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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001.

or

For the transition period from                             

Commission file number 0-21815

FIRST MARINER BANCORP
(Exact name of registrant as specified in its charter)

410-342-2600
(Telephone number)

Securities registered under Section 12(b) of the Exchange Act: NONE

Securities registered under Section 12 (g) of the Exchange Act:

COMMON STOCK, par value $0.05 per share

(Title of Class)

        Check 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 ý    No o

        Check 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. o

        The aggregate market value of the voting stock held by non-affiliates of the registrant as March 26, 2002 was $52,996,238.

        The number of shares of common stock outstanding as of March 26, 2002 is 5,374,872 shares.

        Documents incorporated by reference:

        Proxy Statement—Part III

FIRST MARINER BANCORP

Annual Report on Form 10-K
December 31, 2001

TABLE OF CONTENTS

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FORWARD-LOOKING STATEMENTS

        Part I and Part II of this Annual Report on Form 10-K may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of "forward-looking statements." Statements that are not historical in nature, including the words "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions, are based on current expectations, estimates and projections about (among other things) the industry and the markets in which the Company operates, they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this From 10-k, general economic, market or business conditions; changes in interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; changes in our competitive position or competitive actions by other companies; changes in the quality or composition of loan and investment portfolios; the ability to mange growth; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond the Company's control. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on the Company's business or operations. Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

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PART I

ITEM 1    BUSINESS

General

        First Mariner Bancorp (the "Company") is a bank holding company whose business is conducted primarily through its wholly-owned subsidiary, First Mariner Bank ("the Bank"). The Bank, which was formed in 1995 through mergers of several local financial institutions, serves central Maryland, portions of Maryland's Eastern Shore and portions of Virginia. The Bank is headquartered in Baltimore City. On January 1, 2002, the Bank consolidated the operations of its wholly-owned subsidiary, First Mariner Mortgage Corporation into a newly formed operating division of the Bank titled First Mariner Mortgage.

        The Bank, whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") is an independent community bank engaged in the general commercial banking business, with particular attention and emphasis on the needs of individuals and small to mid-sized businesses. The Bank delivers a wide range of financial products and services that are offered by many larger competitors. Products and services include traditional deposit products, a variety of consumer and commercial loans, residential and commercial mortgage and construction loans, money transfer services, non-deposit investment products, and Internet banking and similar services. Most importantly, the Bank provides customers with access to local Bank officers who are empowered to act with flexibility to meet customers' needs in an effort to foster and develop long-term loan and deposit relationships.

        Since the Company's formation in 1995, the business strategy has focused on development of an operational and retail distribution infrastructure to create a platform to support the generation of assets and deposits. At its inception the Bank had 20 employees, four full service branches and two ATM's in the Baltimore region, with total assets of $35.2 million, loans of $20.4 million, and deposits of $24.6 million. Since that time, assets have grown at an average compound annual growth rate of 50%. At December 31, 2001, the Company had 483 employees, 24 full service branches, and approximately 170 ATMS (29 owned) and 141 available to customers through third party agreements) ATM's, with total assets of $777.9 million, loans of $468.9 million and deposits of $600.6 million. Net income for the period ending December 31, 2001 was $2.3 million.

        The Company's executive offices are located at 1801 South Clinton Street, Baltimore, Maryland 21224 and its telephone number is (410) 342-2600.

Business Strategy

        The Company's initial strategy involved building a network of banking branches and ATMs to capture market share and build a community franchise for stockholders, customers and employees. Having developed this infrastructure, the focus is now on growing assets and earnings by capitalizing on the broad network of Bank branches, mortgage offices, and ATMs that were established during the infrastructure expansion phase. The Company believes its current strategy to grow assets and increase profitability will not require substantial expansion of the existing infrastructure.

        To continue asset growth and profitability, the Company's marketing strategy is targeted to:

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Capitalize on a personal relationship approach that the Company believes differentiates itself from its larger competitors;



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Provide customers with access to local executives who make key credit and other decisions;



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Pursue commercial lending opportunities with small to mid-sized businesses that are underserved by larger competitors;



•

Develop innovative financial products and services to generate additional sources of revenue;

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•

Cross-sell products and services to existing customers to leverage relationships and enhance profitability;



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Review branch performance from time to time to evaluate possible consolidations that may increase efficiency; and



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Adhere to rigorous credit standards to maintain the continued quality of assets as the Company implements its growth strategy.

