<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended MARCH 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from
_______________________.
Commission file number: 0-21815
FIRST MARINER BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1834860
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
1801 SOUTH CLINTON STREET, BALTIMORE, MD 21224 410-342-2600
- ---------------------------------------- ---------- ------------------
(Address of principal executive offices) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes X No
--- ---
The number of shares of common stock outstanding as of May 12, 1999 was
3,166,813 shares.
<PAGE>
FIRST MARINER BANCORP
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1999 (unaudited) and at December 31, 1998..................3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and March 31, 1998
(unaudited)..........................................................4
Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 1999
and March 31, 1998 (unaudited).......................................5
Notes to Consolidated Financial Statements (unaudited)..................6
Item 2 - Management's discussion and analysis of
financial condition and results of operations.........................9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...............16
PART II - OTHER INFORMATION
Item 1 - Legal proceedings........................................................17
Item 2 - Changes in securities and use of proceeds................................17
Item 3 - Defaults on senior securities............................................17
Item 4 - Submission of matters to a vote of security holders......................17
Item 5 - Other information........................................................17
Item 6 - Exhibits and reports on Form 8-K........................................17
Signatures........................................................................18
</TABLE>
2
<PAGE>
First Mariner Bancorp and Subsidiaries
Consolidated Statements of Financial Condition
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,780 $ 17,193
Interest-bearing deposits 23,647 7,246
Available-for-sale securities, at fair value 179,627 187,697
Investment securities, fair value of $5,528 and $5,547
respectively 5,502 5,502
Loans held for sale 18,045 21,321
Loans receivable 270,665 242,725
Allowance for loan losses (2,893) (2,676)
--------- ---------
Loans, net 267,772 240,049
Other real estate owned 1,437 1,633
Federal Home Loan Bank of Atlanta stock, at cost 3,250 3,235
Property and equipment, net 8,443 7,530
Accrued interest receivable 3,074 2,655
Prepaid expenses and other assets 4,148 3,426
--------- ---------
Total assets $ 537,725 $ 497,487
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 303,337 $ 262,311
Borrowings 84,706 86,714
Repurchase agreements 97,726 94,450
Company-obligated mandatorily redeemable preferred
securities of a Subsidiary trust holding solely
debentures of the Company 21,450 21,450
Accrued expenses and other liabilities 2,356 4,074
--------- ---------
Total liabilities 509,575 468,999
--------- ---------
--------- ---------
Stockholders' equity
Common stock, $.05 par value; 20,000,000 shares
Authorized; 3,166,813 and 3,166,813 shares issued
and outstanding, respectively 158 158
Additional paid-in capital 34,394 34,394
Accumulated deficit (6,316) (6,517)
Accumulated other comprehensive income (86) 453
--------- ---------
Total stockholders' equity 28,150 28,488
--------- ---------
Total liabilities and stockholders' equity $ 537,725 $ 497,487
--------- ---------
--------- ---------
</TABLE>
3
<PAGE>
First Mariner Bancorp and Subsidiaries Consolidated
Statements of Operations (Unaudited)
For the three months ended March 31, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Interest income:
Loans $ 5,768 $ 3,784
Investments 3,263 877
------- -------
Total interest income 9,031 4,661
------- -------
Interest expense:
Deposits 2,461 2,066
Borrowed funds and other 2,672 154
------- -------
Total interest expense 5,133 2,220
------- -------
Net interest income 3,898 2,441
Provision for loan losses 220 152
------- -------
Net interest income after provision for loan losses 3,678 2,289
------- -------
Noninterest income:
Gain on sale of loans 440 237
Service fees on deposits 699 392
Gain (loss) on securities, net (2) 285
Other 356 118
------- -------
Total noninterest income 1,493 1,032
------- -------
Noninterest expenses:
Salaries and employee benefits 2,490 1,471
Net occupancy 685 400
Deposit insurance premiums 38 27
Furniture, fixtures and equipment 267 148
Professional services 87 160
Advertising 174 170
