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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended
December 31, 2000.
/ / 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
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FIRST MARINER BANCORP
(Exact name of registrant as specified in its charter)
MARYLAND 52-1834660
(State of Incorporation) (I.R.S. Employer Identification
Number)
1801 SOUTH CLINTON STREET, BALTIMORE, 21224
MD (Zip Code)
(Address of principal executive
offices)
410-342-2600
(Telephone Number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, par value $0.05 per share
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such report, 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 in this form, and no disclosure will
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 March 5, 2001 was $21,664,848.
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The number of shares of common stock outstanding as of March 5, 2001 is
3,610,808 shares.
Documents incorporated by reference:
Proxy Statement--Part III
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FIRST MARINER BANCORP
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1 Business.................................................... 1
Item 2 Property.................................................... 11
Item 3 Legal Proceedings........................................... 13
Item 4 Submission of Matters to a Vote of Security Holders......... 13
Item 4A Executive Officers of the Registrant........................ 13
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholders Matters........................................ 14
Item 6 Selected Financial Data..................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 15
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 37
Item 8 Financial Statements and Supplementary Data................. 40
Item 9 Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosures....................................... 63
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 64
Item 11 Executive Compensation...................................... 64
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 64
Item 13 Certain Relationships and Related Transactions.............. 64
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 64
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 about the Company's plans and expectations, and unknown outcomes
including statements regarding growth strategies, new banking services 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 and 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. Risk factors are
described further in Exhibit 99 to this Form 10-K.
PART I
ITEM 1 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 25 full service branches and 44
Automated Teller Machines ("ATMs"). At December 31, 2000, the Company had total
assets of $677,449,000. The Company and its subsidiaries had approximately 438
full time and part time employees as of December 31, 2000.
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.
MARKET AREA AND MARKET STRATEGY
The Bank's core market is central Maryland, which consists primarily of
Baltimore City, Baltimore County, Harford County, Howard 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
Bank also services portions of Maryland's eastern shore with branches in Talbot
and Worcester Counties.
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 places emphasis on
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
1
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 entities that can enhance the
breadth and delivery of financial products and services; and
- Invest in new products and technology, including Internet and online
banking.
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. The Bank's products and 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 in the secondary market, as well as the origination of loans to be held
in the Bank's loan portfolio. 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
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participating in loan programs sponsored or guaranteed by the SBA, FHA, VA, CDA,
Maryland Industrial Development Financing Authority, and the Settlement Expense
Loan Program.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At December 31, 2000, the Bank's loan portfolio
totaled $430.0 million representing approximately 63.5% of its total assets. The
following table sets forth the Bank's loans (net of related deferred fees and
costs) by major categories as of December 31, 2000:
AMOUNT PERCENT
(DOLLARS IN THOUSANDS) -------- --------
Commercial.................................................. $ 70,726 16.5%
Real Estate Construction-Consumer........................... 82,318 19.1%
Real Estate Development and Construction.................... 34,832 8.1%
Real Estate Mortgage:
Residential............................................... 98,731 23.0%
Commercial................................................ 101,601 23.6%
Consumer.................................................... 41,790 9.7%
-------- -----
Total loans............................................... $429,998 100.0%
======== =====
COMMERCIAL LOANS. The Bank originates secured and unsecured loans for
business purposes. Less than one percent all commercial 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 that secures the loan. It is the
Bank's general policy to obtain personal guarantees from the principals of the
commercial loan borrowers.
REAL ESTATE CONSTRUCTION-CONSUMER. 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.
REAL ESTATE DEVELOPMENT AND CONSTRUCTION LOANS. The real estate development
and construction loan portfolio consisted of the following as of December 31,
2000:
AMOUNT PERCENT
(DOLLARS IN THOUSANDS) -------- --------
Commercial Construction..................................... $16,332 46.9%
Commercial Acquisition and Construction..................... 4,596 13.2%
Commercial Land Acquisition................................. 3,836 11.0%
Commercial Acquisition, Development and Construction........ 1,437 4.1%
Residential Builders Construction........................... 5,752 16.5%
Residential Builders Acquisition and Development............ 2,769 8.0%
Residential Builders Acquisition, Development and
Construction.............................................. 110 0.3%
------- -----
Total Real Estate--Development and Construction........... $34,832 100.0%
======= =====
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
3
adjustable. The Bank carefully monitors these loans with on-site inspections and
control of disbursements.
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 and obtaining periodic financial
statements and tax returns from borrowers. It is also the Bank's general policy
to obtain personal guarantees from the principals of the borrowers and
assignments of all leases related to the collateral.
CONSUMER LOANS. The Bank offers a variety of consumer loans. These loans
are typically secured by residential real estate or personal property, including
automobiles and boats. Home equity loans (closed-end and lines of credit) are
typically made up to 80% of the appraised value, less the amount of any existing
prior liens on the property and generally have maximum term of 10 years,
although the bank does offer a 90% loan to value product. The interest rates on
closed-end home equity loans are generally fixed, while interest rates on home
equity lines of credit are variable.
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 $500,000 for residential mortgages and consumer construction
loans, and for other types of loans the lending authority is $250,000. The
Board's Loan Committee is authorized to approve loans up to the Bank's legal
lending
4
limit, which currently approximates $6,900,000 as of December 31, 2000. The Bank
has established an in-house limit of $2,000,000 which is reviewed periodically
by the Board of Directors. The Loan Committee will approve loans in excess of
in-house limit on an exception basis.
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. Many of the financial
institutions operating in the Bank's market area offer certain services such as
trust services and international banking, which the Bank does not offer, and
have greater financial resources or have substantially higher lending limits
than does the Bank.
To compete with other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers and specialized services
tailored to meet its customers' needs. In those instances where the Bank is
unable to accommodate a customers' needs, the Bank will arrange for those
services to be provided by other banks with which it has a relationship.
Current 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 are permitted to merge with banks organized
under the laws of different states. These changes have resulted 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.
SUPERVISION AND REGULATION
The Company and the Bank are extensively regulated under federal and state
law. Generally, these laws and regulations are intended to protect depositors,
not stockholders. The following is a summary description of certain provisions
of certain laws that 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
5
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. The Federal Reserve may conduct
examinations of the Company and its subsidiaries.
With certain limited exceptions, the Company is required to obtain prior
approval from the Federal Reserve before acquiring direct or indirect ownership
or control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. In acting on applications for such approval,
the Federal Reserve must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in the relevant
geographical and product markets, each party's financial condition and
management resources and record of performance under the Community Reinvestment
Act ("CRA"). Additionally, with certain exceptions any person proposing to
acquire control through direct or indirect ownership of 25% or more of any
voting securities of the Company is required to give 60 days written notice of
the acquisition to the Federal Reserve, which may prohibit the transaction, and
to publish notice to the public.
Generally, a bank holding company may not engage in any activities other
than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the Federal Reserve, the Company may acquire more than 5% of the assets or
outstanding shares of a company engaging in nonbank activities determined by the
Federal Reserve to be closely related to the business of banking or of managing
or controlling banks. Under current Federal Reserve regulations, such
permissible nonbank activities include mortgage banking, equipment leasing,
securities brokerage and consumer and commercial finance company operations.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, investments in their securities, and 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. The Federal Reserve has ended the
anti-tying rules for bank holding companies and their non-banking subsidiaries.
Such rules were retained for banks.
Under Federal Reserve policy, a bank holding company is expected to act as a
source of financial strength to its subsidiary banks and to make capital
injections into a troubled subsidiary bank, and the Federal Reserve may charge
the bank holding company with engaging in unsafe and unsound practices for
failure to commit resources to a subsidiary bank when required. A required
capital injection may be called for at a time when the holding company does not
have the resources to provide it. In addition, depository institutions insured
by the FDIC can be held liable for any losses incurred by, or reasonably
anticipated to be incurred by, the FDIC in connection with the default of, or
assistance provided to, a commonly controlled FDIC-insured depository
institution. Accordingly, in the event that any insured subsidiary of the
Company causes a loss to the FDIC, other insured subsidiaries of the Company
could be required to compensate the FDIC by reimbursing it for the estimated
amount of such loss. Such cross guaranty liabilities generally are superior in
priority to the obligations of the depository institution to its stockholders
due solely to their status as stockholders and obligations to other affiliates.
STATE BANK HOLDING COMPANY REGULATION. As a Maryland bank holding company,
the Company is subject to various restrictions on its activities as set forth in
Maryland law, in addition to those restrictions set forth in federal law. Under
Maryland law, a bank holding company that desires to acquire a bank or bank
holding company that has its principal place of business in Maryland must
6
obtain approval from the Maryland Commissioner of Financial Regulation. 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. Enforcement powers
also regulate activities which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
In its lending activities, the maximum legal rate of interest, fees and
charges that a financial institution may charge on a particular loan depends on
a variety of factors such as the type of borrower, the purpose of the loan, the
amount of the loan and the date the loan is made. Other laws tie the maximum
amount which may be loaned to any one customer and its related interest to
capital levels. The Bank is also subject to certain restrictions on extensions
of credit to executive officers, directors, principal shareholders or any
related interest of such persons which generally require that such credit
extensions be made on substantially the same terms as are available to third
persons dealing with the Bank and not involve more than the normal risk of
repayment.
The Community Reinvestment Act ("CRA") requires that, in connection with the
examination of financial institutions within their jurisdictions, the FDIC
evaluates the record of the financial institution in meeting the credit needs
its communities including low and moderate income neighborhoods, consistent with
the safe and sound operation of those banks. These factors are also considered
by all regulatory agencies in evaluating mergers, acquisitions and applications
to open a branch or facility. As of the date of its most recent examination
report, the Bank has a CRA rating of "Satisfactory."
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
noncapital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the FDIC, have adopted standards
covering internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be subject the institution to regulatory sanctions if required by
the agency to develop a plan acceptable to the agency, specifying the steps that
the institution will take to meet the standards. The Company, on behalf of the
Bank, believes that it meets substantially all standards which have been
adopted. FDICIA also imposed new capital standards on insured depository
institutions.
Before establishing new branch offices, the Bank must meet certain minimum
capital stock and surplus requirements. With each new branch located outside the
municipal area of the Bank's principal banking office, these minimal levels
increase by $120,000 to $900,000, based on the population size of the municipal
area in which the branch will be located. Prior to establishment of the branch,
the Bank must obtain Commissioner and FDIC approval. If establishment of the
branch involves the purchase of a bank building or furnishings, the total
investment in bank buildings and furnishings cannot exceed, with certain
exceptions, 50% of the Bank's unimpaired capital and surplus.
7
DEPOSIT INSURANCE
As a FDIC member institution, deposits of the Bank are currently insured to
a minimum of $100,000 per depositor through the Savings Association Insurance
Fund ("SAIF"), administered by the FDIC. Insured financial institutions are
members of either SAIF or the Bank Insurance Fund ("BIF"). SAIF members
generally are savings and loan associations or savings banks, including banks
and trust companies that have converted from a savings and loan association or
savings bank to a commercial bank or trust company or bank and trust companies
that have acquired SAIF deposits. The Bank is a converted federal savings bank,
therefore, its deposits are insured through SAIF. Mergers or transfers of assets
between SAIF and BIF members generally are permitted with the assuming or
resulting depository institution making payments of SAIF assessments on the
portion of liabilities attributable to the SAIF-insured institution.
The FDIC is required to establish the semi-annual assessments for BIF- and
SAIF-insured depository institutions at a rate determined to be appropriate to
maintain or increase the reserve ratio of the respective deposit insurance funds
at or above 1.25 percent of estimated insured deposits or at such higher
percentage that the FDIC determines to be justified for that year by
circumstances raising significant risk of substantial future losses to the fund.
Federal legislation that became effective September 30, 1996 assessed a one-time
charge on deposits insured by SAIF. This one-time charge for the Bank of
approximately $154,000, was paid in 1996.
This recapitalization has lowered the semi-annual assessments paid by the
Bank as a SAIF member. Assessments are made on a risk-based premium system with
nine risk classifications based on certain capital and supervisory measures.
Financial institutions with higher levels of capital and involving a low degree
of supervisory concern are assessed lower premiums than financial institutions
with lower levels of capital or involving a higher degree of supervisory
concern. Before the recapitalization, the rates assessable on SAIF-insured
deposits ranged from $0.23 per $100 of domestic deposits to $0.31 per $100 of
domestic deposits; the Bank's assessment stood at $0.23 per $100. Rates
assessable to BIF members have been significantly lower at a range of $0.03 to
$0.27 per $100, with the highest rated BIF institutions paying the statutory
minimum of $2,000 per year. With recapitalization of SAIF, the assessment ranges
for both BIF and SAIF institutions has decreased.
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. 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
"Federal Deposit Insurance Corporation Improvement Act of 1991" below. The
Company does not anticipate that such provisions will be applied to the Bank.
The Federal Reserve has issued a policy statement dated November 14, 1985 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. 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 reflect as it did of December 31, 2000, negative
undivided profits (accumulated deficit). The Company anticipates that such
approval will be required for the foreseen future. In addition to these specific
restrictions, bank regulatory agencies 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.
8
CAPITAL REQUIREMENTS
The Federal Reserve and FDIC have adopted certain risk-based capital
guidelines to assist in the assessment of the capital adequacy of a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit and recourse arrangement
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities to 100% for assets with relatively high credit risk, such as business
loans.
A banking organization's risk-based capital ratio is obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. "Tier 1", or core capital includes common equity,
perpetual preferred stock (excluding auction rate issues), trust preferred
securities (subject to certain limitations), and minority interest in equity
accounts of consolidated subsidiaries (less goodwill and other intangibles),
subject to certain exceptions. "Tier 2", or supplementary capital, includes,
among other things limited-life preferred stock, hybrid capital instruments,
mandatory convertible securities and trust preferred securities, qualifying and
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies, subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk-weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. At
December 31, 2000, the Bank's ratio of Tier 1 to risk-weighted assets stood at
9.3% and its ratio of total capital to risk-weighted assets stood at 10.2%. In
addition to risk-based capital, banks and bank holding companies are required to
maintain a minimum amount of Tier 1 capital to fourth quarter average assets,
referred to as the leverage capital ratio, of at least 4%. At December 31, 2000,
the Bank's leverage capital ratio stood at 6.1%.
Federal banking agencies have adopted regulations specifying that the
agencies will include, in their evaluations of a Bank's capital adequacy, an
assessment of the Bank's interest rate risk ("IRR") exposure. The standards for
measuring the adequacy and effectiveness of a banking organization's interest
rate risk management includes a measurement of board of director and senior
management oversight, and a determination of whether a banking organization's
procedures for comprehensive risk management are appropriate to the
circumstances of the specific banking organization. The Bank maintains IRR
models that are used to measure and monitor IRR. Additionally, the regulatory
agencies have been assessing IRR on an informal basis for several years. For
these reasons the Company does not expect the addition of IRR evaluation to the
agencies' capital guidelines to result in significant changes in capital
requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the Company.
