
Exercise of common stock
options and warrants 30,094 1 274 - - 275
Net income - - - 1,123 - 1,123
Other comprehensive income - - - - 124 124
- --------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 3,166,813 $ 158 34,394 (6,517) 453 28,488
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,123 365 (2,173)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 1,237 542 418
Amortization of unearned loan fees, net (636) (175) (588)
Amortization of premiums on deposits (11) (24) (28)
Amortization of premiums on loans 53 22 79
Amortization of premiums and discounts on mortgage-backed
securities, net (105) - -
Gain on securities, net (738) (479) (330)
Loss on other real estate owned 157 - -
Increase in accrued interest receivable (1,221) (721) (511)
Provision for loan losses 1,212 472 1,040
Net increase in mortgage loans held-for-sale (4,426) (13,823) (3,072)
Net increase (decrease) in accrued expenses and other liabilities 1,349 1,735 (133)
Net (increase) decrease in prepaids and other assets (3,005) 160 (94)
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (5,011) (11,926) (5,392)
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loan disbursements, net of principal repayments (98,656) (53,554) (61,795)
Purchases of property and equipment (3,781) (2,646) (1,217)
Purchases of Federal Home Loan Bank of Atlanta stock (1,836) (919) (180)
Purchases of available for sale securities (192,940) (43,383) (2,154)
Sales of available for sale securities 16,374 5,044 2,338
Principal repayments on mortgage-backed securities 16,265 806 -
Maturities of available for sale securities 6,500 - -
Purchases of investment securities - (7,492) (1,000)
Maturities of investment securities 3,099 6,000 2,170
Construction disbursements--other real estate owned (705) (345) -
Sales of other real estate owned 1,296 - -
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (254,384) (96,489) (61,838)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 65,359 95,004 60,830
Net increase in other borrowings 101,133 15,331 -
Proceeds from advances from Federal Home Loan Bank of Atlanta 66,700 9,000 6,000
Repayments of advances from Federal Home Loan Bank of Atlanta (17,000) - -
Proceeds from trust preferred securities offering 21,450 - -
Proceeds of stock options and warrants exercised 275 143 -
Proceeds from stock issuance, net - 2,344 15,256
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 237,917 121,822 82,086
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (21,478) 13,407 14,856
Cash and cash equivalents at beginning of year 45,917 32,510 17,654
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,439 45,917 32,510
- --------------------------------------------------------------------------------------------------------
Supplemental information:
Interest paid on deposits and borrowed funds $ 13,826 6,440 2,938
Real estate acquired in satisfaction of loans 436 1,599 -
Income taxes paid 8 1 -
- --------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
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
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 loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the State of Maryland. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for losses on loans. Such agencies may
require the Banks to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
LOAN FEES - Origination and commitment fees and direct origination costs on
loans held for investment are deferred and amortized to income over the
contractual lives of the related loans using the interest method. Under certain
circumstances, commitment fees are recognized over the commitment period or upon
expiration of the commitment. Unamortized loan fees are recognized in income
when the related loans are sold or prepaid.
SALES OF MORTGAGE LOANS - Loans originated for sale are carried at the lower
of aggregate cost or market value. Market value is determined based on
outstanding investor commitments or, in the absence of such commitments, based
on current investor yield requirements. Gains and losses on loan sales are
determined using the specific identification method.
INVESTMENT SECURITIES - Debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held to maturity and
recorded at amortized cost. Debt and equity securities are classified as trading
securities if bought and held principally for the purpose of selling them in the
near term. Trading securities are reported at fair value, with unrealized gains
and losses included in earnings. Debt securities not classified as held to
maturity and debt and equity securities not classified as trading securities are
considered available for sale and are reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of tax effect, in
accumulated 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
1. CONTINUED
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.
NONACCRUAL AND IMPAIRED LOANS - Loans are placed in nonaccrual status when
they are past due 90 days as to either principal or interest, unless the loan is
well secured and in the process of collection or earlier, when in the opinion of
management, the collection of principal and interest is in doubt. A loan remains
in nonaccrual status until the loan is current as to payment of both principal
and interest and the borrower demonstrates the ability to pay and remain
current. Loans are charged-off when a loan or a portion thereof is considered
uncollectible.
The Company identifies impaired loans and measures impairment (i) at the
present value of expected cash flows discounted at the loan's effective interest
rate; (ii) at the observable market price, or (iii) at the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, an impairment is
recognized through a valuation allowance and corresponding charge to provision
for loan losses. The Company does not apply these provisions to larger groups of
smaller-balance homogeneous loans such as consumer installment, residential
first and second mortgage loans and credit card loans. These loans are
collectively evaluated for impairment.
A loan is determined to be impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual 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.
STOCKHOLDERS' EQUITY - On May 12, 1998, the Board of Directors declared a
10% stock dividend, which was paid on May 26, 1998. An amount equal to the fair
value of the common shares issued plus cash in lieu of fractional shares was
transferred from Accumulated deficit to Common stock and Additional paid-in
capital. This transfer has been reflected in the Consolidated Statements of
Stockholders' Equity at December 31, 1995. The Stockholders' equity section of
the Consolidated Statements of Financial Position have been adjusted
accordingly. Except for the number of shares authorized, all references to per
share information and number of shares in the consolidated financial statements
have been adjusted to reflect the stock dividend on a retroactive basis.
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
1. CONTINUED
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.
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, expected
levels of future taxable income 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.
Basic earnings per share (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.
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.
All stock option activity is based on the increased number of shares giving
retroactive effect to the stock dividend discussed above.
RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 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. The required reserve
balance was $300,000 and $375,000 at December 31, 1998 and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
3. INVESTMENTS
The composition of the investment portfolios and maturities, where
applicable, are as follows (in thousands) at December 31:
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities:
Mortgage-backed securities $ 162,463 838 202 163,099
Trust preferred securities - due after ten years 21,006 226 507 20,725
Equity securities 3,391 441 59 3,773
Other bonds - due after one year through five years 100 - - 100
- -------------------------------------------------------------------------------------------------------------
$ 186,960 1,505 768 187,697
- -------------------------------------------------------------------------------------------------------------
Investment securities - held to maturity
U.S. Treasury:
Due in one year or less $ 5,502 45 - 5,547
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<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 year through
five years $ 6,500 - 67 6,433
Mortgage-backed securities 24,122 133 - 24,255
Equity securities 1,694 470 - 2,164
- ----------------------------------------------------------------------------------------------------------------
$ 32,316 603 67 32,852
- ----------------------------------------------------------------------------------------------------------------
Investment securities - held to maturity:
U.S. Treasury:
Due in one year or less $ 4,502 42 - 4,544
Due after one year through five years 4,000 - - 4,000
Certificate of Deposit:
Due in one year or less 99 - - 99
- ----------------------------------------------------------------------------------------------------------------
$ 8,601 42 - 8,643
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
During 1998 the Company recognized gains on the sale of securities of
$1,090,000 and recorded writedowns of $352,000 on certain equity securities
based on the determination of other than temporary declines in market values of
those securities. During 1997 and 1996 the Company recognized gains on the sales
of securities of $479,000 and $330,000, respectively. No losses on the sale of
securities were recognized in 1998, 1997 or 1996.
At December 31, 1998, available for sale securities with an aggregate
carrying value (fair value) of $28,000,000 were pledged as collateral for the
Federal Home Loan Bank of Atlanta borrowings. In addition, at December 31, 1998,
available for sale securities with an aggregate carrying value (fair value) of
$98,000,000 were pledged as collateral for borrowings under repurchase
agreements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
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 (in thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by first mortgages on real estate:
Residential $ 63,330 33,648
Commercial 46,283 45,954
Construction, net of undisbursed principal 57,156 30,602
- -----------------------------------------------------------------------------------------------------
Total first mortgage loans 166,769 110,204
Commercial 55,792 28,602
Loans secured by second mortgages on real estate 11,613 3,456
Consumer loans 8,617 2,076
Loans secured by deposits and other 188 208
- -----------------------------------------------------------------------------------------------------
Total loans 242,979 144,546
- -----------------------------------------------------------------------------------------------------
Unamortized loan premiums 108 140
Unearned income (362) (614)
- -----------------------------------------------------------------------------------------------------
Loans receivable $ 242,725 144,072
- -----------------------------------------------------------------------------------------------------
</TABLE>
Nonaccrual loans totaled approximately $1,520,000 and $1,550,000 at December
31, 1998 and 1997, respectively. The interest income which would have been
recorded in 1998, 1997 and 1996 under the original terms of loans in nonaccrual
status at December 31, 1998, 1997 and 1996, respectively, was approximately
$111,000, $85,000 and $32,000, respectively. The actual interest income recorded
on these loans was approximately $67,000, $77,000 and $0, respectively, in 1998,
1997 and 1996.
Impaired loans totaled $1,039,000 and $1,057,000 at December 31, 1998 and
1997, respectively, and were all collateral dependent loans. Collateral
dependent loans are measured based on fair value of the collateral. There were
no impaired loans at December 31, 1998 and 1997 with an allocated valuation
allowance.
The average recorded investment in impaired loans was approximately
$1,779,000, $589,000 and $257,000 at December 31, 1998, 1997 and 1996,
respectively, and no income has been accrued or collected on these loans while
they have been classified as impaired.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
4. CONTINUED
Changes in the allowance for losses on loans are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,614 1,242 376
Provisions for loan losses 1,212 472 1,040
Charge-offs, net of recoveries (150) (100) (174)
- -------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,676 1,614 1,242
- -------------------------------------------------------------------------------------------------------------
</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, 1998 and 1997, the Company had commitments to originate first
mortgage loans on real estate of approximately $15,475,000 and $2,890,000,
respectively, all of which were committed for sale in the secondary market.
At December 31, 1998 and 1997, the Company also had commitments to loan
funds under unused home equity lines of credit aggregating approximately
$7,776,000 and $1,716,000, respectively, and unused commercial lines of credit
aggregating approximately $44,169,000 and $46,458,000, respectively. Such
commitments carry a floating rate of interest. Commitments to originate
commercial loans totaled $23,615,000 at December 31, 1998.
Commitments for mortgage loans generally expire within 60 days and are
normally funded with loan principal repayments, excess liquidity, savings
deposits and borrowings. 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,
1998 and 1997, 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 $5,566,000 and $5,208,000 at December 31, 1998 and 1997,
respectively. During 1998, $8,259,000 of new loans and advances on existing
loans were made and repayments totaled $7,901,000; in 1997, $4,458,000 of new
loans were made and repayments totaled $526,000.
5. OTHER REAL ESTATE OWNED
At December 31, 1998, other real estate owned included a land development
project consisting of 199 residential building lots with a carrying value of
approximately $1,122,000. The land development project is being completed under
the direction of the Company. Currently, 112 lots are under contract, for
settlement through March 2001. In addition, three condominium units with a
carrying value of $142,000 and eleven single family lots with a carrying value
of $369,000 were also included in other real estate owned. Two condominum units
and four of the single family lots were sold after December 31, 1998, and
currently, the remaining condominium unit is under contract. The amount of
write-down on other real estate for 1998 was $157,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
6. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands) at December
31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1998 1997 LIVES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 392 392 -
Buildings and improvements 2,285 1,791 10-39 years
Leasehold improvements 2,241 1,216 10-33 years
Furniture, fixtures and equipment 4,847 2,577 3-7 years
- ---------------------------------------------------------------------------------------------------------
Total at cost 9,765 5,976
Less accumulated depreciation and amortization 2,235 1,200
- ---------------------------------------------------------------------------------------------------------
Total property and equipment, net $ 7,530 4,776
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,183,000, $771,000 and $423,000, respectively.