Banking Services

        Commercial Banking.    The Bank focuses its commercial loan originations on small and mid-sized business (generally up to $20.0 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. In addition to traditional products and services, the Bank offers contemporary products and services, such as debit cards, mutual funds and annuities, and Internet banking and electronic bill payment services. Consumer loan products offered by the Bank include home equity lines of credit, fixed rate second mortgages, new and used auto loans, new and used boat loans, overdraft protection, unsecured personal credit lines and the debit card.

        Mortgage Banking.    The Bank's mortgage banking business is structured to provide a source of fee income largely from the process of originating product for sale on the secondary market, as well as the origination of loans to be held in the Bank's loan portfolio. Mortgage banking capabilities include the Federal Housing Administration ("FHA") and/or the federal Veterans Administration ("VA"); 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 federal Community Reinvestment Act (the "CRA") and actively searches for opportunities to meet the development needs of all members of the community it serves, including persons of low to moderate income in a manner consistent with safe and sound banking practices. The Bank currently fulfills this commitment by participating in loan programs sponsored or guaranteed by the United States Small Business Administration, the FHA, the VA, the federal Community Development Act, the Maryland Industrial Development Financing Authority, and the Settlement Expense Loan Program.

Lending Activities

        Loan Portfolio Composition.    At December 31, 2001, the Bank's loan portfolio totaled $468.7 million, representing approximately 60.3% of its total assets of $777.9 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2001 for more detailed information concerning the composition of the loan portfolio.

        Commercial Loans.    The Bank originates secured and unsecured loans for business purposes. Less than one percent of 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,

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inventory, equipment or other assets. The financial condition and cash flow of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns. The frequency of submissions of required financial information depends on the size and complexity of the credit and the collateral which secures the loan. It is the Bank's general policy to obtain personal guarantees from the principals of the commercial loan borrowers.

        Real Estate Development and Construction Loans.    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 that provide interim financing on the property are generally made for 80% or less of the appraised value of the property. Real estate development and construction loan funds are disbursed periodically at pre-specified stages of completion. Interest rates on these loans are generally adjustable. The Bank carefully monitors these loans with on-site inspections and control of disbursements.

        Loans to individuals for the construction of their primary residences are typically secured by the property under construction, they frequently include additional collateral (such as second mortgage on the borrower's present home), and commonly have maturities of nine to 12 months.

        Loans to residential builders are for the construction of residential homes for which a binding sales contract exists and the prospective buyers have been pre-qualified for permanent mortgage financing. Development loans are made only to developers with a proven track record. Generally, these loans are extended only when the borrower provides evidence that the lots under development will be sold to builders satisfactory to the Bank.

        Development and construction loans are secured by the properties under development or construction and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely in the value of the underlying property, the Bank considers the financial condition and reputation of the borrower and any guarantors, the amount of the borrowers equity in the project, independent appraisals, costs estimates and pre-construction sale information.

        See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2001 for more detailed information concerning real estate development and construction lending.

        Residential Real Estate Mortgage Loans.    The Bank's mortgage division 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 terms 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.

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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. The loan committee of the board of directors is authorized to approve loans up to the Bank's legal lending limit, which currently approximates $9.1 million as of December 31, 2001. The Bank has established an in-house limit of $3.0 million, which is reviewed periodically by the board of directors. The loan committee will approve loans in excess of the 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 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

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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 Regulations

        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 which affect the regulation of bank holding companies and banks. The discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in such laws and regulations may have a material effect on the business and prospects of the Company and the Bank.

        Federal Bank Holding Company Regulation and Structure.    The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and as such, it is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System. The Company is required to file annual and quarterly reports with the Federal Reserve and to provide the Federal Reserve with such additional information as the Federal Reserve may require. 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

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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 obtain approval from the Maryland Commissioner of Financial Regulation. Also, a bank holding company and its Maryland 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 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 which a financial institution may charge on a particular loan depends on a variety of factors such as the type of borrower, the purpose of the loan, the amount of the loan and the date the loan is made. Other laws tie the maximum amount which may be loaned to any one customer and the related interest to a financial institution's 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 evaluate the record of the financial institution in meeting the credit needs of their communities including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of its most recent examination report, the Bank has a CRA rating of "Satisfactory."

        Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("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

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documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution which fails to meet those standards may be required by the agency to develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The Company, on behalf of the Bank, believes that it meets substantially all standards which have been adopted. FDICIA also imposed new capital standards on insured depository institutions.

        Before establishing new branch offices, the Bank must meet certain minimum capital stock and surplus requirements. With each new branch located outside the municipal area of the Bank's principal banking office, these minimal levels increase by $120,000 to $900,000, based on the population size of the municipal area in which the branch will be located. Prior to establishment of the branch, the Bank must obtain 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.

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% 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.

        This recapitalization has lowered the semiannual 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.

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 uninsured 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 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

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capital stock, cash dividends may not be paid in excess of 90% of net earnings. 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.

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 arrangements 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, 2001, the Bank's ratio of Tier 1 to risk-weighted assets stood at 10.0% and its ratio of total capital to risk-weighted assets stood at 11.0%. In addition to risk-based capital banks and bank holding companies are required to maintain a minimum amount of Tier 1 capital to fourth quarter average assets, referred to as the leverage capital ratio, of at least 4%. At December 31, 2001, the Bank's leverage capital ratio stood at 7.4%.

        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.

        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

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to grow and could restrict the amount of profits, if any, available for the payment of dividends to the Company.

Federal Deposit Insurance Corporation Improvement Act of 1991

        In December, 1991, Congress enacted 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.

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

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of the enactment of the Riegle-Neal and prior to June 1, 1997. These laws must apply equally to all-out-of-state banks and expressly prohibit merger transactions involving out-of-state banks. Riegle-Neal also permits interstate branch acquisitions if the laws of the state where the branch is located permits interstate branch acquisitions. The interstate merger and branch acquisitions permitted by Riegle-Neal are subject to nationwide and statewide insured deposit limitations as described in Riegle-Neal.

        Riegle-Neal also authorizes the federal banking agencies to approve de novo interstate branching by national and state banks in states which specifically allow for such branching. To the Company's knowledge, 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

        Effective in pertinent part on March 11, 2000, the federal Gramm-Leach-Bliley Act ("GLBA") revises the federal Bank Holding Company Act of 1956 and repeals the affiliation provisions of the federal Glass-Steagall Act of 1933, which, taken together, limited the securities, insurance, and other non-banking activities of any company that controls a FDIC insured 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, real estate development, and, with certain exceptions, merchant banking activities, with new expedited notice procedures. GLBA also permits certain qualified national banks to form "financial subsidiaries," which have broad authority to engage in all financial activities except insurance underwriting, insurance investments, real estate investment or development, and merchant banking, and expands the potential activities of subsidiaries of state banks, subject to applicable state law. The range of activities in which bank holding companies and their subsidiaries may engage is not as broad, and GLBA may increase the competition the Company encounters.

Regulatory Agreements

        The Company and the Bank had previously been operating under agreements ("Memoranda of Understanding") with the Maryland Commissioner of Financial Regulation, the FDIC, and the Federal Reserve Bank of Richmond to improve operating earnings and internal controls, to review and analyze the Company's growth strategy and access to capital, and monitor transactions with affiliates. Based upon the most recent examination completed in 2002 by all of those regulators, the Company and the Bank have complied with the provisions of these agreements and the agreements have been terminated.

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 lease approximately 40,000 square feet of space at this location. 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 $232,000 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.

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        The Bank has branches at the following locations:*

14

        The Bank has mortgage offices at the following locations:

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 six years.

        Joseph A. Cicero has been the President of the Company and Chief Operating Officer of the Bank for the preceding six years.

        George H. Mantakos has been Executive Vice President of the Company, and the President of First Mariner Bank for the preceding six 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 preceding five years.

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PART II

ITEM 5    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS

Market for Common Stock

        The Company's common stock trades on The Nasdaq National Market under the symbol "FMAR." The table below sets forth for the periods indicated the low and high market prices of the Company's common stock as reported on The Nasdaq National Market. These over-the-counter market quotations reflect inter-dealer prices and do not include retail mark-up, mark-down or commissions, and they may not necessarily represent actual transactions.