Data processing 288 192
Cleaning and Maintenance 146 80
ATM Expenses 127 83
Other 541 439
------- -------
Total noninterest expenses 4,843 3,170
------- -------
Income before taxes 328 151
Provision for income taxes 127 --
------- -------
Net income $ 201 $ 151
------- -------
------- -------
Net income per common share:
Basic $ 0.06 $ 0.05
Diluted 0.06 0.04
------- -------
------- -------
</TABLE>
4
<PAGE>
First Mariner Bancorp and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 201 $ 151
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 341 217
Amortization of unearned loan fees and costs, net (124) (198)
Amortization of premiums on deposits -- (6)
Amortization of discounts on loans (13) (16)
Amortization of premiums and discounts on mortgage-backed securities, net 108 --
Loss (gain) on securities, net 2 (285)
Increase in accrued interest receivable (419) (1,220)
Provision for loan losses 220 152
Net decrease in mortgage loans held-for-sale 3,276 1,165
Net decrease in accrued expenses and other liabilities (1,718) (1,953)
Net (increase) decrease in prepaids and other assets (383) 1,143
-------- --------
Net cash provided by (used in) operating activities 1,491 (850)
-------- --------
Cash flows from investing activities:
Loan disbursements, net of principal repayments (27,806) (16,787)
Purchases of property and equipment (1,254) (754)
Redemptions (purchases) of Federal Home Loan Bank of Atlanta stock (15) 399
Purchases of available for sale securities (2,789) (5,140)
Sales of available for sale securities 231 931
Principal repayments of available for sale securities 9,640 947
Maturities of available for sale securities -- 2,500
Maturities of investment securities -- 2,000
Construction disbursements-other real estate owned (55) (20)
Sales of other real estate owned 251 --
-------- --------
Net cash used in investing activities (21,797) (15,924)
-------- --------
Cash flows form financing activities:
Net increase in deposits 41,026 6,755
Net increase (decrease) in other borrowings 10,968 (3,164)
Proceeds from advances from Federal Home Loan Bank of Atlanta -- 15,000
Repayment of advances from Federal Home Loan Bank of Atlanta (9,700) (10,000)
Proceeds from stock issuance, net -- 175
-------- --------
Net cash provided by financing activities 42,294 8,766
-------- --------
Decrease in cash and cash equivalents 21,988 (8,008)
Cash and cash equivalents at beginning of period 24,439 45,917
Cash and cash equivalents at end of period $ 46,427 $ 37,909
-------- --------
-------- --------
Supplemental information:
Interest paid on deposits and borrowed funds $ 4,770 $ 2,221
Real estate acquired in satisfaction of loans -- 456
Income taxes paid 265 --
-------- --------
-------- --------
</TABLE>
5
<PAGE>
FIRST MARINER BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The foregoing consolidated financial statements of First Mariner
Bancorp (the "Company") are unaudited; however, in the opinion of management,
all adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of the results of interim periods have been included. These
statements should be read in conjunction with the financial statements and
accompanying notes included in First Mariner Bancorp's Annual Report on Form
10-K for the year ended December 31, 1998. The results shown in this interim
report are not necessarily indicative of results to be expected for the full
year.
Consolidation of financial information has resulted in the elimination
of all significant intercompany accounts and transactions.
NOTE 2 - COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Net income $ 201 $ 151
Other comprehensive income items:
Unrealized holding gains (losses) arising during the period
(net of tax (benefit) of $(339) and $56, respectively) (540) 87
Less: reclassification adjustment for gains (losses)
(net of tax (benefit) of $(1) and $110, respectively)
included in net income (1) 175
----- -----
Total other comprehensive income (539) (88)
----- -----
Total comprehensive income (loss) $(338) $ 63
----- -----
----- -----
</TABLE>
6
<PAGE>
NOTE 3 - REDEEMABLE TRUST PREFERRED SECURITIES
Company-obligated mandatorily redeemable preferred securities of a
Subsidiary trust, holding debentures of the Company (trust preferred securities)
consist of 2,145,000 securities with a liquidation amount of $10 per security,
which were issued in June 1998 by a statutory business trust, Mariner Capital
Trust (the "Trust"). The Trust is a wholly owned Subsidiary of the Company by
ownership 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, including 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 expenses.