The Company and the Bank occupy space leased from a company, of which the
Chairman and CEO of the Company, is the owner. This company is paid $689,000
annually for office and branch space. The term of the lease is 15 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 seven of Mars Super Markets,
Inc. stores and has installed ATMs in fourteen (14) of the markets. The Bank may
open additional branches in Mars Super Markets in the future. The Bank pays rent
of $37,000 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 each of the next five years are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1999 $ 1,339
2000 1,319
2001 1,225
2002 1,102
2003 997
Thereafter 7,709
- --------------------------------------------------------------------------------------------
$ 13,691
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
7. DEPOSITS
Deposits are summarized as follows (dollars in thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EFFECTIVE EFFECTIVE
AMOUNT RATE AMOUNT RATE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noncertificate:
Passbook and other $ 12,117 2.75% $ 8,006 2.75%
Interest bearing demand deposits 38,460 1.25% 14,079 0.90%
Money market accounts 100,832 4.65% 58,887 4.93%
Non interest bearing demand deposits 24,054 - 24,006 -
- ----------------------------------------------------------------------------------------------------
Total noncertificate deposits 175,463 104,978
- ----------------------------------------------------------------------------------------------------
Certificates of deposit:
Original maturities:
Under 12 months 10,054 4.77% 6,460 5.16%
12 to 60 months 69,251 5.72% 78,345 5.85%
IRA and KEOGH 7,543 5.75% 7,169 5.97%
- ----------------------------------------------------------------------------------------------------
Total certificates of deposit 86,848 91,974
- ----------------------------------------------------------------------------------------------------
Unamortized premium - 10
- ----------------------------------------------------------------------------------------------------
Total deposits $ 262,311 $ 196,962
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Scheduled certificate of deposit maturities: % of total % of total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 6 months $ 27,177 31.29% $ 37,718 41.01%
6 months to 12 months 16,230 18.69% 26,298 28.59%
12 months to 24 months 34,627 39.87% 21,602 23.49%
24 months to 36 months 6,456 7.43% 5,098 5.54%
36 months to 48 months 927 1.07% 313 0.34%
Over 48 months 1,431 1.65% 945 1.03%
- --------------------------------------------------------------------------------------------
$ 86,848 100.00% $ 91,974 100.00%
- --------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit of $100,000 or more totaled approximately
$18,126,000 and $22,107,000 at December 31, 1998 and 1997, respectively.
Deposits of directors, their affiliates and policy making officers were
$6,529,000 at December 31, 1998.
8. OTHER BORROWINGS
Other borrowings consist of Federal Home Loan Bank at Atlanta (FHLB)
advances, short-term promissory notes and long term repurchase agreements with
callable options. The FHLB advances are available under a specific collateral
pledge and security agreement, which allows the Company to borrow up to
$67,500,000 and requires the Company to maintain collateral for all of its
borrowings in the form of either specific first mortgage loans with outstanding
principal equal to 133% of the advances or securities equal to 110-125% of
advances. At December 31, 1998, the Company had pledged as collateral
approximately $61,000,000 of first mortgage loans, $28,000,000 of securities and
$3,235,000 of FHLB stock.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
8. CONTINUED
The counterparties for (and the amounts of ) the outstanding repurchase
agreements at December 31, 1998 are Salomon Smith Barney Inc. ($30,000,000),
Merrill Lynch Pierce, Fenner & Smith Incorporated ($50,000,000) and Morgan
Stanley Dean Witter ($14,450,000), with maturities of 2008, 2003, and 1999,
respectively. The carrying value (fair value) of the related securities pledged
as collateral are $32,827,000, $50,587,000, and $14,512,000, respectively,
resulting in amounts at risk of $2,827,000, $587,000, and $62,000.
Certain information regarding borrowings are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amount outstanding at year-end:
FHLB short-term advances $ 19,700 15,000
Short-term promissory notes 22,014 15,331
Short-term repurchase agreements 14,450 -
FHLB long-term advances 45,000 -
Long-term repurchase agreements 80,000 -
Weighted average interest rates at year end:
FHLB short-term advances 4.95% 6.50%
Short-term promissory notes 3.72% 4.83%
Short-term repurchase agreements 5.62% -
FHLB long-term advances 5.02% -
Long-term repurchase agreements 5.17% -
Maximum outstanding at any month-end:
FHLB short-term advances $ 19,700 15,000
Short-term promissory notes 32,030 15,461
Short-term repurchase agreements 14,450 -
FHLB long-term advances 45,000 -
Long-term repurchase agreements 80,000 -
Average outstanding:
FHLB short-term advances $ 4,615 1,904
Short-term promissory notes 11,149 4,128
Short-term repurchase agreements 5,386 -
FHLB long-term advances 24,507 -
Long-term repurchase agreements 38,448 -
Weighted average interest rates during the year:
FHLB short-term advances 5.61% 6.05%
Short-term promissory notes 3.96% 5.47%
Short-term repurchase agreements 5.97% -
FHLB long-term advances 5.02% -
Long-term repurchase agreements 5.22% -
<CAPTION>
- ------------------------------------------------------------------------------------------------------
</TABLE>
The long-term repurchase agreements mature within five to ten years, subject
to call provisions beginning in 1999.
The FHLB long-term advances mature in ten years, subject to call provisions
beginning in 1999.