9
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December, 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) publicly available annual financial
condition and management reports for financial institutions, including audits by
independent accountants, (ii) the establishment of uniform accounting standards
by federal banking agencies, (iii) the establishment of a "prompt corrective
action" system of regulatory supervision and intervention, based on
capitalization levels with more scrutiny and restrictions placed on depository
institutions with lower levels of capital, (iv) additional grounds for the
appointment of a conservator or receiver, and (v) restrictions or prohibitions
on accepting brokered deposits, except for institutions which significantly
exceed minimum capital requirements. FDICIA also provides for increased funding
of the FDIC insurance funds and the implementation of risked-based premiums.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically undercapitalized.
FDICIA provides the federal banking agencies with significantly expanded
powers to take enforcement action against institutions which fail to comply with
capital or other standards. Such action may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
10
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 of one of the banks
that is a party to the merger transaction opted out of the merger provisions of
Riegle-Neal by adopting a law after the date of the enactment of Riegle-Neal and
prior to June 1, 1997. These laws must apply equally to all-out-of-state banks
and expressly prohibit merger transactions involving out-of-state banks.
Riegle-Neal also permits interstate branch acquisitions if the 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.
FINANCIAL SERVICES MODERNIZATION
In November 1999, the Gramm-Leach-Bliley Act ("GLBA") was signed into law.
Effective in pertinent part on March 11, 2000, GLBA revises the Bank Holding
Company Act of 1956 and repeals the affiliation provisions of the Glass-Steagall
Act of 1933, which, taken together, limited the securities, insurance and other
non-banking activities of any company that controls a FDIC insurance financial
institution. Under GLBA, bank holding companies can elect, subject to certain
qualifications, to become a "financial holding company". GLBA provides that a
financial holding company may engage in a full range of financial activities,
including, insurance and securities sales and underwriting activities, and real
estate development, with new expedited notice producers. GLBA also permits
certain qualified national bank subsidiaries to form financial subsidiaries,
which have broad authority to engage in all financial activities except
insurance underwriting, insurance investments, real estate investment or
development, or merchant banking.
ITEM 2 PROPERTY
The principal executive offices of the Company and the main office of the
Bank are located at 1801 South Clinton Street, Baltimore, Maryland. The Company
and the Bank occupy approximately 40,000 square feet of space at this location
which is leased from Edwin F. Hale, Sr., Chairman and Chief Executive Officer of
the Company. Annual rent for this space is approximately $554,000, of which
$519,000 is allocated for 38,830 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. The Company maintains an operations facility at 1516 Baylis
Street, Baltimore, Maryland. The Bank occupies approximately 23,000 square feet
of office space and 6,000 square feet of storage space at this location which is
leased from Edwin F. Hale, Sr. Annual rent is approximately $231,000 for the
office space and $32,000 for the storage space. Management believes that such
terms are at least as favorable as those that could be obtained from an
unaffiliated third party lessor.
11
The Bank has branches at the following locations:
SQUARE LEASE RENEWAL
LOCATION FEET ANNUAL RENT EXPIRATION OPTIONS
- -------- -------- ----------- ---------- --------
1801 South Clinton Street 1,170 $35,000 10/31/2013 --
(Baltimore City)
115 East Joppa Road 2,750 Own building -- --
Towson (Baltimore County) (subject to $25
ground rent)
1641 Joppa Road 2,480 Own building -- --
Towson (Baltimore County)
9833 Liberty Road 2,800 Own building -- --
(Baltimore County) (subject to $12,000
ground rent)
12 A. S. Bel Air Parkway 2,288 Own building 6/30/2017 --
Bel Air (Harford County) (subject to $35,000
ground rent)
16 South Calvert Street 2,515 $25,270 5/14/2001 5 Years
Baltimore City
7007 Security Boulevard (1) 2,100 Own building 5/1/2016 15 Years
Woodlawn (Baltimore County) (subject to $80,000
ground rent)
1013 Reisterstown Road 4,156 Own building -- --
Pikesville (Baltimore County)
60 Painters Mill Road 2,350 $80,235 3/1/2006 5 Years
Owings Mills (Baltimore County)
161 Jennifer Road 4,400 $85,446 6/30/2001 5 Years
Annapolis (Anne Arundel County)
1770 Merritt Blvd 2,500 $38,716 2/19/2007 5 Years
Dundalk (Baltimore County)
1740 York Road 1,200 $36,000 3/1/2012 5 Years
Lutherville (Baltimore County) x3
15 E. Padonia Road (Mars Store) 276 $36,500 10/20/2002 5 Years
Timonium (Baltimore County)
8433 Bel Air Road 2,050 Own building -- --
Perry Hall (Baltimore County)
8133 Elliott Road 2,099 $38,569 3/31/2003 5 Years
Easton (Talbot County) x2
8206 Pulaski Highway 6,500 $38,350 2/28/2008 5 Years
Rosedale (Baltimore County) x2
360 Governor Ritchie Highway 2,200 $48,099 5/31/2008 5 Years
Severna Park (Anne Arundel County) x2
7878 Wise Avenue (Mars Store) 450 $31,500 9/15/2008 --
Dundalk (Baltimore County)
176 Carroll Island Road 1,800 $29,520 2/1/2028 5 Years
Baltimore (Baltimore County)
1053 MD Route 3 2,480 Own building 4/28/2015 5 Years
Crofton (Anne Arundel County) (subject to $30,000 x3
ground rent)
12
SQUARE LEASE RENEWAL
LOCATION FEET ANNUAL RENT EXPIRATION OPTIONS
- -------- -------- ----------- ---------- --------
1401 Pulaski Highway (Mars Store) 484 $36,500 12/3/2001 5 years
Edgewood (Harford County)
12505 Coastal Highway 1,800 $29,004 10/31/2004 5 Years
Ocean City (Worcester County)
10065 Baltimore National Pike 2,480 Own building 8/1/2009 5 Years
Ellicott City (Howard County) (subject to $75,000 x4
ground rent)
7400 L Ritchie Highway 2,250 $43,755 12/1/2004 5 Years
Glen Burnie (Anne Arundel County) x4
7860 Wise Ave 2,405 $70,000 3/31/2019 10 Years
Dundalk (Baltimore County)
- --------------------------
(1) Branch is expected to open in second quarter, 2001
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
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
EDWIN F. HALE, SR. has been Chairman and Chief Executive Officer of the
Company and of the Bank for the preceding five years.
JOSEPH A. CICERO has been the President of the Company and Chief Operating
Officer of the Bank for the preceeding five years.
GEORGE H. MANTAKOS has been Executive Vice President of the Company, and the
President of First Mariner Bank for the preceeding five years.
MARK A. KEIDEL has been Senior Vice President and Chief Financial Officer of
the Company and the Bank since June 2000. Prior to June 2000, Mr. Keidel was
Senior Vice President and Chief Financial Officer of Mason Dixon Bancshares for
the preceeding five years.
13
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
MARKET FOR COMMON STOCK
Shares of First Mariner Bancorp trade on The Nasdaq Stock Market's National
Market under the trading symbol FMAR. For the period January 1, 2000 through
December 31, 2000 the high and low prices as quoted on The Nasdaq Stock Market
were $8.250 and $3.625, respectively.
As of December 31, 2000, First Mariner Bancorp had approximately 2,304
shareholders of record. The Company paid its first cash dividend of 2 cents per
share in May, 1999, and subsequently paid dividends of 2 cents per share in
August, 1999 and November, 1999, for total dividends of 6 cents per share paid
in 1999. The Company paid a cash dividend of 2 cents per share in
February 2000. After this payment, the Board of Directors discontinued the
payment of any further cash dividends in 2000 to conserve cash and capital
resources.
QUARTERLY STOCK PRICES FOR PAST TWO FISCAL YEARS:
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 as quoted on the Nasdaq Stock Market for the periods indicated.
LOW HIGH
-------- --------
2000 QUARTER ENDED:
Fourth quarter........................................ $ 3.625 $ 5.375
Third quarter......................................... 4.750 5.625
Second quarter........................................ 5.250 7.000
First quarter......................................... 5.500 8.250
1999 QUARTER ENDED:
Fourth quarter........................................ 7.250 10.250
Third quarter......................................... 9.875 11.750
Second quarter........................................ 10.750 12.063
First quarter......................................... 11.375 13.250
14
ITEM 6 SELECTED FINANCIAL DATA
(Dollars in thousands except for per share data)
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Net Interest Income....................... $ 20,838 $ 17,651 $ 12,022 $ 7,753 $ 3,629
Provision For Loan Losses................. 1,105 785 1,212 472 1,040
Noninterest income........................ 9,105 7,264 5,595 2,351 1,074
Noninterest expense....................... 27,798 22,743 16,246 9,459 5,836
Net Income................................ 640 877 1,123 365 (2,173)
Net Income Per Common Share--Basic........ 0.20 0.28 0.36 0.12 (1.56)
Total Assets.............................. $677,449 $616,072 $497,487 $256,984 $132,562
Loans Receivable, Net..................... 425,657 326,206 240,049 142,458 90,822
Deposits.................................. 476,882 368,751 262,311 196,962 102,289
Stockholders' Equity...................... 27,849 21,863 28,488 26,966 23,796
Allowance For Loan Losses................. 4,341 3,322 2,676 1,614 1,242
Net Chargeoffs............................ 86 139 150 100 174
Nonperforming Assets To Total Assets...... 1.00% 0.90% 0.63% 1.36% 1.19%
Return On Average Assets.................. 0.10% 0.16% 0.32% 0.21% (2.64)%
Return On Average Equity.................. 2.85% 3.30% 4.07% 1.39% (21.67)%
Dividend Payout Ratio..................... 10% 21% -- -- --
Regulatory Capital Ratios
Leverage................................ 6% 6% 8% 15% 19%
Tier 1 Capital To Risk Weighted
Assets................................ 9% 10% 14% 17% 18%
Total Capital To Risk Weighted Assets... 12% 15% 19% 18% 19%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal objective of this financial review is to provide a discussion
and an overview of the financial condition and results of operations of First
Mariner Bancorp and its subsidiaries for the years ended December 31, 2000, 1999
and 1998. 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 and parts of the eastern shore of Maryland. The Bank
offers mortgage lending services through its wholly owned subsidiary, First
Mariner Mortgage Corporation ("FMMC").
The Company is a bank holding company incorporated under the laws of
Maryland and registered under the Bank Holding Company Act of 1956, as amended.
The Company was organized in 1994 and changed its name to First Mariner Bancorp
in May 1995. Since 1995, management has implemented a strategy of building a
branch network in its core market area. This strategy is intended to position
the Bank to optimize the opportunities that management believes have been
created by dislocations caused by the widespread consolidations among local
banks with large out-of-state acquirers.
Portions of this annual report may contain forward-looking language within
the meaning of The Private Securities Litigation Reform Act of 1995. Statements
may include expressions about the Company's confidence, policies, and
strategies, provisions and allowances for credit losses, adequacy of capital
levels, and liquidity. Such forward looking statements involve certain risks and
uncertainties,
15
including general economic conditions, competition in the geographic and
business areas in which the Company operates, inflation, fluctuations in
interest rates, legislation and government regulation. These risks are described
in more details in the Exhibit 99 of this form 10-K under the heading "Risk
Factors". The Company assumes no obligation to update forward-looking statements
at any time.
PERFORMANCE OVERVIEW
The Company recorded net income of $640,000 for 2000 compared to $877,000
for 1999. 2000's results continue to reflect the cost of the Company's expansion
strategy as the Bank has grown to twenty-five retail banking branches, and ten
residential mortgage lending offices. Also contributing to the decrease in
earnings is the increase in the provision for loan losses as the Company
continued to realize significant loan growth. Basic net income per share for the
year ended December 31, 2000 was $0.20 per share, compared to $0.28 per share
reported last year.
Total assets increased by $61,377,000 or 10.0%, reflecting significant
increases in loans and deposits. Loans outstanding increased by $100,470,000 or
30.5%, while deposits grew by $108,131,000 or 29.3%. Growth statistics for loans
and deposits continue to compare favorably to industry averages, and reflect the
Company's continued efforts in business development and advertising.
Stockholders' equity increased $5,986,000 or 27.4% reflecting improvements in
the market value of the Company's available-for-sale securities portfolio as
well as a $1,536,000 capital contribution from members of the Company's Board of
Directors and Executive management.
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 $20,838,000 for 2000, an 18.1% increase
from the net interest income of $17,651,000 earned for 1999. The increase was
primarily attributable to the growth in average earning assets, which totaled
$615,591,000 for 2000, a 17.8% increase as compared to $522,491,000 for 1999.
Average loans increased by 30.7% to $414,765,000 and average investments and
other earning assets decreased by 2.2% to $200,826,000. 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 the increased
emphasis on consumer lending. The decrease in investments and other earning
assets was primarily the result of normal runoff in the Bank's mortgage-backed
securities portfolio. Earning asset growth was funded by an increase in average
interest-bearing deposits of $95,142,000 or 34.9%. Other borrowed funds
decreased by $1,720,000 or .8%. The increase in deposits was due to the
aggressive expansion of the Company's retail banking network to twenty-five
branches, the continued popularity of the Bank's "Money Market Maximizer"
product, and growth in certificate of deposit products. The decrease in
borrowings occurred, as deposit growth was more than sufficient to fund earning
asset growth.
Interest income on loans increased to $36,881,000 for 2000 which represents
an increase of $10,162,000 or 38.0% from $26,719,000 for 1999. In addition to
higher average balances on loans, yields increased due to several increases in
market interest rates throughout the year. Interest income on investments and
other earning assets increased to $14,497,000 for 2000 which represents an
increase of $743,000 or 5.4% from $13,754,000. While overall average balances
decreased on investments and other earning assets, yields on short-term
investments improved. Interest expense on deposits increased to $18,188,000 in
2000, an increase of $6,391,000 or 54.2% from $11,797,000 for 1999. In addition
to the
16
increases in average balances, higher market interest rates increased the rates
paid on money market accounts and certificates of deposit. Interest expense on
borrowings increased to $12,352,000 for 2000, an increase of $1,327,000 or 12.0%
from $11,025,000 for 1999. Higher interest costs for short-term borrowings more
than offset declines in average balances.