Redemptions of the trust preferred securities are payable at the liquidation
amount from redemption payments received on the debentures. The Company may
redeem the debentures at par at any time after June 30, 2003.
NOTE 4 - PER SHARE DATA
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share is computed after adjusting the numerator and
denominator of the basic earnings per share computation for the effects of all
dilutive potential common shares outstanding during the period. The dilutive
effects of options, warrants and their equivalents are computed using the
"treasury stock" method.
Information relating to the calculation of earnings per common share is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net income-basic and diluted $ 201,537 $ 151,342
---------- ----------
---------- ----------
Weighted-average shares outstanding-basic 3,166,813 3,142,433
Dilutive securities-options and warrants 287,687 455,208
---------- ----------
Weighted-average shares outstanding-dilutive 3,454,500 3,597,641
---------- ----------
</TABLE>
All options and warrants have an exercise price of $9.09
NOTE 5 - 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 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.
7
<PAGE>
<TABLE>
<S> <C> <C>
For the quarter ended March 31, 1999
(dollars in thousands)
Total revenue:
Commercial and consumer banking $ 4,695 (1)
Mortgage banking 1,157
Less related party transactions (461) (3)
---------
Net mortgage banking 696 (2)
---------
Consolidated revenue $ 5,391
---------
---------
Income (loss) before income taxes:
Commercial and consumer banking $ 636
Mortgage banking 153
Less related party transactions (461) (3)
---------
Net mortgage banking (308) (2)
---------
Consolidated income before income taxes $ 328
---------
---------
Identifiable assets:
Commercial and consumer banking $ 516,315
Mortgage banking 21,410
---------
Consolidated total assets $ 537,725
---------
---------
</TABLE>
(1) Includes net interest income of $3,828.
(2) Includes net interest income of $70.
(3) Management's policy for the mortgage banking segment is to recognize a
value for loans sold to the Bank at market prices determined on a loan
by loan basis.
8
<PAGE>
<TABLE>
<S> <C> <C>
For the quarter ended March 31, 1998
(dollars in thousands)
Total revenue:
Commercial and consumer banking $ 3,129 (1)
Mortgage banking 432
Less related party transactions (88) (3)
---------
Net mortgage banking 344 (2)
---------
Consolidated revenue $ 3,473
---------
---------
Income (loss) before income taxes:
Commercial and consumer banking $ 317
Mortgage banking (78)
Less related party transactions (88) (3)
---------
Net mortgage banking (166) (2)
---------
Consolidated income before income taxes $ 151
---------
---------
Identifiable assets:
Commercial and consumer banking $ 247,821
Mortgage banking 15,988
---------
Consolidated total assets $ 263,809
---------
---------
</TABLE>
(1) Includes net interest income of $2,399.
(2) Includes net interest income of $42.
(3) Management's policy for the mortgage banking segment is to recognize a
value for loans sold to the Bank at market prices determined quarterly.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read and reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
In addition to historical information, this Form 10-Q contains
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans and expectations regarding the Year 2000 and
other matters, and unknown outcomes. The Company's actual results could differ
materially from management's expectations. Factors that could contribute to
those differences include, but are not limited to, changes in regulations
applicable to the Company's business, successful implementation of Company's
branch expansion strategy, its concentration in real estate lending, increased
competition, changes in technology, particularly internet banking, impact of
interest rates, possibility of economic recession or slow down (which could
impact credit quality, adequacy of loan loss reserve and loan growth) and
control by and dependency on key personnel, particularly Edwin F. Hale, Sr.,
chairman of the board of directors and CEO of the Company.
THE COMPANY
9
<PAGE>
The Company is a bank holding company formed in Maryland in 1994 under the
name MarylandsBank Corporation that later changed its name to First Mariner
Bancorp in May 1995. The business of the Company is conducted primarily 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.