9. REDEEMABLE TRUST PREFERRED SECURITIES
Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust holding debentures of the Company (trust preferred securities)
consist of 2,145,000 securities with a liquidation amount of $10 per security,
which were issued in June 1998 by a statutory business trust, Mariner
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
9. CONTINUED
Capital Trust (the "Trust"). The Trust is a wholly owned subsidiary of the
Company because the Company owns all of the securities of the Trust that
possesses general voting powers. The Trust used the proceeds of the trust
preferred securities to purchase at par $22,113,000 of 8.3% junior subordinated
debentures of the Company due June 30, 2028. The junior subordinated debentures
are the sole assets of the Trust.
Payments to be made by the Trust on the trust preferred securities are
dependent on payments that the Company has undertaken to make, particularly the
payments to be made by the Company on the debentures. Considered together, the
obligations of the Company constitute a full and unconditional guarantee of the
Trust's obligations under the trust preferred securities.
Distributions on the trust preferred securities are payable from interest
payments received on the debentures and are due quarterly at a rate of 8.3% of
the liquidation amount, subject to deferral for up to five years under certain
conditions. Distributions are included in interest expense. 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.
10. 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 $76,000 and $40,000
in 1998 and 1997, respectively.
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 or greater than the estimated fair market
value of the common stock at the date of the grant. Options are exercisable
immediately after the date of grant and expire ten years after the date of
grant.
Information with respect to stock options is as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 192,830 198,660 16,500
Granted - - 182,930
Exercised (1,900) (4,180) -
Forfeited - (1,650) (770)
- -------------------------------------------------------------------------------------------------------
Outstanding at end of year 190,930 192,830 198,660
- -------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average remaining life of options outstanding at December 31,
1998 was 7.6 years. All options have an exercise price of $9.09.
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
10. CONTINUED
options granted, net income and net income per share would have been changed to
the following pro forma amounts for the year ended December 31, 1996:
<TABLE>
<S> <C> <C>
Net loss As reported $2,173,000
Pro forma 2,908,000
Net loss per share-basic As reported 1.56
Pro forma 2.09
- ------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair values of options granted during 1996 were
$735,000, on the date of grant. The fair values of options granted were
calculated using the Black-Scholes option-pricing model with the following
weighted average assumptions: risk-free interest rate of 6.01%; no expected
volatility; and expected lives of ten years. The weighted average fair value of
options granted for 1996 was $4.02 per share as adjusted for the stock dividend.
WARRANTS - Warrants to acquire 860,376, 888,605 and 900,155 shares of common
stock of $9.09 per share were outstanding and exercisable at December 31, 1998,
1997 and 1996, respectively.
11. INCOME TAXES
Income taxes (benefit) consists of the following (in thousands) for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 112 - -
Deferred (1,075) (192) -
- ---------------------------------------------------------------------------------------------------------------
Income tax benefit $ (963) (192) -
- ---------------------------------------------------------------------------------------------------------------
</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 (in
thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at federal corporate rate $ 54 59 (739)
Change in valuation allowance (918) (216) 776
Other (99) (35) (37)
- -------------------------------------------------------------------------------------------------------------
Income tax benefit $ (963) (192) -
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
11. CONTINUED
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities relate to the following (in
thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans $ 920 518
Realized loss on investments 135 -
Net operating loss carryforwards 428 821
Interest and fees on loans 39 59
- ---------------------------------------------------------------------------------------------------------
Total gross deferred assets 1,522 1,398
Less valuation allowance - (918)
- ---------------------------------------------------------------------------------------------------------
Net deferred tax assets 1,522 480
Deferred tax liabilities:
Depreciation and amortization 2 15
Federal Home Loan Bank stock dividends 12 12
Excess of fair value of assets acquired over cost 34 54
- ---------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 48 81
- ---------------------------------------------------------------------------------------------------------
Attributable to operations 1,474 399
Unrealized gain on investments charged to other comprehensive income (285) (207)
- ---------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,189 192
- ---------------------------------------------------------------------------------------------------------
</TABLE>
In assessing the realizability of the deferred tax asset, management
determined that the valuation allowance was no longer necessary and as a result
the Company recognized tax benefits of $918,000 in 1998. Management believes
that all of the deferred tax asset will be realized based on expected future
taxable income.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $1,108,000 which are available to
offset future federal taxable income through 2010. As a result of ownership
changes, utilization of a portion of the net operating loss carryforward is
subject to annual limitations.
12. OTHER EXPENSES
Other expenses are comprised of the following (in thousands) for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service and maintenance $ 418 190 122
Office supplies 255 149 149
Amortization of cost of intangible assets 210 75 75
Cost of ATM network 427 241 145
Printing 246 192 130
Corporate insurance 83 153 53
Other (a) 2,034 894 182
- ------------------------------------------------------------------------------------------------------------
Other expenses $ 3,673 1,894 856
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) No single item included in this category exceeded one percent of total
revenues.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
13. DIVIDENDS AND EARNINGS PER SHARE
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 of regulatory authorities must
be maintained. The Company and the Bank comply with such capital requirements.
The Company's current ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiary, the Bank. Both federal and
state laws impose restrictions on the ability of the Bank to pay dividends. The
FRB has issued a policy statement which provides that, as a general matter,
insured banks and bank holding companies may pay dividends only out of prior
operating earnings. For a Maryland state-chartered bank or trust company,
dividends may be paid out of undivided profits or, with the prior approval of
the Commissioner, from surplus in excess of 100% of required capital stock. If
however, the surplus of a Maryland bank is less than 100% of its required
capital stock, cash dividends may not be paid in excess of 90% of net earnings.
In addition to these specific restrictions, bank regulatory agencies, in
general, also have the ability to prohibit proposed dividends by a financial
institution which would otherwise be permitted under applicable regulations if
the regulatory body determines that such distribution would constitute an unsafe
or unsound practice.