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 3.39% for the year ended December 31, 2000 as compared to 3.38% for
1999. Yields on earning assets increased by 60 basis points, while the cost of
interest bearing deposits increased by 62 basis points and the cost of other
borrowings increased by 71 basis points. A higher mix of loans as a percentage
of earning assets and higher average balances on non-interest deposit accounts
offset the higher costs of deposits and borrowings.
17
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 non-interest bearing
deposits.
TABLE 1: COMPARATIVE AVERAGE BALANCES (1) YIELDS AND RATES
2000
------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
(DOLLARS IN THOUSANDS) -------- -------- --------
Assets:
Loans (net of unearned income) (1)........................ $414,765 $ 36,881 8.89%
Mortgage-backed securities available for sale............. 155,879 11,132 7.14%
Interest-bearing bank balances............................ 7,382 435 5.89%
Treasury notes and agencies............................... 6,833 515 7.54%
Trust preferred securities................................ 23,298 1,885 8.09%
Other earning assets...................................... 7,434 530 7.13%
-------- --------
Total earning assets.................................. 615,591 51,378 8.35%
--------
Allowance for loan losses................................. (3,669)
Other assets.............................................. 37,988
--------
Total assets.......................................... $649,910
========
Liabilities and stockholders' equity:
Deposits:
Passbook/Savings........................................ $ 27,376 760 2.78%
NOW/MMDA................................................ 178,115 8,404 4.72%
Certificates............................................ 161,904 9,024 5.57%
-------- --------
Total interest-bearing deposits....................... 367,395 18,188 4.95%
Other borrowed funds...................................... 201,989 12,352 6.12%
-------- --------
Total interest-bearing liabilities.................... 569,384 30,540 5.36%
--------
Noninterest-bearing demand deposits....................... 57,377
--------
Other liabilities......................................... 702
Stockholders' equity...................................... 22,447
--------
Total liabilities and stockholders' equity............ $649,910
========
Interest rate spread ..................................... 2.99%
(Average yield less average rate) =====
Net interest income ...................................... $ 20,838
(Interest income less interest expense) ========
Net Interest Margin ...................................... 3.39%
(Net interest income/total earning assets) =====
18
1999
------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
(DOLLARS IN THOUSANDS) -------- -------- --------
Assets:
Loans (net of unearned income) (1)........................ $317,237 $26,719 8.42%
Mortgage-backed securities available for sale............. 161,098 10,782 6.69%
Interest-bearing bank balances............................ 9,586 477 4.98%
Treasury notes and agencies............................... 6,205 392 6.32%
Trust preferred securities................................ 20,994 1,722 8.20%
Other earning assets...................................... 7,371 381 5.17%
-------- -------
Total earning assets.................................. 522,491 40,473 7.75%
-------
Allowance for loan losses................................. (3,067)
Other assets.............................................. 34,871
--------
Total assets.......................................... $554,295
========
Liabilities and stockholders' equity:
Deposits:
Passbook/Savings........................................ $ 19,140 529 2.76%
NOW/MMDA................................................ 129,885 4,828 3.72%
Certificates............................................ 123,228 6,440 5.23%
-------- -------
Total interest-bearing deposits....................... 272,253 11,797 4.33%
Other borrowed funds...................................... 203,709 11,025 5.41%
-------- -------
Total interest-bearing liabilities.................... 475,962 22,822 4.79%
-------
Noninterest-bearing demand deposits....................... 46,473
Other liabilities......................................... 5,323
Stockholders' equity...................................... 26,537
--------
Total liabilities and stockholders' equity............ $554,295
========
Interest rate spread ..................................... 2.96%
(Average yield less average rate) =====
Net interest income ...................................... $17,651
(Interest income less interest expense) =======
Net Interest Margin ...................................... 3.38%
(Net interest income/total earning assets) =====
19
1998
------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
(DOLLARS IN THOUSANDS) -------- -------- --------
Assets:
Loans (net of unearned income) (1)........................ $199,761 $18,165 9.09%
Mortgage-backed securities available for sale............. 91,762 6,089 6.64%
Interest-bearing bank balances............................ 9,513 471 4.95%
Treasury notes and agencies............................... 7,836 468 5.97%
Trust preferred securities................................ 7,626 644 8.44%
Other earning assets...................................... 9,763 484 4.96%
-------- -------
Total earning assets.................................. 326,261 26,321 8.07%
-------
Allowance for loan losses................................. (1,923)
Other assets.............................................. 23,346
--------
Total assets.......................................... $347,684
========
Liabilities and stockholders' equity:
Deposits:
Passbook/Savings........................................ $ 10,427 281 2.69%
NOW/MMDA................................................ 96,297 3,993 4.15%
Certificates............................................ 85,895 4,807 5.60%
-------- -------
Total interest-bearing deposits....................... 192,619 9,081 4.71%
Other borrowed funds...................................... 94,882 5,218 5.50%
-------- -------
Total interest-bearing liabilities.................... 287,501 14,299 4.97%
-------
Noninterest-bearing demand deposits....................... 30,661
Other liabilities......................................... 1,915
Stockholders' equity...................................... 27,607
--------
Total liabilities and stockholders' equity............ $347,684
========
Interest rate spread ..................................... 3.10%
(Average yield less average rate) =====
Net interest income ...................................... $12,022
(Interest income less interest expense) =======
Net Interest Margin ...................................... 3.68%
(Net interest income/total earning assets) =====
- ------------------------
(1) Loans on non-accrual status are included in the calculation of average
balances. Loans held for sale are included in calculation of average
balances, income and yield.
20
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 (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000
COMPARED TO
YEAR ENDED DECEMBER 31, 1999
--------------------------------
VARIANCE DUE TO
CHANGES IN
------------------- NET
AVERAGE AVERAGE INCREASE/
VOLUME RATE (DECREASE)
-------- -------- ----------
Interest Income:
Loans (net of unearned income)............................ $8,600 $ 1,562 $10,162
Mortgage-backed securities available for sale............. (358) 708 350
Interest-bearing bank balances............................ (121) 79 (42)
Treasury notes and agencies............................... 42 81 123
Trust preferred securities................................ 186 (23) 163
Other earning assets...................................... 3 146 149
------ ------- -------
Total interest income..................................... 8,352 2,553 10,905
------ ------- -------
Interest Expense:
Passbook.................................................. 227 4 231
NOW/MMDA.................................................. 2,074 1,502 3,576
Certificates.............................................. 2,140 444 2,584
Other borrowed funds...................................... (95) 1,422 1,327
------ ------- -------
Total interest expense.................................... 4,346 3,372 7,718
------ ------- -------
Change in net interest income............................... $4,006 $ (819) $ 3,187
====== ======= =======
YEAR ENDED DECEMBER 31, 1999
COMPARED TO
YEAR ENDED DECEMBER 31, 1998
--------------------------------
VARIANCE DUE TO
CHANGES IN
------------------- NET
AVERAGE AVERAGE INCREASE/
VOLUME RATE (DECREASE)
-------- -------- ----------
Interest Income:
Loans (net of unearned income)............................ $9,980 $(1,426) $ 8,554
Mortgage-backed securities available for sale............. 4,647 46 4,693
Interest-bearing bank balances............................ 3 3 6
Treasury notes and agencies............................... (102) 26 (76)
Trust preferred securities................................ 1,097 (19) 1,078
Other earning assets...................................... (123) 20 (103)
------ ------- -------
Total interest income..................................... 15,502 (1,350) 14,152
------ ------- -------
Interest Expense:
Passbook.................................................. 241 7 248
NOW/MMDA.................................................. 1,282 (447) 835
Certificates.............................................. 1,969 (336) 1,633
Other borrowed funds...................................... 5,894 (87) 5,807
------ ------- -------
Total interest expense.................................... 9,386 (863) 8,523
------ ------- -------
Change in net interest income............................... $6,116 $ (487) $ 5,629
====== ======= =======
21
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, 2000 was $9,105,000
as compared to $7,264,000 for the year ended December 31, 1999, an increase of
$1,841,000 or 25.3%. The increase was due primarily to increased service fees on
deposits, higher gains recognized on the sale of securities, and increases in
other mortgage banking fees. Gains on sale of loans were lower when compared to
1999. Total noninterest income, exclusive of gains on sales of securities
increased as a percentage of total revenue (net interest income plus noninterest
income) to 29.2% compared to 28.2% in 1999.
Gains on sales of loans declined by $331,000 or 17.4% from the year ended
December 31, 1999. While total originations of mortgage loans increased for the
year, fewer loans were sold into the secondary market than during the prior
year. Service fees on deposits increased by $901,000 or 34.6% as the Company
increased the number of demand deposit accounts by 5,119 or 26.3%. ATM fees
increased by $364,000 or 33.3% due to increased transaction volume and added ATM
locations. Other mortgage banking fees grew by $759,000 as a result of increased
volume and the recognition of excess servicing rights of $298,000 for loans sold
in 2000 with servicing retained. Other sources of noninterest income increased
by $30,000 or 5.1%. A net gain of $359,000 was realized on the sale of
securities in 2000 compared to a net gain of $241,000 for 1999.
TABLE 3: NONINTEREST INCOME
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
(DOLLARS IN THOUSANDS) -------- -------- --------
Gain on sale of loans............................... $1,576 $1,907 $1,444
Service fees on deposits............................ 3,504 2,603 1,808
ATM Fees............................................ 1,457 1,093 646
Gain on securities.................................. 359 241 738
Other mortgage banking fees......................... 1,586 827 519
Other operating income.............................. 623 593 440
------ ------ ------
Total noninterest income.......................... $9,105 $7,264 $5,595
====== ====== ======
NONINTEREST EXPENSE
Noninterest expense totaled $27,798,000 for the year ended December 31, 2000
as compared to $22,743,000 for 1999, an increase of $5,055,000 or 22.2%. This
increase reflects management's continued emphasis on growth through branching,
costs associated with the data processing conversion, as well as significant
increases in loans, deposits and mortgage banking activities.
Salaries and benefits increased $1,909,000 or 16.7% primarily due to
additional staffing as a result of the branch expansion, staffing increases to
support loan and deposit growth, as well as regular salary increases and higher
benefit costs. Occupancy costs grew for 2000 in the amount of $964,000 or 32.8%
when compared to the prior year. This increase is due to the additional branches
and mortgage offices, as well as additional space requirements at the operations
facility. Furniture and fixtures expense increased for the year ended 2000 by
$391,000 or 30.8% due to the addition of new branches and mortgage offices, and
increases in technology costs associated with the data processing conversion.
Professional services increased by $273,000 or 83.2% as a result of
consulting costs associated with the data processing conversion as well as
increased legal fees. Advertising expenses grew by 3.2% and totaled $1,061,000
as the Company maintained most of its advertising campaigns from the prior year.
The increase in data processing and other expense was primarily due to
additional branch locations, expansion of FMMC and higher volume of loans,
deposits and transactions. Other noninterest expenses increased by $1,172,000 or
26.7%, driven by increases in office supplies, service and maintenance,
increased ATM transaction costs, postage and courier expenses and other volume
driven expense categories.
22
TABLE 4: NONINTEREST EXPENSE
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
(DOLLARS IN THOUSANDS) -------- -------- --------
Salaries and employee benefits.............................. $13,367 $11,458 $ 7,632
Net occupancy............................................... 3,903 2,939 1,856
Deposit insurance premiums.................................. 140 167 122
Furniture, fixtures and equipment........................... 1,662 1,271 790
Professional services....................................... 601 328 605
Advertising................................................. 1,061 1,028 683
Data processing............................................. 1,645 1,332 884
ATM servicing expenses...................................... 630 601 427
Office supplies............................................. 391 345 255
Service & maintenance....................................... 915 649 418
OREO expense................................................ 35 25 157
Other....................................................... 3,448 2,600 2,416
------- ------- -------
Total noninterest expense................................. $27,798 $22,743 $16,245
======= ======= =======
INCOME TAXES
The Company recorded tax expense of $400,000 in 2000 for an effective tax
rate of 38.5%. In 1999 the Company recorded an income tax expense of $510,000
which equaled an effective tax rate of 36.8%. The effective rate increased due
to the recognition for financial statement purposes of the remaining benefit of
any operating loss carryforwards in 1999.
The Company has utilized all prior net operating loss carryforwards for
federal income tax purposes at December 31, 2000. Net operating loss
carryforwards for state income tax purposes approximated $3,300,000 and can only
be offset by future state taxable income of First Mariner Bancorp only.
Management anticipates that it is more likely than not that the future
operations of First Mariner Bancorp will not generate sufficient taxable income
to realize the potential utilization of the net operating loss carryforward. A
valuation allowance equal to the deferred tax asset associated with the net
operating loss carryforward of $156,000 has been established to reflect this
uncertainty.
FINANCIAL CONDITION
At December 31, 2000, the Company's total assets were $677,449,000 as
compared to $616,072,000 at December 31, 1999, an increase of 10.0%. This
increase was due to the continued growth in the branching network, expansion of
business development efforts, and continued marketing of deposit and loan
products. The Bank's overall growth in its core business, generating loans and
gathering of deposits grew at a higher rate than overall asset growth as
decreases in investment securities and other borrowings offset some of the
growth in loans and deposits.
Loans at December 31, 2000 were $429,998,000 as compared to $329,528,000 on
December 31, 1999, which represents an increase of $100,470,000 or 30.5%. Growth
occurred in all categories of loans. Loans held for sale increased by
$9,522,000. Investment securities and interest bearing deposits in other banks
decreased by $53,162,000, as normal runoff occurred in the Bank's
mortgage-backed securities portfolio and short term investments were used to pay
down other borrowing and fund loan growth.
Total deposits increased by $108,131,000, an increase of 29.3% from
$368,751,000 at December 31, 1999. Other borrowings, including repurchase
agreements, decreased by $39,359,000, and reduced
23
overall dependence on borrowed funds to 24.9% of total assets as of
December 31, 2000 compared to 33.8% as of December 31, 1999.
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.
The following table sets forth the composition of the Bank's loan portfolio.