The Bank is an independent community bank engaged in the general commercial
banking business with particular emphasis on the needs of individuals and small
to mid-sized businesses. The Bank emphasizes personal attention and professional
service to its customers while delivering a range of traditional and
contemporary financial products.
The Company's executive offices are located at 1801 South Clinton Street,
Baltimore, Maryland 21224 and its telephone number is (410) 342 - 2600.
FINANCIAL CONDITION
The Company's total assets were $537,725,000 at March 31, 1999, compared to
$497,487,000 at December 31, 1998, increasing $40,238,000 or 8.1% for the three
months of 1999. Earning assets increased $32,995,000 or 7.1% to $497,486,000
from $464,491,000, primarily due to increases in loans outstanding of
$27,940,000.
Total loans receivable increased $27,940,000 or 11.5% to $270,665,000 for
the first three months of 1999. The majority of the increase was real estate
secured loans. Mortgage loans held for sale decreased $3,276,000 from
$21,321,000 at December 31, 1998 to $18,045,000 at March 31, 1999, reflecting an
accelerated pace of delivery of residential mortgages to investors by the Bank's
mortgage banking subsidiary, First Mariner Mortgage Corporation. First Mariner
Mortgage Corporation originated $76,063,000 of residential mortgages during the
first three months of 1999 in comparison to approximately $43,247,000 during the
first three months of 1998. Continued strong loan demand and an increase in loan
production staff was the significant factor in this growth in residential
mortgages.
10
<PAGE>
The loan portfolio was comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
Amount Amount
------ ------
<S> <C> <C>
TYPE OF LOANS
Commercial $ 63,067 $ 55,792
Commercial real estate and construction (1) 108,672 103,439
Residential real estate 75,181 63,330
Consumer 24,058 20,418
-------- --------
Total loans 270,978 242,979
-------- --------
Unamortized loan premiums 95 108
Unearned income and costs, net 408 362
-------- --------
Loans receivable $270,665 $242,725
-------- --------
-------- --------
</TABLE>
(1) Net of undisbursed principal
CREDIT RISK MANAGEMENT
The first quarter provision for loan losses in 1999 was $220,000, which
compares to $152,000 for the three month period ended March 31, 1998. The
allowance for loan losses stands at $2,893,000 at March 31, 1999 compared to
$2,676,000 at December 31, 1998. As of March 31, 1999 the allowance for loan
losses is 1.07% of outstanding loans as compared to 1.04% at March 31, 1998 and
1.10% at December 31, 1998.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Allowance for loan losses, beginning of period $ 2,676 $ 1,614
--------- ---------
Loans charged off:
Commercial -- (25)
Real estate -- (70)
Consumer (4) --
--------- ---------
Total loans charged off (4) (95)
--------- ---------
Recoveries:
Commercial -- --
Real estate -- --
Consumer 1 1
--------- ---------
Total recoveries 1 1
--------- ---------
Net chargeoffs (3) (94)
--------- ---------
Provision for loan losses 220 152
--------- ---------
Allowance for loan losses, end of period $ 2,893 $ 1,672
--------- ---------
--------- ---------
Loans (net of premiums and discounts)
Period-end balance 270,665 160,530
Average balance during period 255,145 147,702
Allowance as percentage of period-end loan balance 1.07% 1.04%
Percent of average loans:
Provision for loan losses 0.35% 0.42%
Net chargeoffs 0.00% 0.26%
</TABLE>
11
<PAGE>
Non-performing assets, expressed as a percentage of total assets, decreased
to 0.55% at March 31, 1999 from 0.63% at December 31, 1998, reflecting the
decrease in other real estate owned of $196,000 or 12.0% and the significant
increase in assets. The decrease in other real owned for the period was due to
the sale of properties.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
--------- ------------ ---------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Loans on nonaccrual basis $1,504 $1,520 $1,356
Real estate acquired by foreclosure 1,437 1,633 2,420
------ ------ ------
Total non-performing assets $2,941 $3,153 $3,776
------ ------ ------
------ ------ ------
Loans past-due 90 days or more and accruing $ 449 $ 126 $ 268
</TABLE>
At March 31, 1999, the allowance for loan losses represented 192.4% of
nonaccruing loans compared to 176.1% at December 31, 1998. Management believes
the allowance for loan losses at March 31, 1999 is adequate.