Information relating to the calculations of earnings per common share is
summarized as follows (dollars in thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 1,123 365 (2,173)
- -----------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - basic 3,158,071 3,151,145 1,391,355
Dilutive securities - stock options and warrants 371,758 300,136 -
- -----------------------------------------------------------------------------------------------------
Weighted-average shares outstanding - diluted 3,529,829 3,451,281 1,391,355
- -----------------------------------------------------------------------------------------------------
</TABLE>
14. REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets.
Management believes, as of December 31, 1998, that the Bank meets all
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
14. CONTINUED
capital adequacy requirements to which it is subject. As of December 31, 1998
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 (dollars in thousands) and ratios for the Company
and the Bank as of December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISION
-------------------- ---------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total capital (to risk weighted assets):
Consolidated $ 52,162 18.9% $ 22,092 8.0% $ 27,616 10.0%
The Bank 35,689 13.1% 21,729 8.0% 27,162 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated 37,381 13.5% 11,046 4.0% 16,570 6.0%
The Bank 33,013 12.2% 10,865 4.0% 16,297 6.0%
Tier 1 capital (to average assets):
Consolidated 37,381 8.1% 18,541 4.0% 23,176 5.0%
The Bank 33,013 7.2% 18,293 4.0% 22,866 5.0%
AS OF DECEMBER 31, 1997
Total capital (to risk weighted assets):
Consolidated 28,040 18.2% 12,299 8.0% 15,374 10.0%
The Bank 19,442 12.0% 12,989 8.0% 16,236 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated 26,427 17.2% 6,150 4.0% 9,224 6.0%
The Bank 17,829 11.0% 6,494 4.0% 9,741 6.0%
Tier 1 capital (to average assets):
Consolidated 26,427 15.0% 7,051 4.0% 8,814 5.0%
The Bank 17,829 10.2% 6,986 4.0% 8,733 5.0%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The FDIC, through the Savings Association Insurance Fund (SAIF), insures
deposits of accountholders up to $100,000. The Bank pays an annual premium to
provide for this insurance. The Bank is a member of the Federal Home Loan Bank
System and is required to maintain an investment in the stock of the FHLB equal
to at least 1% of the unpaid principal balances of their residential mortgage
loans, .3% of their total assets or 5% of their outstanding advances from the
bank, whichever is greater. Purchases and sales of stock are made directly with
the bank at par value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
15. 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, 1998 and 1997.
The carrying value and estimated fair value of financial instruments is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and interest-bearing deposits $ 24,439 24,439 45,917 45,917
Investment securities 193,199 193,244 41,453 41,495
Loans receivable 240,049 246,787 142,458 143,322
Loans held for sale 21,321 21,321 16,895 16,895
Liabilities:
Deposit accounts 262,311 262,588 196,963 197,448
FHLB advances 64,700 66,301 15,000 15,000
Other borrowings 116,464 117,331 15,331 15,331
Company-obligated manditorily redeemable preferred
securities of subsidiary trust holding solely
debentures of the company 21,450 22,145 - -
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.
LOANS - Loans were segmented into portfolios with similar financial
characteristics. Loans were also segmented by type such as residential,
multifamily and nonresidential, construction and land, second mortgage loans,
commercial, and consumer. Each loan category was further segmented by fixed and
adjustable rate interest terms and performing and nonperforming categories. The
fair value of residential loans was calculated by discounting anticipated cash
flows based on weighted-average contractual maturity, weighted-average coupon,
and discount rate.
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.
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 be equal to the carrying amounts. The
fair value of certificates of deposit is based on the discounted
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
15. CONTINUED
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.
BORROWINGS - Borrowings were segmented into categories with similar
financial characteristics. Federal funds and short-term repurchase agreements
fair value approximates carrying values. All other borrowings were discounted
using a cash flow approach based on market rates as of December 31, 1998
specific for each category.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - The Company's adjustable rate
commitments to extend credit move with market rates and are not subject to
interest rate risk. The rates and terms of the Company's fixed rate commitments
to extend credit are competitive with others in the various markets in which the
Company operates. The fair values of these instruments are immaterial.
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 information and information about financial
instruments. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect estimates.
16. SEGMENT INFORMATION
The Company is in the business of providing financial services, and operates
in two business segments--commercial and consumer banking and mortgage banking.
Commercial and consumer banking is conducted through the Bank and involves in
delivering a broad range of financial products and services, including lending
and deposit taking, to individuals and commercial enterprises. Mortgage banking
is conducted through First Mariner Mortgage Corporation, a subsidiary of the
Bank, and involves originating residential single family mortgages for sale in
the secondary market and to the Bank.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
16. CONTINUED
The following table presents certain information regarding these business
segments for the year ended December 31, 1998 (in thousands). Information is not
available for years prior to 1998.
<TABLE>
<S> <C> <C>
Total revenue:
Commercial and consumer banking $ 15,420(1)
Mortgage banking 2,761
Less related party transactions (564) (3)
- -------------------------------------------------------------------------------------------
Net mortgage banking 2,197(2)
- -------------------------------------------------------------------------------------------
Consolidated revenue $ 17,617
- -------------------------------------------------------------------------------------------
Income (loss) before income taxes:
Commercial and consumer banking $ 206(1)
Mortgage banking 518
Less related party transactions (564) (3)
- -------------------------------------------------------------------------------------------
Net mortgage banking (46)(2)
- -------------------------------------------------------------------------------------------
Consolidated income before income taxes $ 160
- -------------------------------------------------------------------------------------------
Identifiable assets:
Commercial and consumer banking $ 473,441
Mortgage banking 24,046
- -------------------------------------------------------------------------------------------
Consolidated total assets $ 497,487
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Includes net interest income of $11,801.
(2) Includes net interest income of $221.
(3) Management's policy for the mortgage banking segment is to recognize a gain
for loans sold to the Bank at prices determined annually.