TABLE 5: LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- --------
TYPE OF LOANS
Commercial................................. $ 70,828 $ 67,917 $ 55,792 $ 24,119 $17,097
Commercial real estate and construction.... 219,731 141,169 103,439 81,039 55,888
Residential real estate.................... 99,038 85,874 63,330 34,396 17,140
Consumer................................... 41,367 35,101 20,418 4,992 2,566
-------- -------- -------- -------- -------
Total loans.............................. 430,964 330,061 242,979 144,546 92,691
Add:
Unamortized loan premiums................ 20 47 108 140 205
Less:
Unearned income.......................... 986 580 362 614 833
-------- -------- -------- -------- -------
Loans receivable....................... $429,998 $329,528 $242,725 $144,072 $92,063
======== ======== ======== ======== =======
24
TABLE 6: MATURITY SCHEDULE OF SELECTED LOANS
DECEMBER 31, 2000
------------------------------------------------------
MORE THAN 5 YEARS
UP TO 1 YEAR TO 10+
ONE YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
-------- ---------- -------- -------- --------
Residential real estate..................... $ 1,905 $ 9,055 $10,392 $77,686 $ 99,038
Commercial real estate and construction..... 105,510 74,488 32,655 7,078 219,731
Commercial.................................. 29,837 35,877 3,751 1,363 70,828
Consumer.................................... 2,472 26,784 4,858 7,253 41,367
-------- -------- ------- ------- --------
Total..................................... $139,724 $146,204 $51,656 $93,380 $430,964
======== ======== ======= ======= ========
Fixed interest rate......................... $116,668 $116,273 $39,193 $44,383 $316,517
Variable interest rate...................... 23,056 29,931 12,463 48,997 114,447
-------- -------- ------- ------- --------
Total..................................... $139,724 $146,204 $51,656 $93,380 $430,964
======== ======== ======= ======= ========
DECEMBER 31, 1999
------------------------------------------------------
MORE THAN 5 YEARS
UP TO 1 YEAR TO 10+
ONE YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
-------- ---------- -------- -------- --------
Residential real estate..................... $ 443 $ 3,359 $ 9,819 $72,253 $ 85,874
Commercial real estate and construction..... 47,626 86,657 6,886 -- 141,169
Commercial.................................. 21,119 45,725 1,073 -- 67,917
Consumer.................................... 948 21,467 12,686 -- 35,101
-------- -------- ------- ------- --------
Total..................................... $ 70,136 $157,208 $30,464 $72,253 $330,061
======== ======== ======= ======= ========
Fixed interest rate......................... $ 52,618 $121,134 $27,698 $27,322 $228,772
Variable interest rate...................... 17,518 36,074 2,766 44,931 101,289
-------- -------- ------- ------- --------
Total..................................... $ 70,136 $157,208 $30,464 $72,253 $330,061
======== ======== ======= ======= ========
DECEMBER 31, 1998
------------------------------------------------------
MORE THAN 5 YEARS
UP TO 1 YEAR TO 10+
ONE YEAR TO 5 YEARS 10 YEARS YEARS TOTAL
-------- ---------- -------- -------- --------
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
======== ======== ======= ======= ========
The Bank's loan portfolio composition as of December 31, 2000 reflects a
concentration in commercial real estate and construction loans. This category of
loans increased by $78,562,000 and was primarily driven by increases in the
Bank's residential construction portfolio. The residential construction
portfolio consists of loans to individuals for construction of their primary
residence. These loans are generally converted to a permanent first mortgage
upon completion of the construction and
25
are underwritten for eventual sale in the secondary market. Residential real
estate loans, which consist primarily of 3 year and 5 year adjustable rate
mortgages, increased by $13,164,000. Commercial loans increased by $2,911,000.
Consumer loans, comprised primarily of second mortgage loans, increased by
$6,266,000.
Approximately 27% of the Bank's loans have adjustable rates as of
December 31, 2000 and approximately 31% at December 31, 1999, the majority of
which are adjustable rate first mortgages indexed to U.S. Treasury obligations.
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 interest income. See also the discussion
under "Liquidity and Interest Rate Sensitivity" below. The preceeding table sets
forth the maturity distribution, classified according to sensitivity to changes
in interest rate, for the Bank's loan portfolio at December 31, 2000, 1999 and
1998. Some of the loans may be renewed or repaid prior to maturity. Therefore,
the preceeding table should not be used as a forecast of future cash
collections. 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, 2000, the Company had approximately $3,172,000 in
nonaccrual loans as compared with $4,229,000 at December 31, 1999. The Company
held other real estate owned of $3,610,000 at December 31, 2000 compared to
$1,360,000 at December 31, 1999. The increase in other real estate owned was due
to the foreclosure on several loans previously in nonaccrual status, as well as
an increase in foreclosures on residential real estate.
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 $1,105,000 for loan losses
for the year ended December 31, 2000, as compared to $785,000 for the year ended
December 31, 1999. The increase resulted primarily to provide coverage of the
higher level of loan growth in 2000 ($100,470,000) compared to 1999
($86,803,000).
26
As of December 31, 2000 the allowance for loan losses was $4,341,000, as
compared with the December 31, 1999 balance of $3,322,000, an increase of
$1,019,000 or 30.7%. Net charge-offs of $86,000 and $139,000 were recognized for
2000 and 1999, respectively. Net charge-offs as a percentage of average loans
decreased from 0.05% for 1999 to 0.02% in 2000. The growth in the allowance was
driven by the growth and mix in the loan portfolio. The allowance for loan
losses represented 1.01% of outstanding loans at December 31, 2000 and
December 31, 1999.
The following table 7: "Allowance for Loan Losses" summarizes the allowance
activities.
TABLE 7: ALLOWANCE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- --------
Allowance for loan losses, beginning of year.... $ 3,322 $ 2,676 $ 1,614 $ 1,242 $ 376
------- ------- ------- ------- ------
Loans charged off:
Commercial.................................... (62) -- (88) -- (157)
Real estate................................... (24) -- (70) (100) (49)
Consumer...................................... (12) (142) (23) -- (42)
------- ------- ------- ------- ------
Total loans charged off..................... (98) (142) (181) (100) (248)
------- ------- ------- ------- ------
Recoveries
Commercial.................................... -- -- 9 -- 63
Real estate................................... 4 -- 17 -- --
Consumer...................................... 8 3 5 -- 11
------- ------- ------- ------- ------
Total recoveries............................ 12 3 31 -- 74
------- ------- ------- ------- ------
Net chargeoffs.............................. (86) (139) (150) (100) (174)
------- ------- ------- ------- ------
Provision for loan losses....................... 1,105 785 1,212 472 1,040
------- ------- ------- ------- ------
Allowance for loan losses, end of year.......... $ 4,341 $ 3,322 $ 2,676 $ 1,614 $1,242
======= ======= ======= ======= ======
Loans (net of premiums and discounts) (excluding
loans held for sale)
Period-end balance............................ 429,998 329,528 242,725 144,072 92,064
Average balance during period................. 383,719 301,108 188,156 124,794 64,705
Allowance as percentage of period-end loan
balance....................................... 1.01% 1.01% 1.10% 1.12% 1.35%
Percent of average loans:
Provision for loan losses..................... 0.29% 0.26% 0.64% 0.38% 1.61%
Net chargeoffs................................ 0.02% 0.05% 0.08% 0.08% 0.27%
Management's judgment as to the level of future losses on existing loans is
based on management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers. In determining the collectibility of certain loans,
management also considers the fair value of any underlying collateral. However,
management's determination of the appropriate allowance level is based upon a
number of assumptions about future events, which are believed to be reasonable,
but which may or may not prove valid. Thus, there can be no assurance that
charge-offs 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.
27
As a result of management's ongoing review of the loan portfolio, loans may
be classified as non-accrual even though the presence of collateral or the
borrowers' financial strength may be sufficient to provide for ultimate
repayment. Interest is not recognized on any non-accrual loans except
residential real estate loans is recognized only when received. The following
table summarizes the allocation of allowance by loan type.
TABLE 8: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------- ---------------------------------
PERCENT OF PERCENT OF
PERCENT LOANS TO PERCENT LOANS TO
AMOUNT OF TOTAL TOTAL LOANS AMOUNT OF TOTAL TOTAL LOANS
(DOLLARS IN THOUSANDS) -------- -------- ----------- -------- -------- -----------
Real estate.................. $2,085 48.0% 74.0% $1,442 43.4% 68.7%
Commercial................... 1,042 24.0% 16.4% 1,210 36.4% 20.6%
Consumer..................... 183 4.2% 9.6% 124 3.7% 10.7%
Unallocated.................. 1,031 23.8% -- 546 16.5% --
------ ----- ----- ------ ----- -----
Total...................... $4,341 100.0% 100.0% $3,322 100.0% 100.0%
====== ===== ===== ====== ===== =====
DECEMBER 31, 1998
---------------------------------
PERCENT OF
PERCENT LOANS TO
AMOUNT OF TOTAL TOTAL LOANS
(DOLLARS IN THOUSANDS) -------- -------- -----------
Real estate.................. $1,073 40.1% 68.6%
Commercial................... 622 23.3% 23.0%
Consumer..................... 68 2.5% 8.4%
Unallocated.................. 913 34.1% --
------ ----- -----
Total...................... $2,676 100.0% 100.0%
====== ===== =====
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- ---------------------------------
PERCENT OF PERCENT OF
PERCENT LOANS TO PERCENT LOANS TO
AMOUNT OF TOTAL TOTAL LOANS AMOUNT OF TOTAL TOTAL LOANS
-------- -------- ----------- -------- -------- -----------
Real estate.................. $ 918 56.9% 79.8% $ 793 63.9% 78.8%
Commercial................... 205 12.7% 16.7% 75 6.1% 18.4%
Consumer..................... 14 0.8% 3.5% 9 0.7% 2.8%
Unallocated.................. 477 29.6% -- 365 29.3% --
------ ----- ----- ------ ----- -----
Total...................... $1,614 100.0% 100.0% $1,242 100.0% 100.0%
====== ===== ===== ====== ===== =====
TABLE 9: NONPERFORMING ASSETS
DECEMBER 31,
------------------------------
2000 1999 1998
(DOLLARS IN THOUSANDS) -------- -------- --------
Loans on nonaccrual basis................................... $3,172 $4,229 $1,520
Real estate acquired by foreclosure......................... 3,610 1,360 1,633
------ ------ ------
Total non-performing assets............................. $6,782 $5,589 $3,153
====== ====== ======
Loans past-due 90 days or more and accruing................. $ 701 $2,062 $ 126
Nonperforming assets, expressed as a percentage of total assets, increased
to 1.00% at December 31, 2000 from 0.91% at December 31, 1999, reflecting the
increase in other real estate owned. The allowance for loan losses represented
64.0% of nonperforming assets as of December 31, 2000 compared to 59.4% as of
December 31, 1999. At December 31, 2000, the allowance for loan losses
represented 136.9% of nonaccruing loans compared to 78.6% at December 31, 1999.
Management believes the allowance for loan losses is adequate.
At December 31, 2000, other real estate owned included a land development
project consisting of 126 residential building lots with a carrying value of
approximately $653,000. The land development project is being completed under
the direction of the Company. Currently, the remaining 126 lots are under
contract for settlement through May 2002. In addition, nine single family lots
with a carrying value of $570,000, a commercial property with a carrying value
of $132,000 and thirteen single family units with a carrying value of $2,255,000
were also included in other real estate owned.
28
CAPITAL RESOURCES
Stockholders' equity totaled $27,849,000 as of December 31, 2000 as compared
to $21,863,000 as of December 31, 1999, an increase of 27.4%. The increase of
$5,986,000 was the result of the change in accumulated other comprehensive loss
of $3,677,000, the net retention of earnings of $577,000, and the issuance of
additional capital of $1,732,000. Cash dividends of two cents per share were
declared and paid in 2000. The change in accumulated other comprehensive loss
reflects the increase in value of the Company's available for sale securities.
As market interest rates declined throughout 2000 the long term fixed rate
nature of these securities resulted in an increase in market valuation. The
additional capital of $1,732,000 resulted from a contribution of capital by
members of the Company's Board of Directors and executive management of
$1,536,000, as well as shares issued under the Company's employee stock purchase
plan of $196,000.
Banking regulatory authorities have implemented strict capital guidelines
directly related to the credit risk associated with an institution's assets.
Banks and bank holding companies are required to maintain capital levels based
on their "risk adjusted" assets so that categories of assets with higher
"deemed" credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
The Company and the Bank have agreed with the Federal Reserve Bank of
Richmond, the FDIC, and the State Banking Commissioner to submit plans to
improve earnings and maintain capital levels commensurate with the growth plans
of the Company and the Bank. The Company will comply with the Federal Reserve
Policy dated November 14, 1985 concerning the payment of cash dividends and will
not incur additional debt at the holding company level without Federal Reserve
approval. Management believes that these agreements do not restrict or impede
the Bank's ability to conduct normal banking and business transactions.
Management is committed to complying with the provisions of the agreement.
To date, the Company has provided its capital requirements mainly through
the funds received for 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 Company
exceeded its capital adequacy requirements as of December 31, 2000 and 1999 and
meets the requirements for "well capitalized" status under Federal Banking
Regulations. The Company continually monitors its capital adequacy ratios to
assure that the Company 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 Company's capital position is presented in the following Table:
TABLE 10: CAPITAL RATIOS
MINIMUM TO BE WELL
DECEMBER 31, REQUIREMENTS CAPITALIZED UNDER
------------------------------ FOR CAPITAL PROMPT CORRECTIVE
2000 1999 1998 ADEQUACY PURPOSES ACTION PROVISION
-------- -------- -------- ----------------- -----------------
Total capital to risk weighted
assets.............................. 12.3% 14.6% 18.9% 8.0% 10.0%
Tier 1 capital to risk weighted
assets.............................. 9.0% 10.5% 13.5% 4.0% 6.0%
Tier 1 capital leverage ratio......... 6.0% 6.4% 8.1% 4.0% 5.0%
29
The Bank also maintains capital levels which qualify for "Well Capitalized"
status under current regulatory guidelines. See note 14 to the consolidated
financial statements for more detailed information on the Bank's capital
adequacy ratios.
INTEREST RATE SENSITIVITY AND LIQUIDITY
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of earning assets and funding sources.
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 interest rate movements, 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 with the Board of Directors Asset/Liability
Committee and meeting periodically to monitor and manage the statement of
financial condition, control interest rate exposure, and evaluate pricing
strategies for the Company. The asset mix of the statement of financial
condition is continually evaluated in terms of several variables: yield, credit
quality, appropriate funding sources and liquidity. Management of the liability
mix of the statement of financial condition focuses on expanding the various
funding sources.
In theory, interest rate risk can be diminished by maintaining a nominal
level of interest rate sensitivity. In practice, this is made difficult by a
number of factors including cyclical variation in loan demand, different impacts
on interest-sensitive assets and liabilities when interest rates change, and the
availability of funding sources. Accordingly, the Company undertakes to manage
the interest-rate sensitivity gap by adjusting the maturity of and establishing
rates on the earning asset portfolio and certain interest-bearing liabilities
commensurate with management's expectations relative to market interest rates.
Additionally, management may employ the use of off balance sheet instruments,
such as interest rate swaps or caps, to manage its exposure to interest rate
movements. 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 Company.