Deposits were $303,337,000 as of March 31, 1999, increasing $41,026,000 or
15.6% from the December 31, 1998 balance of $262,311,000. The increase in
deposits is attributable to activity generated by an ongoing advertising
campaign and the addition of new branches this year. Since January 1999, the
Company has opened two branch banking offices.
RESULTS OF OPERATIONS
NET INTEREST INCOME. First quarter net interest income before provision for
loan losses was $3,898,000 in 1999, an increase of 59.7% over $2,441,000 for the
first quarter of 1998, reflecting primarily an increase of $253,363,000 in
average earning assets. The increase in average earning assets was comprised of
an increase of $106,245,000 in average loans and $148,759,000 in average
investments, primarily available for sale mortgage backed securities. The net
interest margin was 3.33% for the first three months of 1999 as compared to
4.47% for the comparable period of 1998. The decline in the net yield on earning
assets was primarily due to the leveraging strategy adopted by the Company in
1998 whereby available for sale securities were funded by borrowings at
significantly lower interest rate spreads than were generally available in the
loan and deposit portfolios.
NONINTEREST INCOME AND EXPENSES-Noninterest income increased $461,000 or
44.7% for the first quarter of 1999 to $1,493,000 from $1,032,000 for the first
quarter of 1998. The principal reasons for the increase were gains on sale of
loans and an increase in deposit related fees. The increase in the gains on sale
of loans was a result of the greater volume of residential mortgage loans
originated and sold by First Mariner Mortgage Corporation.
Deposit service charges rose 78.3% as compared to the quarter ended March
31, 1998 which is primarily due to the increased number of deposit accounts. The
number of deposit accounts increased 50% to 34,568 accounts. These increases are
the result of continuing marketing and promotion of the retail banking products.
The loss on the sales of securities was $2,000 for the quarter ended March
31, 1999 compared to a gain of $285,000 for the quarter ended March 31, 1998.
First quarter noninterest expense increased $1,673,000 or 52.8% to
$4,843,000 in 1999 from $3,170,000 in the first quarter of 1998. Increases in
almost all categories of expense were incurred to support the substantially
increased asset base and the expanding branch network including increases in
personnel.
12
<PAGE>
While total noninterest expense increased $1,673,000, noninterest expense
as a percent of average total assets continues to decrease. Noninterest expense
on an annualized basis as a percent of average total assets for the quarter
ended March 31 was 4.0% in 1999 as compared to 5.2% in 1998.
INCOME TAXES- The Company recorded income tax expense of $127,000 on income
before taxes of $328,000, resulting in an effective tax rate of 38.62% for the
first quarter ended March 31, 1999. No income tax expense was recognized in the
first quarter 1998 due to the availability of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Stockholders' equity decreased $338,000 in the first three months of 1999
to $28,150,000 from $28,488,000 as of December 31, 1998. The change is due to
the decrease in accumulated other comprehensive income which decreased $539,000
which was caused by the decline in net unrealized holding gains on certain
investments. This decrease was partially offset by net income of $201,000 for
the first quarter.