17. COMPREHENSIVE INCOME
The Company's components of comprehensive income are as follows (in
thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 1,123 365 (2,173)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income items:
Unrealized holding gains arising during the period (net of tax of $335,
$273, and $125, respectively) 596 625 222
Less: reclassification adjustment for gains (net of tax of $266, $172, and
$119, respectively) included in net income 472 307 211
- ---------------------------------------------------------------------------------------------------------------
Total other comprehensive income items 124 318 11
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 1,247 683 (2,162)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
18. FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of First Mariner Bancorp (parent
company only):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
STATEMENT OF FINANCIAL CONDITION 1998 1997
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash $ 8,883 7,167
Commercial loans 2,960 -
Available for sale securities 3,773 2,164
Investment in subsidiary 33,230 18,165
Other assets 2,494 39
- -------------------------------------------------------------------------------------------------------
Total assets $ 51,340 27,535
- -------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Other liabilities $ 1,402 569
Company-obligated manditorily redeemable preferred securities of subsidiary
trust holding solely debentures of the company 21,450 -
Stockholders' equity 28,488 26,966
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 51,340 27,535
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
STATEMENT OF OPERATIONS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Interest income on investments $ 497 295 43
Interest income on loans 74 - -
Gain on sale of securities 690 455 330
Other income 208 20 -
- ---------------------------------------------------------------------------------------------------------
Total income 1,469 770 373
- ---------------------------------------------------------------------------------------------------------
Expenses:
Interest expense 940 - -
Salaries and employee expenses 837 524 240
Amortization 12 7 8
Professional expenses 312 52 -
Other expenses 222 16 15
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Total expenses 2,323 599 263
- ---------------------------------------------------------------------------------------------------------
Income (loss) before income tax benefit (854) 171 110
Income tax benefit (963) (192) -
- ---------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income (loss) of the Bank 109 363 110
Equity in undistributed net income (loss) of the Bank 1,014 2 (2,283)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,123 365 (2,173)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996 FIRST MARINER BANCORP AND SUBSIDIARY
18. CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
STATEMENT OF CASH FLOWS 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Income before undistributed net income of the Bank $ 109 363 110
Depreciation and amortization 12 7 7
Increase in other liabilities 833 (169) 696
Increase in other assets (2,467) (27) (7)
Gain on sale of securities (690) (455) (330)
Other - - (3)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (2,203) (281) 473
- -------------------------------------------------------------------------------------------------------
Net cash flows from investing activities:
Investment in subsidiaries (13,927) - (10,500)
Loan disbursements, net (2,960) - -
Purchase of available for sale securities (8,050) (1,562) (2,154)
Sale of available for sale securities 7,131 496 2,170
- -------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (17,806) (1,066) (10,484)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities:
Proceeds from stock issuance, net 275 2,487 15,256
Proceeds from trust preferred securities offering 21,450 - -
- -------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 21,725 2,487 15,256
- -------------------------------------------------------------------------------------------------------
Net increase in cash and temporary investments 1,716 1,140 5,245
Cash and temporary investments at beginning of year 7,167 6,027 782
- -------------------------------------------------------------------------------------------------------
Cash and temporary investments at end of year $ 8,883 7,167 6,027
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
DIRECTORS AND OFFICERS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
BOARD OF DIRECTORS
Edwin F. Hale, Sr.
CHAIRMAN OF THE BOARD &
CHIEF EXECUTIVE OFFICER
FIRST MARINER BANCORP
FIRST MARINER BANK
Joseph A. Cicero
PRESIDENT AND CHIEF OPERATING OFFICER
FIRST MARINER BANCORP
CHIEF OPERATING OFFICER
FIRST MARINER BANK
George H. Mantakos
EXECUTIVE VICE PRESIDENT
FIRST MARINER BANCORP
PRESIDENT
FIRST MARINER BANK
Barry B. Bondroff
PRESIDENT & MANAGING DIRECTOR
GRABUSH, NEWMAN & CO., P.A.
Edith B. Brown
DIRECTOR OF PUBLIC & COMMUNITY RELATIONS
THE BALTIMORE ARENA
Rose M. Cernak
PRESIDENT
OLDE OBRYCKI'S CRAB HOUSE, INC.
Christopher P. D'Anna
EXECUTIVE VICE PRESIDENT
MARS SUPER MARKETS, INC.
Bruce H. Hoffman
EXECUTIVE DIRECTOR
MARYLAND STADIUM AUTHORITY
Melvin S. Kabik
COMMERCIAL REAL ESTATE INVESTOR
R. Andrew Larkin
PRESIDENT
MARYLAND REALTY INVESTMENTS CORP.
Michael J. Lynch
VICE PRESIDENT
THE GENERAL SHIP REPAIR COMPANY
Jay J. J. Matricciani
PRESIDENT
THE MATRICCIANI COMPANY
Walter L. McManus, Jr.
PRESIDENT
CASTLEWOOD REALTY COMPANY, INC.
James P. O'Conor
PRESIDENT & CEO
O'CONOR, PIPER & FLYNN
John J. Oliver, Jr.
CEO AND PUBLISHER
AFRO-AMERICAN PUBLISHING CO.
Hanan Y. Sibel
CEO & CHAIRMAN
MAI-CHAIMSON, INC.
Leonard Stoler
OWNER & PRESIDENT
LEN STOLER, INC.
Captain Michael R. Watson
PRESIDENT
ASSOCIATION OF MARYLAND PILOTS
FIRST MARINER BANCORP
SENIOR OFFICERS
Edwin F. Hale, Sr.