The interest rate sensitivity position as of December 31, 2000 is presented
in Table 11: "Rate Sensitivity Analysis." 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 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, 2000, the Company's interest sensitive
liabilities exceeded interest sensitive assets within a one year period by
$32,517,000 or 4.8% of total assets compared to $111,970,000 or 18.2% of total
assets at December 31, 1999. The decrease in the interest rate sensitivity gap
occurred due to the lower levels of longer term fixed rate investment securities
as well as the purchase of an off balance sheet hedge, which is discussed in
greater detail below.
In addition to the use of interest rate sensitivity reports, the Company
tests its interest rate sensitivity through the deployment of simulation
analysis. Earnings simulation models are used to estimate what effect specific
interest rate changes would have the Company's net interest income and
30
net income. Derivative financial instruments, such as interest rate caps, are
included in the analysis. Changes in prepayments have been included where
changes in behavior patterns are assumed to be significant to the simulation,
particularly mortgage related assets. Call features on certain securities and
borrowings are based on their call probability in view of the projected rate
change. At December 31, 2000, the Company's estimated earnings sensitivity
profile reflected a minimal sensitivity to interest rate changes. Based on an
assumed increase of 200 basis points over a one year period, the Company's net
interest income would decrease by 2% if rates were to increase and decrease by
1% if rates were to decline.
The Bank purchased an interest rate cap during 2000 to hedge a portion of
its' borrowing position, and thereby protect a portion of the Bank's exposure to
increasing interest rates. The interest rate cap purchased had a notional amount
of $50,000,000, a maturity of March 22, 2002 and is based on a cap rate of
6.75%. The notional amount represents the unit of measure to determine payments,
and is not an exchange of principal. Any credit risk is equal to the fair value
of the cap if the counterparty fails to perform, which is usually a small
percentage of the notional amount. Counterparty risk is mitigated by executing
transactions with highly rated counterparties using International Derivatives
Association Master Agreements. Cap payments are made quarterly, and are based
upon 3 month LIBOR (London Inter Bank Offering Rate). To the degree 3 month
LIBOR exceeds 6.75% at the quarterly measurement periods, the Bank receives
payments based on the difference between 3 month LIBOR and the cap rate of 6.75%
with the notional amount representing the unit of measure to determine the
payment. The interest rate cap was purchased for $127,500 and is being amortized
using the straight-line method. As of December 31, 2000, the unamortized portion
of the interest rate cap totaled $106,000, and had a fair value of $4,000 which
represents the risk of loss due to failure of the counterparty to perform.
31
TABLE 11: RATE SENSITITIVITY ANALYSIS
AS OF DECEMBER 31, 2000
------------------------------------------------------------------
LONGER THAN
10 YEARS
180 DAYS 181 DAYS ONE-FIVE FIVE-TEN OR NON-
OR LESS ONE YEAR YEARS YEARS SENSITIVE TOTAL
-------- -------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Interest-bearing deposits......... $ 6,344 $ -- $ -- $ -- $ -- $ 6,344
Investment securities............. 14,197 11,927 52,379 34,338 43,894 156,735
Loans held for sale............... 35,821 -- -- -- -- 35,821
Loans............................. 199,501 49,006 153,577 23,522 4,392 429,998
-------- -------- -------- -------- ------- --------
Total interest-earnings
assets........................ $255,863 $ 60,933 $205,956 $ 57,860 $48,286 $628,898
======== ======== ======== ======== ======= ========
Interest-bearing liabiltities:
Savings........................... $ 1,273 $ 1,291 $ 10,990 $ 15,549 $ -- $ 29,103
NOW accounts...................... 1,615 1,625 13,373 17,684 -- 34,297
Money market accounts............. 154,112 1,474 12,489 -- -- 168,075
Certificates...................... 64,572 40,786 70,309 -- -- 175,667
Borrowings........................ 82,048 517 5,000 60,000 21,450 169,015
-------- -------- -------- -------- ------- --------
Total interest-bearing
liabilities................... $303,620 $ 45,693 $112,161 $ 93,233 $21,450 $576,157
-------- -------- -------- -------- ------- ========
Interest rate sensitive gap......... $(47,757) $ 15,240 $ 93,795 $(35,373) $26,836 $ 52,741
======== ======== ======== ======== ======= ========
Cumulative interest rate gap........ $(47,757) $(32,517) $ 61,278 $ 25,905 $52,741
======== ======== ======== ======== =======
Ratio of rate sensitive assets to
rate sensitive liabilities........ 84% 133% 184% 62% 225%
======== ======== ======== ======== =======
Liquidity describes the ability of the Company and the Bank to meet the
financial obligations that arise out of the ordinary course of business.
Liquidity is primarily needed to meet the borrowing and deposit withdrawal
requirements of the Bank's customers and to fund current and planned
expenditures. Liquidity is derived from increased customer deposits, the
maturity distribution of the investment portfolio, loan repayment and income
from earning assets. The Company's loan to deposit ratio was 90.2% and 89.4% for
December 31, 2000 and 1999 respectively. Funds received from new and existing
depositors, provided a large source of liquidity for the years ended
December 31, 2000 and 1999. 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". To the extent that deposits are not adequate to fund customer loan
demand, liquidity needs can be met in the short-term funds market. Longer term
funding requirements can be obtained through advances from the Federal Home Loan
Bank ("FHLB"). The Bank maintains lines of credit with the FHLB of $175,000,000,
with a remaining availability of $104,225,000. The Bank maintains other lines of
credit with a remaining availability of $220,000,000.
The Bank's investment securities portfolio includes $126,985,000 of
mortgage-backed securities which provide significant cash flow each month. The
entire investment portfolio is classified as available for sale, is highly
marketable, and available to meet liquidity needs. The Bank's residential real
estate portfolio includes loans, which are underwritten to secondary market
criteria, and provide an additional source of liquidity. Approximately
$18,800,000 of residential real estate loans were sold into the secondary market
in 2000. Additionally, the Bank's residential construction loan portfolio
provides a source of liquidity as construction periods generally range from
6-12 months, and these loans are
32
subsequently financed with permanent first mortgages and sold into the secondary
market. Management is not aware of any known trends, demands, commitments, or
uncertainties that are reasonably likely to result in material changes in
liquidity.
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
DECEMBER 31,
------------------------------
2000 1999 1998
(DOLLARS IN THOUSANDS) -------- -------- --------
Under 3 months................................... $ 7,905 $ 4,600 $ 2,988
3 to 6 months.................................... 6,031 6,261 4,508
6 to 12 months................................... 10,371 5,870 2,840
Over 12 months................................... 16,038 18,327 7,790
------- ------- -------
Total.......................................... $40,345 $35,058 $18,126
======= ======= =======
The Bank offers individuals and businesses a wide variety of accounts. These
balances 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, the average rate paid
and the percentage of each category to total deposits for the years ended
December 31, 2000, 1999 and 1998.
33
TABLE 13: AVERAGE DEPOSIT COMPOSITION AND COST
YEAR ENDED DECEMBER 31, 2000
------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
(DOLLARS IN THOUSANDS) -------- -------- --------
NOW & money market savings deposits......................... $178,115 4.72% 41.9%
Regular savings deposits.................................... 27,376 2.78% 6.5%
Time deposits............................................... 161,904 5.57% 38.1%
-------- ------
Total interest-bearing deposits........................... 367,395 4.95% 86.5%
-------- ------
Noninterest-bearing demand deposits......................... 57,377 -- 13.5%
-------- ------
Total deposits............................................ $424,772 4.28% 100.0%
======== ======
YEAR ENDED DECEMBER 31, 1999
------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
-------- -------- --------
NOW & money market savings deposits......................... $129,885 3.72% 40.7%
Regular savings deposits.................................... 19,140 2.76% 6.0%
Time deposits............................................... 123,228 5.23% 38.7%
-------- ------
Total interest-bearing deposits........................... 272,253 4.33% 85.4%
-------- ------
Noninterest-bearing demand deposits......................... 46,473 -- 14.6%
-------- ------
Total deposits............................................ $318,726 3.70% 100.0%
======== ======
YEAR ENDED DECEMBER 31, 1998
------------------------------
AVERAGE AVERAGE PERCENT
BALANCE RATE OF TOTAL
-------- -------- --------
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%
======== ======
Total deposits as of December 31, 2000 were $476,882,000 compared to
$368,751,000 as of December 31, 1999, an increase of $108,131,000. While the
main source of the increase was money market and time deposits, other types of
deposits increased as well, including savings accounts, 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.
34
INVESTMENT SECURITIES
The following table presents the composition of the Company's securities
portfolio as of December 31, 2000, 1999 and 1998:
TABLE 14: INVESTMENT SECURITIES
DECEMBER 31,
------------------------------
2000 1999 1998
(IN THOUSANDS) -------- -------- --------
Investment securities -- available for sale:
Mortgage-backed securities................................ $126,985 $163,734 $163,099
Trust preferred securities................................ 20,140 20,536 20,725
Agency bonds.............................................. 5,008 4,836 --
Other bonds............................................... 600 350 100
U.S. Treasury securities.................................. 1,008 -- --
Equity securities......................................... 2,994 2,439 3,773
-------- -------- --------
Total investment securities -- available-for-sale....... 156,735 191,895 187,697
======== ======== ========
Investment securities -- held to maturity:
U.S. Treasury securities.................................. -- -- 5,502
Certificates of deposit................................... -- -- --
-------- -------- --------
Total investment securities -- held to maturity......... -- -- 5,502
-------- -------- --------
Total investment securities............................. $156,735 $191,895 $193,199
======== ======== ========
SHORT-TERM BORROWINGS
Short-term borrowings consist of short-term promissory notes issued to
certain qualified investors, short-term repurchase agreements and borrowings
from The Federal Home Loan Bank of Atlanta ("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. Short-term borrowings from FHLB
outstanding during 2000 and 1999 had maturities of one year or less and can be
prepaid without penalty.
35
TABLE 15: SHORT-TERM BORROWINGS
DECEMBER 31,
------------------------------
2000 1999 1998
(DOLLARS IN THOUSANDS) -------- -------- --------
Amount outstanding at year-end:
FHLB Short-term advances....................... $ 5,775 $ 7,300 $19,700
Short-term promissory notes.................... 27,874 22,439 22,014
Short-term repurchase agreements and other
short-term borrowing......................... 38,916 12,840 14,450
Weighted average interest rates at year-end:
FHLB Short-term advances....................... 6.87% 4.55% 4.95%
Short-term promissory notes.................... 4.41% 4.01% 3.72%
Short-term repurchase agreements and other
short-term borrowing......................... 6.63% 5.58% 5.62%
Maximum outstanding at any month-end:
FHLB Short-term advances....................... $64,000 $32,300 $19,700
Short-term promissory notes.................... 29,516 29,705 32,030
Short-term repurchase agreements and other
short-term borrowing......................... 44,767 22,958 14,450
Average outstanding:
FHLB Short-term advances....................... $32,175 $ 7,844 $ 4,615
Short-term promissory notes.................... 22,257 18,474 11,149
Short-term repurchase agreements and other
short-term borrowing......................... 28,116 15,828 5,693
Weighted average interest rate during the year:
FHLB Short-term advances....................... 6.50% 5.61% 5.61%
Short-term promissory notes.................... 4.31% 3.79% 3.96%
Short-term repurchase agreements and other
short-term borrowing......................... 5.95% 5.60% 5.97%
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.
FINANCIAL REVIEW 1999/1998
For the year ended December 31 1999, the Company recorded net income of
$877,000 or $0.28 per basic share, compared to net income of $1,123,000 income
or $0.36 per basic share in 1998. The per share amounts have been adjusted for
the ten percent stock dividend paid in May 1998. The results for 1998 include
income tax benefits of $963,000. On a pre-tax basis, net income equaled
$1,387,000 for 1999 compared to $160,000 for 1998.
Net interest income for 1999 increased $5,629,000 or 46.8% from 1998 and
average earning assets grew $196,230,000 or 60.1% over the prior year. The net
interest margin decreased 30 basis points from 3.68% to 3.38% primarily caused
by the decline in average loans as a percentage of average earning assets from
61.2% in 1998 to 60.7% in 1999.
36
The provision for loan losses decreased from $1,212,000 in 1998 to $785,000
in 1999. The allowance for loan losses at December 31, 1999 represented 1.01% of
outstanding loans as compared with 1.10% as of December 31, 1998. Net chargeoffs
were $139,000 in 1999 compared to $150,000 in 1998.
Total noninterest income increased 29.8% to $7,264,000. The major reason for
the increase was an increase in service fees on deposits and ATM fees of 50.6%
as a result of increases in demand deposit account volume of 51.2% and some
pricing increases. Other operating income increased 48.1% due primarily to
increased mortgage banking fees, higher loan fees, and miscellaneous cash
management fees. Gain on sale of loans increased 32.1% as a result of the
expansion of mortgage banking activities and increased origination and sales.
The Company's noninterest expenses increased 40.0% to $22,743,000 in 1999.