The first cash dividend for the Company was declared on May 4, 1999 in the
amount of $0.02 per share payable on or about May 31, 1999 to stockholders of
record on May 17,1999.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks and bank holding companies are required to maintain capital levels based
on their "risk adjusted" assets so that categories of assets with higher
"defined" credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
The Bank has exceeded its capital adequacy requirements to date. The
Company regularly monitors its capital adequacy ratios to assure that the Bank
exceeds its regulatory capital requirements. The regulatory capital ratios are
listed below:
13
<PAGE>
<TABLE>
<CAPTION>
At March 31,
------------
(unaudited)
1999 1998
---- ----
<S> <C> <C>
Regulatory capital ratios
Leverage
Consolidated 7.5% 11.3%
The Bank 6.7% 8.1%
Tier 1 capital to risk weighted assets
Consolidated 12.6% 12.7%
The Bank 12.0% 10.4%
Total capital to risk weighted assets
Consolidated 17.6% 13.5%
The Bank 13.0% 11.4%
</TABLE>
The Bank's principal sources of liquidity are cash and cash equivalents,
which are cash on hand, amounts due from financial institutions, federal funds
sold, stock investments, money market mutual funds, interest bearing deposit and
available-for-sale securities. The levels of such assets are dependent on the
Bank's operating, financing and investment activities at any given time and are
influenced by anticipated deposit flows and loan growth.
YEAR 2000 ACTION PLAN
In 1997, the Company adopted a Year 2000 Action Plan (the "Plan"). This
plan is consistent with the mandates and guidelines set forth by the FDIC and
FFIEC. As part of the plan the Company has established a senior management
committee to address the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000. In
developing the Plan the committee identified five phases: Awareness, Assessment,
Renovation, Validation, and Implementation. The last four phases consist of (1)
inventorying Year 2000 affected items; (2) assigning priorities to identified
items; (3) assessing the Year 2000 compliance of items determined to be material
to the company; (4) repairing or replacing material items that are determined
not to be Year 2000 compliant; (5) testing material items; and (6) designing and
implementing contingency and business continuation plans for items identified as
critical.
The awareness phase is a continuing effort to educate employees, customers,
business partners and vendors of the impact of the Year 2000 issues. The effort
is well under way through communication with the appropriate constituencies and
required training for all employees.
During the assessment phase which 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 ATMs
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
14
<PAGE>
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 ATMs Year 2000 compliant. The Company does not track internal
costs for personnel devoted to 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 SFAS No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS No. 133").
SFAS No. 133 established 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 as 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Results of operations for financial institutions, including the Company,
may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate values, rapid changes in interest
rates and the monetary and fiscal policies of the federal government. The
profitability of the Company is in part a function of the spread between the
interest rates earned on assets and the interest rates paid on deposits and
other interest-bearing liabilities (net interest income), including advances
from Federal Home Loan Bank of Atlanta ("FHLB") 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 March 31, 1999, the Company had a one year cumulative
negative gap of approximately $4,752 million or 1% of total assets.
15
<PAGE>
PART II - Other Information
Item 1 - Legal proceedings - None
Item 2 - Changes in securities and use of proceeds - None
Item 3 - Defaults on senior securities - None
Item 4 - Submission of matters to a vote of security holders
At the Company's Annual Meeting of Stockholders held May 4, 1999, the
following directors were elected to serve a three-year term expiring upon the
date of the Company's 2002 Annual Meeting or until their respective successors
are elected and qualified:
Edwin F. Hale, Sr.
Barry B. Bondroff
Bruce H. Hoffman
Walter L. McManus, Jr.
James P. O'Conor, Jr.
The following directors were elected to serve a one-year term expiring upon
the date of the Company's 2000 Annual Meeting or until their respective
successors are elected and qualified:
Michael J. Lynch
Howard Friedman
Dr. Patricia Schmoke
Votes cast for the election of all directors were 2,496,744 and against
were 24,550.
Shareholders voted in favor of adoption of KPMG LLP to serve as independent
auditors for fiscal year 1999. Votes cast for 2,495,904, against 5,228 and
abstain 20,162.
Item 5 - Other information - None
Item 6 - Exhibits and reports on Form 8-K
a. Exhibits-27 Financial Data Schedule filed electronically herein
b. Reports on Form 8-K-None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MARINER BANCORP
Date: 5/14/99 By: /s/ Edwin F. Hale Sr.
------------------- -------------------------------
Edwin F. Hale Sr.
Chairman and Chief Executive Officer
Date: 5/14/99 By: /s/ Joseph A. Cicero
----------------- --------------------------------
Joseph A. Cicero
President
17
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