CHAIRMAN & CHIEF EXECUTIVE OFFICER
Joseph A. Cicero
PRESIDENT & CHIEF OPERATING OFFICER
George H. Mantakos
EXECUTIVE VICE PRESIDENT
Kevin M. Healey
SENIOR VICE PRESIDENT
Eugene A. Friedman
VICE PRESIDENT &
CORPORATE SECRETARY
FIRST MARINER MORTGAGE
COMPANY
Brett J. Carter
PRESIDENT
Joseph A. Cicero
CHIEF OPERATING OFFICER
Albert Kavalsky
SENIOR VICE PRESIDENT
Lynda J. Jeffers
SENIOR VICE PRESIDENT
William A. Benner
VICE PRESIDENT
Deborah J. Leypoldt
VICE PRESIDENT
Barbara O'Brien Greaver
VICE PRESIDENT
Patty Robinson
VICE PRESIDENT
Carla Commons
VICE PRESIDENT
Tammy Ruse
VICE PRESIDENT
<PAGE>
DIRECTORS AND OFFICERS
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
FIRST MARINER BANK
SENIOR OFFICERS
Edwin F. Hale, Sr.
CHAIRMAN & CHIEF EXECUTIVE OFFICER
George H. Mantakos
PRESIDENT
Joseph A. Cicero
CHIEF OPERATING OFFICER
M. Neil Brownawell, II
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Kevin M. Healey
SENIOR VICE PRESIDENT
Jane A. Higgins
SENIOR VICE PRESIDENT
RETAIL AND OPERATIONS
William A. Murphy
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Robert P. Warr
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
John Winkler
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Lawrence W. Mathe
SENIOR VICE PRESIDENT
COMMERCIAL LENDING
Rodney J. Baker
VICE PRESIDENT
CONSUMER LENDING
Kathy J. Bennett
VICE PRESIDENT
BRANCH ADMINISTRATION
Frances Crawford
VICE PRESIDENT
BRANCH ADMINISTRATION
Robert Friday, Jr.
VICE PRESIDENT
BRANCH ADMINISTRATION
Eugene A. Friedman
VICE PRESIDENT & CORPORATE SECRETARY
Linda D. Gaunt
VICE PRESIDENT
BRANCH ADMINISTRATION
Linda R. Heier
REGIONAL VICE PRESIDENT
BRANCH ADMINISTRATION
Kenneth C. Jones
VICE PRESIDENT
FACILITIES
Imelda Liberatore
VICE PRESIDENT
BRANCH ADMINISTRATION
John Soos
VICE PRESIDENT
BRANCH ADMINISTRATION
Wayne W. Spencer
REGIONAL VICE PRESIDENT
BRANCH ADMINISTRATION
Gerard T. Stanczyk
VICE PRESIDENT
SYSTEMS
Richard Sutton
VICE PRESIDENT
BRANCH ADMINISTRATION
William F. Thompson
VICE PRESIDENT
INTERNAL AUDIT
Sandy Wildberger
VICE PRESIDENT
BRANCH ADMINISTRATION
Ralph Wood
VICE PRESIDENT
BRANCH ADMINISTRATION
Lila E. Yingling
VICE PRESIDENT
OPERATIONS
<PAGE>
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------
FIRST MARINER BANCORP AND SUBSIDIARY
First Mariner Bancorp's periodic reports filed with the Securities and Exchange
Commission are available without charge to stockholders and other interested
parties. To request those publications, or if you have questions about First
Mariner Bancorp, you are invited to contact:
INVESTOR RELATIONS
First Mariner Bancorp
1801 South Clinton Street
Baltimore, MD 21224
410-342-2600
TRANSFER AGENT AND REGISTRAR
American Transfer & Trust Company
40 Wall Street
New York, NY 10005
212-936-5100
Communications concerning changes of address, lost certifcate and transfer
requests should be directed to the Transfer Agent.
ANNUAL MEETING
The 1999 Annual Meeting of Stockholders
will be held on May 4, 1999 at Sparrows Point Country Club, 919 Wise Avenue,
Baltimore, Maryland.
1998 ANNUAL REPORT AND FORM 10-K
This report is submitted for the general information of the stockholders of
First Mariner Bancorp and is not intended to be used in connection with any sale
or purchase of securities. Copies of Form 10-K are available from the Corporate
Secretary of First Mariner Bancorp without charge.
<PAGE>
EXHIBIT 21
SUBSIDIARIES
1 Wholly owned subsidiaries of First Mariner Bancorp
First Mariner Bank
Mariner Capital Trust
2 Wholly owned subsidiaries of First Mariner Bank
First Mariner Mortgage Corporation
Compass Properties, Inc
First Mariner Investment Corp.
18
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Mariner Bancorp:
We consent to the incorporation by reference in the registration statements
(Nos. 333-60961, 333-60963 and 333-60967) on Form S-8 of First Mariner Bancorp
and subsidiary (First Mariner) of our report dated February 7, 1999, relating
to the consolidated statements of financial condition of First Mariner as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 annual report on Form 10-K of First Mariner.
/s/
KPMG LLP
Baltimore, Maryland
March 30, 1999
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements as of and for the period ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,193
<INT-BEARING-DEPOSITS> 7,246
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 187,697
<INVESTMENTS-CARRYING> 5,502
<INVESTMENTS-MARKET> 5,547
<LOANS> 242,725
<ALLOWANCE> 2,676
<TOTAL-ASSETS> 497,487
<DEPOSITS> 262,311
<SHORT-TERM> 56,164
<LIABILITIES-OTHER> 4,074
<LONG-TERM> 125,000
0
21,450
<COMMON> 158
<OTHER-SE> 28,330
<TOTAL-LIABILITIES-AND-EQUITY> 497,487
<INTEREST-LOAN> 18,165
<INTEREST-INVEST> 8,156
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,321
<INTEREST-DEPOSIT> 9,081
<INTEREST-EXPENSE> 14,299
<INTEREST-INCOME-NET> 12,022
<LOAN-LOSSES> 1,212
<SECURITIES-GAINS> 738
<EXPENSE-OTHER> 3,673
<INCOME-PRETAX> 160
<INCOME-PRE-EXTRAORDINARY> 160
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,123
<EPS-PRIMARY> .36
<EPS-DILUTED> .32
<YIELD-ACTUAL> 3.68
<LOANS-NON> 1,520
<LOANS-PAST> 126
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,614
<CHARGE-OFFS> 181
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 2,676
<ALLOWANCE-DOMESTIC> 1,763
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 913
</TABLE>
<PAGE>
EXHIBIT 99
RISK FACTORS
REGULATORY RISKS. The banking industry is subject to many laws and
regulations. Regulations protect depositors, not stockholders. The Maryland
Division of Financial Regulation, the Federal Deposit Insurance Corporation, and
the Board of Governors of the Federal Reserve System regulate the Company and
the Bank. Regulations and laws increase the Company's operating expenses, affect
the Company's earnings, and put the Company at a disadvantage with less
regulated competitors, such as finance companies, mortgage banking companies,
and leasing companies.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS. Most of the loans made by the
Bank are made to Maryland borrowers. A decline in local economic conditions
would affect the Company's earnings.