Salaries and benefits increased 50.1% to $11,458,000 as a result of additional
staffing in the retail branches and mortgage banking offices due to the Bank's
expansion programs. Also, additional employees were added to support the loan
and deposit growth. Occupancy cost grew by 58.4% or $1,083,000. 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
$345,000 or 50.5% 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 expense of $510,000 in 1999 while a tax
benefit of $963,000 was recorded in 1998.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Interest Rate Sensitivity and Liquidity" in Item 7 beginning on
page 30 of this Form 10-K and incorporated by reference into this Item 7A.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
37
The Board of Directors and Stockholders
First Mariner Bancorp
Baltimore, Maryland
We have audited the accompanying consolidated statement of financial
condition of First Mariner Bancorp and subsidiaries (the "Company") as of
December 31, 2000 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the accompanying consolidated statement of financial
condition as of December 31, 2000 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended present fairly, in all material respects, the financial position of the
Company as of December 31, 2000 and the results of its operations and cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
STEGMAN & COMPANY
Baltimore, Maryland
March 16, 2001
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Mariner Bancorp:
We have audited the accompanying consolidated statement of financial
condition of First Mariner Bancorp and subsidiaries (the Company) as of
December 31, 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the two year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Mariner Bancorp and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Baltimore, Maryland
January 28, 2000
39
FIRST MARINER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 19,095 $ 19,490
Interest-bearing deposits................................... 6,344 24,346
Available-for-sale securities, at fair value................ 156,735 191,895
Loans held for sale......................................... 35,821 26,299
Loans receivable............................................ 429,998 329,528
Allowance for loan losses................................... (4,341) (3,322)
-------- --------
Loans, net.................................................. 425,657 326,206
Other real estate owned..................................... 3,610 1,360
Federal Home Loan Bank of Atlanta stock, at cost............ 4,539 4,365
Property and equipment, net................................. 14,263 10,300
Accrued interest receivable................................. 4,413 3,312
Deferred income taxes....................................... 3,368 5,781
Prepaid expenses and other assets........................... 3,604 2,718
-------- --------
Total assets.......................................... $677,449 $616,072
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $476,882 $368,751
Borrowings................................................ 99,166 109,739
Repurchase agreements..................................... 48,399 77,185
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the Company.......................................... 21,450 21,450
Proceeds on loan sales received in advance................ -- 14,458
Accrued expenses and other liabilities.................... 3,703 2,626
-------- --------
Total liabilities..................................... 649,600 594,209
-------- --------
Stockholders' equity:
Common stock, $.05 par value; 20,000,000 shares
authorized; 3,610,808 and 3,166,813 shares issued and
outstanding, respectively............................... 181 158
Additional paid-in capital.................................. 36,103 34,394
Accumulated deficit......................................... (5,253) (5,830)
Accumulated other comprehensive loss........................ (3,182) (6,859)
-------- --------
Total stockholders' equity............................ 27,849 21,863
-------- --------
Total liabilities and stockholders' equity.................. $677,449 $616,072
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
FIRST MARINER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income:
Loans..................................................... $36,881 $26,719 $18,165
Investment securities..................................... 14,497 13,754 8,156
------- ------- -------
Total interest income....................................... 51,378 40,473 26,321
------- ------- -------
Interest expense:
Deposits.................................................. 18,188 11,797 9,081
Borrowed funds and other.................................. 12,352 11,025 5,218
------- ------- -------
Total interest expense...................................... 30,540 22,822 14,299
------- ------- -------
Net interest income......................................... 20,838 17,651 12,022
Provision for loan losses................................... 1,105 785 1,212
------- ------- -------
Net interest income after provision for loan losses......... 19,733 16,866 10,810
------- ------- -------
Noninterest income:
Gain on sale of loans..................................... 1,576 1,907 1,444
Service fees on deposits.................................. 3,504 2,603 1,808
ATM Fees.................................................. 1,457 1,093 646
Gain on securities, net................................... 359 241 738
Other mortgage banking fees............................... 1,586 827 519
Other..................................................... 623 593 440
------- ------- -------
Total noninterest income.................................... 9,105 7,264 5,595
------- ------- -------
Noninterest expenses:
Salaries and employee benefits............................ 13,367 11,458 7,632
Net occupancy............................................. 3,903 2,939 1,856
Furniture, fixtures and equipment......................... 1,662 1,271 790
Professional services..................................... 601 328 605
Advertising............................................... 1,061 1,028 683
Data processing........................................... 1,645 1,332 884
Other..................................................... 5,559 4,387 3,795
------- ------- -------
Total noninterest expenses.................................. 27,798 22,743 16,245
------- ------- -------
Income before income taxes.................................. 1,040 1,387 160
Income tax expense (benefit)................................ 400 510 (963)
------- ------- -------
Net income.................................................. $ 640 $ 877 $ 1,123
======= ======= =======
Net income per common share:
Basic..................................................... $ 0.20 $ 0.28 $ 0.36
======= ======= =======
Diluted................................................... 0.20 0.26 0.32
======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
41
FIRST MARINER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NUMBER OF ACCUMULATED
SHARES OF ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT (LOSS) INCOME EQUITY
(DOLLARS IN THOUSANDS) --------- -------- ---------- ----------- ------------- -------------
Balance at January 1, 1998............. 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
Net income............................. -- -- -- 877 -- 877
Other comprehensive (loss)............. -- -- -- -- (7,312) (7,312)
Cash dividends......................... -- -- -- (190) -- (190)
--------- ---- ------- ------- ------- -------
Balance at December 31, 1999........... 3,166,813 158 34,394 (5,830) (6,859) 21,863
Common stock issued, net of costs of
issuance............................. 443,995 23 1,709 -- -- 1,732
Net income............................. -- -- -- 640 -- 640
Other comprehensive income............. -- -- -- -- 3,677 3,677
Cash dividends......................... -- -- -- (63) -- (63)
--------- ---- ------- ------- ------- -------
Balance at December 31, 2000........... 3,610,808 $181 $36,103 $(5,253) $(3,182) $27,849
========= ==== ======= ======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
42
FIRST MARINER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income.................................................. $ 640 $ 877 $ 1,123
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization............................. 2,056 1,555 1,237
Capitalized interest...................................... (66) -- --
Amortization of unearned loan fees and costs, net......... (422) (490) (636)
Amortization of premiums and discounts on deposits........ -- -- (11)
Amortization of premiums and discounts on loans........... 27 40 53
Amortization of premiums and discounts on mortgage-backed
securities, net......................................... 221 269 (105)
Gain on sale of available for sale securities............. (359) (241) (738)
Loss on other real estate owned........................... -- 21 157
Deferred income taxes..................................... 137 9 (1,075)
Increase in accrued interest receivable................... (1,101) (657) (1,221)
Provision for loan losses................................. 1,105 785 1,212
Net increase in mortgage loans held-for-sale.............. (9,522) (4,978) (4,426)
Net (decrease) increase loan sales received in advance.... (14,458) 14,458 --
Net increase (decrease) in accrued expenses and other
liabilities............................................. 1,077 (1,448) 1,349
Net increase in prepaids and other assets................. (1,160) (481) (1,930)
-------- -------- --------
Net cash (used in) provided by operating activities......... (21,825) 9,719 (5,011)
-------- -------- --------
Cash flows from investing activities:
Loan disbursements, net of principal repayments........... (102,816) (86,592) (98,656)
Purchases of property and equipment....................... (5,953) (4,325) (3,781)
Purchases of Federal Home Loan Bank of Atlanta stock...... (174) (1,130) (1,836)
Purchases of available for sale securities................ (18,942) (56,937) (192,940)
Sales of available for sale securities.................... 42,549 12,727 16,374
Principal repayments of available for sale securities..... 17,918 28,071 16,265
Maturities of available for sale securities............... -- -- 6,500
Maturities of investment securities....................... -- 5,502 3,099
Construction disbursements-other real estate owned........ (237) (471) (705)
Sales of other real estate owned.......................... 642 823 1,296
-------- -------- --------
Net cash used in investing activities....................... (67,013) (102,332) (254,384)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits.................................. 108,131 106,440 65,359
Net (decrease) increase in other borrowings............... (22,834) (16,840) 101,133
Proceeds from advances from Federal Home Loan Bank of
Atlanta................................................. 275,275 142,500 66,700
Repayment of advances from Federal Home Loan Bank of
Atlanta................................................. (291,800) (119,900) (17,000)
Proceeds from trust preferred securities offering......... -- -- 21,450
Proceeds of stock options and warrants exercised.......... -- -- 275
Proceeds from stock issuance, net......................... 1,732 -- --
Cash dividends............................................ (63) (190) --
-------- -------- --------
Net cash provided by financing activities................... 70,441 112,010 237,917
-------- -------- --------
(Decrease) increase in cash and cash equivalents............ (18,397) 19,397 (21,478)
Cash and cash equivalents at beginning of period............ 43,836 24,439 45,917
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 25,439 $ 43,836 $ 24,439
======== ======== ========
Supplemental information:
Interest paid on deposits and borrowed funds.............. $ 30,280 $ 22,556 $ 13,826
Real estate acquired in satisfaction of loans............. 2,665 100 436
Income taxes paid......................................... 483 495 8
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
43
FIRST MARINER BANCORP AND SUBSIDIARIES
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
First Mariner Bancorp (the "Company") is a bank holding company incorporated
under the laws of Maryland and registered under the Bank Holding Company Act of
1956, as amended. The Company was organized as "MarylandsBank Corp." in
May 1994, and the Company's name was changed to "First Mariner Bancorp" in
May 1995. The Company owns 100% of common stock of First Mariner Bank (the
"Bank").
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States, 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. Certain reclassifications have been made to
amounts previously reported to conform with the classifications made in 2000.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses.
In connection with these determinations, management evaluates historical trends
and ratios and where appropriate obtains independent appraisals for significant
properties and prepares fair value analyses as appropriate.
Management believes that the allowance for losses on loans is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the State of Maryland. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
(b) 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. Fees to extend loans three months or less are recognized in
income upon receipt. Unamortized loan fees are recognized in income when the
related loans are sold or prepaid.
(c) 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.
44
(d) 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 estimated 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 estimated fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of tax effects, 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 investment securities 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.
(e) 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.
(f) 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 is
eliminated from the accounts when an asset is sold or retired and the resultant
gain or loss is credited or charged to income.
(g) 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 loss 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.
45
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.
(h) 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 stock
dividend was issued plus cash in lieu of fractional shares was transferred from
accumulated deficit to common stock and additional paid-in capital. The
Stockholders' equity section of the Consolidated Statements of Financial
Condition 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.
(i) COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' equity during a
period, except those relating to investments by and distributions to
stockholders. The Company's comprehensive income consists of net earnings and
unrealized gains and losses on securities available-for-sale and is presented in
note 17. Accumulated other comprehensive loss is displayed as a separate
component of stockholders' equity.
(j) INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the tax bases of
assets and liabilities. Deferred income taxes are provided on income and expense
items when they are reported for financial statement purposes in periods
different from the periods in which these items are recognized in the income tax
returns. Deferred tax assets are recognized only to the extent that it is more
likely than not that such amounts will be realized based upon consideration of
available evidence, including tax planning strategies and other factors.
(k) STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
(l) NET INCOME PER SHARE
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
basis EPS computation for the effect of all dilutive potential common shares
outstanding during the period. The dilutive effects of options, warrants and
their equivalents are computed under the "treasury stock" method.
46
(m) 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 10.
(n) ADVERTISING COSTS
Advertising costs are charged to operations as incurred and are reported as
a separate line item in the statement of operations.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
The Company will adopt the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" for its quarterly and annual reporting beginning January 1, 2001,
the statement's effective date. The statement requires derivative instruments to
be used to hedge various risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period:
however, any changes in fair value or cash flow that represented ineffective
portions of the hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings.
SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, was issued in September 2000 and replaces SFAS
No. 125. The guidance in SFAS No. 140, while not changing most of the guidance
originally issued in SFAS No. 125, revises the standard for accounting for
securization and other transfers of financial assets and collateral and requires
certain additional disclosures related to transferred assets.
Certain provisions of the statement related to the recognition,
reclassification and disclosure of collateral, as well as the disclosure of
securitization transactions, became effective for the Bank for 2000 year-end
reporting. Other provisions related to the transfer and servicing of financial
assets and extinguishments of liabilities are effective for transactions
occurring after March 31, 2001.
The impact of adopting the provisions of these statement will not have a
material effect on the Company's financial position, results of operations or
cash flows.
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required by the Federal Reserve System to maintain certain cash
reserve balances based principally on deposit liabilities. At December 31, 2000
the required reserve balances was $275,000.
47
(4) AVAILABLE-FOR-SALE SECURITIES
The composition of available-for-sale securities and maturities, where
applicable, are as follows (in thousands) at December 31:
2000
-----------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Mortgage-backed securities.......................... $128,762 15 1,792 126,985
Trust preferred securities-due after 10 years....... 23,275 42 3,177 20,140
Equity securities................................... 3,048 240 294 2,994
U.S. Treasury Securities-due one year............... 999 9 -- 1,008
Other bonds -- due after five years through ten
years............................................. 5,598 11 1 5,608
-------- --- ----- -------
$161,682 317 5,264 156,735
======== === ===== =======
1999
-----------------------------------------------
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Mortgage-backed securities.......................... $171,189 -- 7,455 163,734
Trust preferred securities-due after 10 years....... 23,332 56 2,852 20,536
Equity securities................................... 3,213 7 781 2,439
Other bonds -- due after one year through five
years............................................. 5,337 -- 151 5,186
-------- -------- ------ -------
$203,071 63 11,239 191,895
======== ======== ====== =======
Expected maturities may differ from contractual maturities as issuers have
the right to call or prepay certain obligations without penalty.
During 2000, 1999 and 1998, the Company recognized gains on sale of
securities of $359,000, $267,000 and $1,090,000 respectively. During 1999,
losses on the sale of securities were recognized of $26,000. No losses on the
sale of securities were recognized in 2000 and 1998. During 1998, the Company
recorded write downs of $352,000 on certain equity securities based on
determination of other than temporary declines in market values of those
securities.
At December 31, 2000, available for sale securities with an aggregate
carrying value (fair value) of $88,925,000 were pledged as collateral for
borrowings under repurchase agreements.
(5) 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
48
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:
2000 1999
-------- --------
Loans secured by first mortgages on real estate:
Residential............................................... $ 99,038 85,874
Commercial................................................ 102,080 89,470
Consumer residential construction......................... 82,453 34,376
Construction, net of undisbursed principle................ 35,198 17,323
-------- -------
318,769 227,043
Commercial.................................................. 70,828 67,917
Loans secured by second mortgages on real estate............ 22,412 17,930
Consumer loans.............................................. 17,824 16,232
Loans secured by deposits and other......................... 1,131 939
-------- -------
Total loans............................................. 430,964 330,061
-------- -------
Unamortized loan premiums................................... 20 47
Unearned loan fees, net..................................... (986) (580)
-------- -------
$429,998 329,528
======== =======
The Company retains servicing on certain loans it sold into the secondary
market. At December 31, 2000, the servicing portfolio totaled $10,063,000. The
capitalized amount in connection with acquiring the right to service mortgage
loans during 2000 totaled $298,000, which also equaled the unamortized portion
of servicing rights as of December 31, 2000. Prior to 2000, the Company had not
sold loans into the secondary market and retained servicing. The rights to
service mortgage loans are amortized in proportion to, and over the estimated
period of, the related net servicing revenue. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value.
Nonaccrual loans totaled approximately $3,172,000, $4,229,000 and $1,520,000
at December 31, 2000, 1999, and 1998, respectively. The interest income which
would have been recorded in 2000, 1999 and 1998 under the original terms of
loans in nonaccrual status was approximately $302,000, $271,000 and $111,000,
respectively. The actual interest income recorded on these loans in 2000, 1999
and 1998 was approximately $32,000, $30,000 and $67,000 respectively.
Impaired loans totaled $2,818,000 and $3,638,000 at December 31, 2000 and
1999, 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, 2000 and 1999 with an allocated valuation
allowance.
The average recorded investment in impaired loans was approximately
$3,426,000, $1,279,000 and $1,779,000 at December 31, 2000, 1999 and 1998,
respectively, and no income has been accrued or collected on these loans while
they have been classified as impaired.
49
Changes in the allowance for losses on loans are summarized as follows (in
thousands):
2000 1999 1998
-------- -------- --------
Balance at beginning of year................................ $3,322 2,676 1,614
Provisions for loan losses.................................. 1,105 785 1,212
Charge-offs, net of recoveries.............................. (86) (139) (150)
------ ----- -----
Balance at end of year.................................. $4,341 3,322 2,676
====== ===== =====
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, 2000 and 1999, the Company had commitments to originate first
mortgage loans on real estate of approximately $53,117,000 and $28,327,000,
respectively, all of which were committed for sale in the secondary market.
At December 31, 2000 and 1999, the Company also had commitments to loan
funds under unused home equity lines of credit aggregating approximately
$14,903,000 and $10,825,000, respectively, and unused commercial lines of credit
aggregating approximately $92,933,000 and $79,786,000, respectively. Such
commitments carry a floating rate of interest.
Commitments for first mortgage loans generally expire within 60 days and are
normally funded with loan principal repayments, excess liquidity and savings
deposits. Since certain of the commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
Substantially all of the Company's outstanding commitments at December 31,
2000 and 1999, 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 $5,012,000, and $7,042,000 at December 31, 2000, and 1999,
respectively. During 2000, $705,000 of new loans and advances were made and
repayments totaled $2,735,000; in 1999, $6,121,000 of new loans and advances on
existing loans were made and repayments totaled $4,645,000.
(6) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands) at
December 31:
ESTIMATED
2000 1999 USEFUL LIVES
-------- -------- ------------
Land........................................................ $ 1,177 1,177 --
Buildings and improvements.................................. 4,318 2,719 10-39 years
Leasehold improvements...................................... 4,091 3,380 10-33 years
Furniture, fixtures and equipment........................... 8,964 6,829 3-7 years
------- ------
Total at cost........................................... 18,550 14,105
Less accumulated depreciation and amortization.............. 4,287 3,805
------- ------
$14,263 10,300
======= ======
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $2,191,000, $1,705,000 and $1,183,000, respectively.
50
The Company and the Bank occupy space leased from a company, of which the
Chairman and CEO of the Company, is the owner. In 2000, this company was paid
$817,000 for office, branch and storage space. The original 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.
Minimum lease payments due for each of the next five years are as follows
(in thousands):
2001........................................................ $ 1,941
2002........................................................ 1,751
2003........................................................ 1,624
2004........................................................ 1,517
2005........................................................ 1,341
Thereafter.................................................. 8,456
-------
$16,630
=======
(7) DEPOSITS
Deposits are summarized as follows (dollars in thousands) at December 31:
2000 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EFFECTIVE EFFECTIVE
AMOUNT RATE AMOUNT RATE
-------- --------- -------- ---------
Noncertificate:
Passbook and regular savings........................ $ 29,103 2.78% $ 23,985 2.76%
Interest bearing demand deposits.................... 34,297 1.45% 26,800 1.34%
Money market accounts............................... 168,075 5.35% 110,287 4.23%
Non-interest bearing demand......................... 69,740 -- 49,735 --
-------- --------
Total noncertificate deposits......................... 301,215 210,807
Certificates:
Original maturities:
Under 12 months................................... 8,267 5.64% 11,736 4.72%
12 to 60 months................................... 152,773 5.82% 135,328 5.27%
IRA and KEOGH..................................... 14,627 6.03% 10,880 5.31%
-------- --------
Total certificates of deposit......................... 175,667 157,944
-------- --------
Total deposits........................................ $476,882 $368,751
======== ========
% OF TOTAL % OF TOTAL
---------- ----------
Scheduled certificate maturities:
Under 6 months..................................... $ 64,568 36.76% $ 31,497 19.94%
6 months to 12 months.............................. 40,563 23.09% 20,880 13.22%
12 months to 24 months............................. 57,113 32.51% 91,905 58.19%
24 months to 36 months............................. 11,194 6.37% 11,550 7.31%
36 months to 48 months............................. 827 0.47% 1,280 0.81%
Over 48 months..................................... 1,402 0.80% 832 0.53%
-------- ------ -------- ------
$175,667 100.00% $157,944 100.00%
======== ====== ======== ======
Certificates of deposit of $100,000 or more totaled approximately
$40,345,000 and $35,058,000 at December 31, 2000 and 1999, respectively.
51
(8) BORROWINGS AND REPURCHASE AGREEMENTS
Borrowings and repurchase agreements consist of Federal Home Loan Bank of
Atlanta (FHLB) advances, short-term promissory notes and 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 $175,000,000 and requires the Company to maintain collateral for all of its
borrowings in the form of specific first mortgage loans with outstanding
principal equal to 133% of the advances or securities equal to 103% of advances.
Certain information regarding borrowings and repurchase agreements are as
follows (dollars in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Amount outstanding at year-end:
FHLB short-term advances.................................. $ 5,775 7,300
Short-term promissory notes............................... 27,874 22,439
Short-term repurchase agreements and other short-term
borrowings.............................................. 38,916 12,840
FHLB long-term advances................................... 65,000 80,000
Long-term repurchase agreements........................... 10,000 65,000
Weighted average interest rate at year-end:
FHLB short-term advances.................................. 6.87% 4.55%
Short-term promissory notes............................... 4.41% 4.01%
Short-term repurchase agreements and other short-term
borrowings.............................................. 6.63% 5.58%
FHLB long-term advances................................... 5.89% 5.02%
Long-term repurchase agreements........................... 6.16% 5.35%
Maximum outstanding at any month-end:
FHLB short-term advances.................................. $64,000 32,300
Short-term promissory notes............................... 29,516 29,705
Short-term repurchase agreements and other short-term
borrowings.............................................. 44,767 22,958
FHLB long-term advances................................... 75,000 80,000
Long-term repurchase agreements........................... 85,000 87,797
Average outstanding:
FHLB short-term advances.................................. $32,175 7,844
Short-term promissory notes............................... 22,257 18,474
Short-term repurchase agreements and other short-term
borrowings.............................................. 28,116 15,828
FHLB long-term advances................................... 62,083 64,317
Long-term repurchase agreements........................... 33,750 78,857
Weighted average interest rate during the year:
FHLB short-term advances.................................. 6.50% 5.61%
Short-term promissory notes............................... 4.31% 3.79%
Short-term repurchase agreements and other short-term
borrowings.............................................. 5.95% 5.60%
FHLB long-term advances................................... 5.70% 4.94%
Long-term repurchase agreements........................... 6.01% 5.26%
Repayments on Long-term FHLB advances and Long-term repurchase agreements
are as follows: 2001-$0; 2002-$0; 2003-$0; 2004-$5,000,000; 2005-$10,000,000;
thereafter-$60,000,000. Long term borrowings totaling $50,000,000 are subject to
call provisions beginning in 2001, while the remaining $25,000,000 is subject to
call provisions in 2002.
The Company has pledged securities with a carrying value (fair value) of
$88,925,000 and loans with a carrying value of $72,500,000 as collateral for
other borrowings.
52
(9) REDEEMABLE TRUST PREFERRED SECURITIES
Company-obligated manditorily redeemable preferred securities of a
subsidiary trust holding solely debentures of the Company (trust preferred
securities) consist of 2,145,000 securities with a liquidation amount of $10 per
security, which were issued in June 1998 by a statutory business trust; Mariner
Capital Trust (the "Trust"). The Trust is a wholly owned subsidiary of the
Company because the Company owns all of the securities of the Trust that
possesses general voting powers. The Trust used the proceeds of the trust
preferred securities to purchase at par $22,113,000 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
(a) 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 $145,000, $115,000 and $76,000 in
2000, 1999, and 1998 respectively.
(b) STOCK OPTIONS
The Company has stock option award arrangements, which provide for the
granting of options to acquire common stock to directors and key employees.
Option prices are equal to or greater than the estimated fair market value of
the common stock at the date of the grant. Options issued prior to 1999 are
exercisable immediately after the date of grant. Beginning in 1999, options
granted have a three-year vesting schedule with the first year vested upon
issuance. All options expire ten years after the date of grant.
Information with respect to stock options is as follows for the years ended
December 31,
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year.................... 452,190 $10.57 190,930 $ 9.09 192,830 $9.09
Granted............................................. 54,250 5.73 263,910 11.62 -- --
Exercised........................................... -- -- -- -- (1,900) 9.09
Forfeited/Cancelled................................. (236,260) 11.70 (2,650) 9.09 -- --
-------- ------- -------
Outstanding at end of year.......................... 270,180 $ 8.60 452,190 $10.57 190,930 $9.09
======== ======= =======
53
Options outstanding are summarized as follows at December 31, 2000:
OPTIONS OUTSTANDING
--------------------------------------------------------
WEIGHTED
AVERAGE OPTIONS
REMAINING EXERCISABLE
EXERCISE CONTRACTUAL LIFE -----------
PRICE SHARES (YEARS) SHARES
-------- -------- ---------------- -----------
$ 5.63 48,750 9.2 16,250
6.25 3,000 9.4 1,000
7.50 2,000 9.3 667
8.69 10,000 8.9 6,667
9.09 185,020 5.9 185,020
10.50 3,000 8.6 2,000
11.75 18,410 8.2 12,273
------- -------
$ 8.60 270,180 6.8 223,877
======= =======
The option price was equal to the market price of the common stock at the
date of grant for all options granted and, accordingly, no compensation expense
related to options was recognized. If the Company had applied a fair value-based
method to recognize compensation cost for the options granted, net income and
net income per share would have been changed to the following pro forma amounts
for the year ended December 31,
2000 1999 1998
-------- -------- ---------
Net income........................................ As reported $640,000 877,000 1,123,000
Pro forma 571,000 733,000 1,123,000
Net income per share -- basic..................... As reported 0.20 0.28 0.36
Pro forma 0.18 0.23 0.36
Net income per share -- diluted................... As reported 0.20 0.26 0.32
Pro forma 0.18 0.22 0.32
The weighted average fair values of options granted during 2000 and 1999
were $3.07 and $5.10, respectively, on the dates of grant. No options were
granted in 1998. The fair values of options granted were calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999
-------- --------
Dividend yield.............................................. 0.00% 0.55%
Expected volatility......................................... 25.00% 25.00%
Risk-free interest rate..................................... 6.35% 6.01%
Expected lives.............................................. 10 Years 10 Years
(c) WARRANTS
Warrants to acquire 860,376 shares of common stock at $9.09 per share were
outstanding and exercisable at December 31, 2000, 1999 and 1998, respectively.
(d) EMPLOYEE STOCK PURCHASE PLAN
The Company began a stock purchase plan for employees in 1999 whereby the
employees can purchase Company stock through payroll deductions. The Company may
provide a discount of up to 10% of the purchase price.
54
(11) INCOME TAXES
Income tax expense (benefit) consists of the following (in thousands) for
the years ended December 31:
2000 1999 1998
-------- -------- --------
Current..................................................... $263 501 112
Deferred.................................................... 137 9 (1,075)
---- --- ------
Income tax expense (benefit)................................ $400 510 (963)
==== === ======
Income tax expense (benefit) is 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:
2000 1999 1998
-------- -------- --------
Income tax expense (benefit) at federal corporate rate...... $354 472 54
Change in valuation allowance............................... 49 107 (918)
Other....................................................... (3) (69) (99)
---- --- ------
$400 510 (963)
==== === ======
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:
2000 1999
-------- --------
Deferred tax assets:
Allowance for losses on loans............................. $1,590 1,178
Net operating loss carryforwards.......................... 156 268
Interest and fees on loans................................ 35 150
Other..................................................... 75 74
------ -----
Total gross deferred assets............................. 1,856 1,670
Less valuation allowance.................................... (156) (107)
------ -----
Net deferred tax assets................................. 1,700 1,563
Deferred tax liabilities:
Depreciation.............................................. 80 80
Excess of fair value of assets acquired over cost......... 18 18
------ -----
Total gross deferred tax liabilities.................... 98 98
------ -----
Attributable to operations.................................. 1,602 1,465
Unrealized (gain) loss on investments charged to other
comprehensive income...................................... 1,766 4,316
------ -----
Net deferred tax asset...................................... $3,368 5,781
====== =====
The Company has net operating loss carryforwards for state income tax
purposes of approximately $3,374,000, which expire beginning 2010 through 2020,
that are available to offset future state taxable income of First Mariner
Bancorp only. Management anticipates that it is more likely than not that the
future operations of First Mariner Bancorp will not generate sufficient taxable
income to realize the deferred tax asset in the amount of $156,000 relating to
this state net operating loss.
55
(12) OTHER EXPENSES
Other expenses are comprised of the following (in thousands) for the years
ended December 31:
2000 1999 1998
-------- -------- --------
Service and maintenance..................................... $ 915 649 418
Office supplies............................................. 391 345 255
Amortization of cost of intangible assets................... -- -- 210
Cost of ATM network......................................... 630 601 427
Printing.................................................... 332 301 246
Corporate insurance......................................... 123 108 83
Other....................................................... 3,168 2,383 2,156
------ ----- -----
$5,559 4,387 3,795
====== ===== =====
(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 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, 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, cash dividends may not
be paid in excess of 90% of net earnings. See Note 14 for further information
concerning dividend restrictions.
Information relating to the calculations of earnings per common share is
summarized as follows (dollars in thousands) for the years ended December 31:
2000 1999 1998
--------- --------- ---------
Net income--basic and diluted............................... $ 640 $ 877 $ 1,123
========= ========= =========
Weighted-average shares outstanding......................... 3,185,186 3,166,813 3,158,071
Dilutive securities--options and warrants................... -- 181,755 371,758
--------- --------- ---------
Adjusted weighted-average shares outstanding--dilutive...... 3,185,186 3,348,568 3,529,829
========= ========= =========
(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
56
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.
The Company and the Bank have agreed with the Federal Reserve Bank of
Richmond, the FDIC, and the State Banking Commissioner to submit plans to
improve earnings and maintain capital levels commensurate with the growth plans
of the Company and the Bank. The Company will comply with the Federal Reserve
Policy dated November 14, 1985 concerning the payment of cash dividends and will
not incur additional debt at the holding company level without Federal Reserve
approval. Management believes that these agreements do not restrict or impede
the Bank's ability to conduct normal banking and business transactions.
Management is committed to complying with the provisions of the agreement.