CREDIT RISKS AND INADEQUACY OF LOAN LOSS RESERVE. When borrowers
default and do not repay the loans made to them by the Bank, the Company loses
money. Experience shows that some borrowers either will not pay on time or will
not pay at all. In these cases, the Bank will cancel, or "write off," the
defaulted loan or loans. A "write off" reduces the Company's assets and affects
the Company's earnings. The Company anticipates losses by reserving what it
believes to be an adequate cushion so that it does not have to take a large loss
at any one time. However, actual loan losses cannot be predicted, and the
Company's loan loss reserve may not be sufficient.
INTEREST RATE RISK. The Company's earnings depend greatly on its net
interest income, the difference between the interest earned on loans and
investments and the interest paid on deposits. If the interest rate paid on
deposits is high and the interest rate earned on loans and investments is low,
net interest income is small and the Company earns less. Because interest rates
are established by competition, the Company cannot completely control its net
interest income.
RISKS ASSOCIATED WITH REAL ESTATE LENDING. The Bank makes many real
estate secured loans. Real estate loans are in demand when interest rates are
low and economic conditions are good. Even when economic conditions are good and
interest rates are low, these conditions may not continue. The Company may lose
money if the borrower does not pay a real estate loan. If real estate values
decrease, then the Company may lose more money when the borrowers default.
NO ASSURANCE OF GROWTH. The Company's ability to increase assets and
earnings depends upon many factors, including competition for deposits and
loans, the Company's branch and office locations, avoidance of credit losses,
and hiring and training of personnel. Many of these factors are beyond the
Company's control.
COMPETITION. Other banks and non-banks, including savings and loan
associations, credit unions, insurance companies, leasing companies, small loan
companies, finance companies, and mortgage companies, compete with the Company.
Some of the Company's competitors offer services and products that the Company
does not offer. Larger banks and non-bank lenders can make larger loans and
service larger customers. Law changes now permit interstate banks which may
increase competition. Increased competition may decrease the Company's earnings.
NO ASSURANCE OF CASH OR STOCK DIVIDENDS. Whether dividends may be
paid to stockholders depends on the Company's earnings, its capital needs, law
and regulations, and other factors. The Company's payment of dividends in the
past does not mean that the Company will be able to pay dividends in the future.
STOCK NOT INSURED. Investments in the shares of the Company's common
stock are not deposits that are insured against loss by the government.
RISK INVOLVED IN ACQUISITIONS. Part of the Company's growth may come
from buying other banks and companies. A newly purchased bank or company may not
be profitable after the Company buys it and may lose money, particularly at
first. The new bank or Company may bring with it unexpected liabilities or bad
loans, bad employee relations, or the new bank or company may lose customers.
RISK OF CLAIMS. Customers may sue the Company for losses due to the
Company's alleged breach of fiduciary duties, errors and omissions of employees,
officers and agents, incomplete documentation, the Company's failure to comply
with applicable laws and regulations, or many other reasons. Also, employees of
the Company conduct all of the Company's business. The employees may knowingly
or unknowingly violate laws and regulations. Company management may not be aware
of any violations until after their occurrence. This lack of
20
<PAGE>
knowledge will not insulate the Company from liability. Claims and legal actions
may result in legal expenses and liabilities that may reduce the Company's
profitability and hurt its financial condition.
DEVELOPMENTS IN TECHNOLOGY. Financial services use technology,
including telecommunications, data processing, computers, automation,
internet-based banking, debit cards, and "smart" cards. Technology changes
rapidly. The Company's ability to compete successfully with other banks and
non-banks may depend on whether it can exploit technological changes. The
Company may not be able to exploit technological changes and expensive new
technology may not make the Company more profitable.
YEAR 2000. The "Year 2000 Issue" describes problems that may result
from the improper processing of dates and date-sensitive calculations beginning
in the Year 2000. Many existing computer programs use only two digits to
identify the year in the date field of a program. These programs could
experience serious malfunctions when the last two digits of the year change to
"00" as a result of identifying a year designated "00" as the Year 1900 rather
than the Year 2000. A system failure or other disruptions of operations could
occur if the Company's computer programs and other equipment identify a year
designated "00" as the Year 1900 rather than the Year 2000. The Company cannot
be certain that its computer programs and other equipment, and the computer
programs and other equipment of its customers, vendors, suppliers, and even the
government will be Year 2000 compliant. Any systems failure, disruption, or
other losses could affect the Company's earnings.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS. The
Company's Articles of Incorporation and Bylaws divide the Company's Board of
Directors into three classes and each class serves for a staggered three-year
term. No director may be removed except for cause, and then only by a vote of at
least two-thirds of the total eligible stockholder votes. In addition, Maryland
law contains anti-takeover provisions that apply to the Company. These
provisions may discourage or make it more difficult for another company to buy
the Company or may reduce the market price of the Company's common stock.
21