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, 2000, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 2000 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, 2000 and 1999, were:
MINIMUM TO BE WELL
REQUIREMENTS FOR CAPITALIZED UNDER
CAPITAL ADEQUACY PROMPT CORRECTIVE
PURPOSES ACTION PROVISION
ACTUAL ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
AS OF DECEMBER 31, 2000
Total capital (to risk weighted assets):
Consolidated............................... $56,822 12.3% 36,879 8.0% 46,099 10.0%
The Bank................................... 45,783 10.2% 35,812 8.0% 44,765 10.0%
Tier 1 capital (to risk weighted assets):
Consolidated............................... 41,375 9.0% 18,439 4.0% 27,659 6.0%
The Bank................................... 41,442 9.3% 17,906 4.0% 26,859 6.0%
Tier 1 capital (to average assets):
Consolidated............................... 41,375 6.0% 27,402 4.0% 34,253 5.0%
The Bank................................... 41,442 6.1% 27,109 4.0% 33,886 5.0%
AS OF DECEMBER 31, 1999
Total capital (to risk weighted assets):
Consolidated............................... $53,494 14.6% 29,227 8.0% 36,534 10.0%
The Bank................................... 43,451 12.1% 28,687 8.0% 35,859 10.0%
Tier 1 capital (to risk weighted risk):
Consolidated............................... 38,296 10.5% 14,613 4.0% 21,920 6.0%
The Bank................................... 40,129 11.2% 14,344 4.0% 21,515 6.0%
Tier 1 capital (to average assets):
Consolidated............................... 38,296 6.4% 24,046 4.0% 30,057 5.0%
The Bank................................... 40,129 6.6% 24,429 4.0% 30,537 5.0%
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
57
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.
(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, 2000 and 1999.
The carrying value and estimated fair value of financial instruments is
summarized as follows (in thousands):
2000 1999
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
Assets:
Cash and interest-bearing deposits................... $25,439 25,439 43,836 43,836
Investment securities................................ 156,735 156,735 191,895 191,895
Loans held for sale.................................. 35,821 35,821 26,299 26,299
Loans receivable..................................... 429,998 433,814 326,206 331,067
Liabilities:
Deposit accounts..................................... 476,882 477,396 368,751 366,931
Borrowings........................................... 99,166 100,418 109,739 109,503
Repurchase agreements................................ 48,399 48,398 77,185 77,209
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
debentures of the company.......................... 21,450 16,673 21,450 20,808
Off balance sheet instruments:
Interest Rate Cap.................................... 106 4 -- --
Commitments to extend credit......................... -- -- -- --
Loans sold with recourse............................. -- -- -- --
Unused lines of credit............................... -- -- -- --
(a) CASH AND INTEREST-BEARING DEPOSITS
The carrying amount for cash and interest-bearing deposits approximates fair
value due to the short maturity of these instruments.
(b) 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.
(c) 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.
58
(d) 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 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.
(e) BORROWINGS AND REPURCHASE AGREEMENTS
Borrowings and repurchase agreements were segmented into categories with
similar financial characteristics. Fair values were discounted using a cash flow
approach based on market rates as of December 31, 2000.
(f) 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. It is impractical to assign
fair values to these instruments.
The disclosure of fair value amounts does not include the fair values of any
intangibles, including core deposit intangibles. Core deposit intangibles
represent the value attributable to total deposits based on an expected duration
of customer relationships.
The disclosure of fair value for interest rate caps is based on dealer
quotations and is based on prices currently offered on interest rate caps with
similar maturities and terms.
(g) 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
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.
59
The following table (in thousands) presents certain information regarding
these business segments:
2000 1999 1998
------------------- ------------------- -------------------
Total revenue:
Commercial and consumer
banking...................... $ 25,322(1) $ 21,804(1) $ 15,420(1)
Mortgage banking............... 5,369 4,498 2,761
Less related party
transactions................. 748(3) 1,387(3) 564(3)
----- ----- -----
4,621(2) 3,111(2) 2,197(2)
-------- -------- --------
Consolidated revenue............. $ 29,943 $ 24,915 $ 17,617
======== ======== ========
Income before income taxes
Commercial and consumer
banking...................... $ 1,639(1) $ 2,749(1) $ 206(1)
Mortgage banking............... 149 25 518
Less related party
transactions................. 748(3) 1,387(3) 564(3)
----- ----- -----
(599)(2) (1,362)(2) (46)(2)
-------- -------- --------
Consolidated income before income
taxes.......................... $ 1,040 $ 1,387 $ 160
======== ======== ========
Identifiable assets
Commercial and consumer
banking...................... $652,580 $600,872 $473,441
Mortgage banking............... 24,869 15,200 24,046
======== ======== ========
Consolidated total assets........ $677,449 $616,072 $497,487
======== ======== ========
- ------------------------
(1) Includes net interest income of $20,838, $17,283 and $11,801 for 2000, 1999
and 1998 respectively.
(2) Includes net interest income of $1,757, $368 and $221 for 2000, 1999 and
1998 respectively.
(3) Management's policy for the mortgage banking segment is to recognize a gain
for loans sold to the Bank at market prices determined on an individual loan
basis.
(17) COMPREHENSIVE INCOME
The Company's components of comprehensive income are as follows (in
thousands) for the years ended December 31:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net income.................................................. $ 640 $ 877 $1,123
------ ------- ------
Other comprehensive income items:
Unrealized holding gains (losses) arising during the
period (net of tax (benefit) of $2,452, $(2,978), and
$335, respectively)..................................... 3,897 (7,164) 596
Less: reclassification adjustment for gains (net of taxes
of $139, $93 and $266, respectively) included in net
income.................................................. 220 148 472
------ ------- ------
Total other comprehensive income (loss)..................... 3,677 (7,312) 124
------ ------- ------
Total comprehensive income (loss)........................... $4,317 $(6,435) $1,247
====== ======= ======
60
(18) QUARTERLY RESULTS OF OPERATIONS
The following is a summary of unaudited quarterly results of operations:
2000
-----------------------------------------
12/31 9/30 6/30 3/31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- --------
Three months ended:
Total interest income................................... $14,013 $13,446 $12,453 $11,466
Total interest expense.................................. 8,264 8,224 7,436 6,616
------- ------- ------- -------
Net interest income..................................... 5,749 5,222 5,017 4,850
------- ------- ------- -------
Provision for loan losses............................... 425 300 300 80
Gain on sale of securities.............................. 119 116 115 9
Other operating income.................................. 2,645 2,255 2,220 1,626
Operating expenses...................................... 7,733 6,998 6,745 6,322
------- ------- ------- -------
Income before taxes..................................... 355 295 307 83
Income tax expense...................................... 136 114 118 32
------- ------- ------- -------
Net income.............................................. $ 219 $ 181 $ 189 $ 51
======= ======= ======= =======
Net income per common share (Basic)..................... $ 0.07 $ 0.06 $ 0.06 $ 0.01
Net income per common share (Diluted)................... 0.07 0.06 0.06 0.01
1999
-----------------------------------------
12/31 9/30 6/30 3/31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- --------
Three months ended:
Total interest income................................... $11,106 $10,510 $ 9,826 $ 9,031
Total interest expense.................................. 6,389 5,868 5,432 5,133
------- ------- ------- -------
Net interest income..................................... 4,717 4,642 4,394 3,898
------- ------- ------- -------
Provision for loan losses............................... 130 205 230 220
Gain (loss) on sale of securities....................... 39 118 86 (2)
Other operating income.................................. 1,953 1,943 1,632 1,495
Operating expenses...................................... 6,322 6,089 5,489 4,843
------- ------- ------- -------
Income before taxes..................................... 257 409 393 328
Income tax expense...................................... 74 158 151 127
------- ------- ------- -------
Net income.............................................. $ 183 $ 251 $ 242 $ 201
======= ======= ======= =======
Net income per common share (Basic)..................... $ 0.06 $ 0.08 $ 0.08 $ 0.06
Net income per common share (Diluted)................... 0.06 0.07 0.07 0.06
61
(19) FINANCIAL INFORMATION OF PARENT COMPANY
The following is financial information of First Mariner Bancorp (parent
company only):
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Assets:
Interest bearing deposits................................. $ 4,156 2,254
Loans..................................................... 3,150 4,810
Available-for-sale securities, at fair value.............. 2,582 2,439
Investment in subsidiaries................................ 38,376 32,342
Other assets.............................................. 1,354 1,959
------- ------
Total assets.............................................. $49,618 43,804
======= ======
Liabilities and Stockholders' Equity:
Other liabilities......................................... $ 319 491
Company-obligated manditorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the Company.......................................... 21,450 21,450
Stockholders' equity...................................... 27,849 21,863
------- ------
Total liabilities and stockholders' equity................ $49,618 43,804
======= ======
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Income:
Interest income on investments and interest bearing
deposits................................................ $ 310 532 497
Interest income on loans.................................. 402 351 74
Gain on sale of securities................................ 119 182 690
Other income.............................................. 422 75 208
----- ------ -----
Total income............................................ 1,253 1,140 1,469
----- ------ -----
Expenses:
Interest expense.......................................... 1,880 1,881 940
Salaries and employee benefits............................ -- 486 837
Amortization of organizational expenses................... -- -- 12
Professional expenses..................................... 161 65 312
Other expenses............................................ 208 247 222
----- ------ -----
Total expenses.......................................... 2,249 2,679 2,323
----- ------ -----
Loss before income tax benefit.......................... (996) (1,539) (854)
Income tax benefit.......................................... (339) (602) (963)
----- ------ -----
(Loss) income before equity in undistributed net income
of the subsidiaries................................... (657) (937) 109
Equity in undistributed net income of subsidiaries.......... 1,297 1,814 1,014
----- ------ -----
Net income.............................................. $ 640 877 1,123
===== ====== =====
62
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
(Loss) income before undistributed net income of
subsidiaries............................................ $ (657) (937) 109
Depreciation and amortization............................. -- -- 12
Gain on sale of securities................................ (119) (182) (690)
Decrease (increase) in other assets....................... 3,563 (5,621) (2,467)
(Decrease) increase in other liabilities.................. (172) (911) 833
------- ------ -------
Net cash provided by (used in) operating activities..... 2,615 (7,651) (2,203)
------- ------ -------
Cash flows from investing activities:
Investment in subsidiaries................................ (4,737) 2,702 (13,927)
Loan repayments (disbursements), net...................... 1,660 (1,850) (2,960)
Purchase of available for sale securities................. (76) (1,478) (8,050)
Sale of available for sale securities..................... 771 1,838 7,131
------- ------ -------
Net cash (provided by) used in investing activities..... (2,382) 1,212 (17,806)
------- ------ -------
Cash flows from financing activities:
Proceeds from stock issuance, net......................... 1,732 -- 275
Proceeds from trust preferred securities offering......... -- -- 21,450
Dividends paid............................................ (63) (190) --
------- ------ -------
Net cash provided by (used in) financing activities..... 1,669 (190) 21,725
------- ------ -------
Net increase (decrease) in cash and cash equivalents.... 1,902 (6,629) 1,716
Cash and cash equivalents at beginning of year.............. 2,254 8,883 7,167
------- ------ -------
Cash and cash equivalents at end of year.................... $ 4,156 2,254 8,883
======= ====== =======
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
The Board of Directors of the Company approved the change in accountants
from its previous independent public accountant, KPMG LLP ("KPMG"), to
Stegman & Company, effective July 18, 2000.
The Company believes that for the two fiscal years ended December 31, 1999
and the subsequent interim period through July 18, the Company and KPMG did not
have any disagreement on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of KPMG, would have caused it
to make reference in connection with its report on the Company's financial
statements to the subject matter of the disagreement.
The report of KPMG on the Company's financial statements for the years ended
December 31, 1998 and December 31, 1999, did not contain an adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During that period, there were no
"reportable events" within the meaning if Item 304(a)(1)(v) of Regulation S-K
promulgated under the Securities Act of 1933.
63
The Company requsted that KPMG furnish a letter addressed to the Securities
and Exchange Commssion stating whether KPMG agrees with the above statements.
On July 25, 2000 KPMG filed the letter requested by the Company with the
Securities and Exchange Commission stating that it had read the Company's
statements and agree with such statements, except to the extent that KPMG was
not in a position to agree or disagree with the Company's statement that the
change was approved by the Board of Directors and the Audit Committee.
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 1, 2001, 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 1 2000, 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 certain directors, 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 1, 2001, which proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the fiscal year.
ITEM 13 CERTAIN RELATIONSHIPS 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 1, 2001, 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' Reports
Consolidated Statements of Financial Condition as of December 31, 2000 and
1999
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, 1999
and 1998
Consolidated Statements of Cash flows for the years ended December 31, 2000,
1999 and 1998
64
Notes to Consolidated Financial Statements for the years ended December 31,
2000, 1999 and 1998
(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
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 10.3 of the 1996 Registration Statement)
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)
21 Subsidiaries of Registrant filed herewith
23 Consent of Stegman & Company and KPMG, LLP filed herewith
99 Risk Factors filed herewith.
(b) Reports on Form 8-K
None
(c) Exhibits required by Item 601 of Regulation S-K
See the Exhibits described in Item 14(a) (3) above.
65
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: 3/30/2001 By: /s/ EDWIN F. HALE SR.
-----------------------------------------
Edwin F. Hale Sr.
Chairman and Chief Executive Officer
Date: 3/30/2001 By: /s/ MARK A. KEIDEL
-----------------------------------------
Mark A. Keidel
Chief Financial 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 20th day of March, 2001
/s/ BONDROFF, BARRY B. /s/ MANTAKOS, GEORGE H.
- ------------------------------------ --------------------------------------
Bondroff, Barry B. Mantakos, George H.
/s/ BROWN, EDITH B. /s/ MATRICCIANI, JAY J.
- ------------------------------------ --------------------------------------
Brown, Edith B. Matricciani, Jay J.
/s/ CERNACK, ROSE M. /s/ O'CONOR, JAMES P.
- ------------------------------------ --------------------------------------
Cernack, Rose M. O'Conor, James P.
/s/ CICERO, JOSEPH A. /s/ SCHMOKE, PATRICIA
- ------------------------------------ --------------------------------------
Cicero, Joseph A. Schmoke, Patricia
/s/ FRIEDMAN, HOWARD /s/ SIBEL, HANAN Y.
- ------------------------------------ --------------------------------------
Friedman, Howard Sibel, Hanan Y.
/s/ HALE, EDWIN F. SR. /s/ STOLER, LEONARD
- ------------------------------------ --------------------------------------
Hale, Edwin F. Sr. Stoler, Leonard
/s/ HOFFMAN, BRUCE H. /s/ WATSON, MICHAEL R.
- ------------------------------------ --------------------------------------
Hoffman, Bruce H. Watson, Michael R.
/s/ LYNCH, MICHAEL J.
- ------------------------------------
Lynch, Michael J.
66