        The Company paid a cash dividend totaling 2 cents per share in the first quarter of 2000. The Board of Directors discontinued the payment of any further cash dividends to conserve cash and capital resources.

ITEM 6    SELECTED FINANCIAL DATA

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ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

About First Mariner Bancorp

        First Mariner Bancorp (the "Company") is a bank holding company incorporated under the laws of Maryland and registered under the federal 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, the Company's strategy has involved building a network of banking branches and ATMs to capture market share and build a community franchise for stockholders, customers and employees. The Company is focusing on growing assets and earnings by capitalizing on the broad network of Bank branches, mortgage offices, and ATMs established during its infrastructure expansion phase.

        Through its banking subsidiary, First Mariner Bank (the "Bank"), the Company offers consumer and commercial banking and real estate lending services primarily throughout central Maryland and parts of its Eastern Shore and in portions of Virginia.

        The following discussion compares the financial condition of the Company at December 31, 2001 to the financial condition at December 31, 2000 and results of operations for the years ended December 31, 2001, 2000 and 1999. This discussion should be read in conjunction with the accompanying financial statements and related notes as well as statistical information included in this report.

Performance Overview

        The Bank continued to achieve significant growth in loans and deposits while producing a record profit in 2001. The Company substantially completed the development of its infrastructure and slowed the rate of new branch growth in 2001, which reduced the growth rate of expenses and resulted in higher levels of earnings and improved productivity and efficiency measures.

        The Company recorded net income of $2,304,000 for 2001 compared to $640,000 for 2000, an increase of 260% marking the highest net income for any year since the Company's formation. Diluted earnings per share were also the highest in Company history, totaling $.57 per share for 2001, an increase of 185% from $.20 per diluted share in 2000. The growth in net income and earnings per share resulted as gross revenue increased $6,672,000 or 22% while non interest expenses, the provision for loan losses, and income tax expense increased by $5,008,000 or 17%.

        The largest category of revenue, net interest income grew $4,804,000 or 23.1% due to growth in average earning assets of 8.8% and an increase in the net interest margin to 3.83% for 2001 from 3.39% in 2000. The increase in the net interest margin resulted from lower deposit and borrowing costs, and a higher proportion of lower cost deposits funding the earning asset base. Non interest income increased $1,868,000, or 20.5% due to higher levels of mortgage banking revenue, increased commissions earned on the sales of non-deposit investment products, and growth in deposit service charges and ATM fees. Gains realized on the sale of investment securities decreased $323,000. Core non interest income (excluding gains on sales of investment securities) increased 25.1% and comprised 29.9% of total revenue compared to 29.2% in 2000.

        The increase in total expenses resulted from higher non interest expenses of $3,498,000, an increase in the provision for loan losses of $520,000 and higher income tax expense totaling $990,000. Non interest expense growth was primarily the result of higher salaries and benefit costs, and increased occupancy and equipment expenses to support the Company's growth. The Company's efficiency ratio improved to 85.6% for 2001 from 94.0% for 2000. The increase in the provision for loan losses reflects the growth in loans, higher levels of net charge offs, and an increase in the allowance for credit losses to 1.18% of total loans as of December 31, 2001 from 1.01% as of December 31, 2000. Income tax

17

expense increased due to an increase of $2,654,000 in net income before taxes. The effective tax rate for the Company was 37.6% for 2001 compared to 38.5% for 2000.

        Total assets increased by $100,416,000 or 14.8%, reflecting significant increases in loans and deposits. Loans outstanding increased by $38,667,000 or 9.0%, while deposits grew by $123,706,000 or 25.9%. 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. Since First Mariner's inception in 1995, total assets, loans, and deposits have increased at an average annual compound growth rate of 50.0%, 50.8%, and 52.0% respectively. Stockholders' equity increased $16,159,000 or 58.0% reflecting improvements in the market value of the Company's available-for-sale securities portfolio as well as $11,476,000 from a successful common stock offering completed in the fourth quarter of 2001, and shares issued under the Company's employee stock purchase plan of $200,000.

        Asset quality was favorable in 2001. The ratio of nonperforming assets to total assets decreased to .56% at December 31, 2001 from 1.00% at December 31, 2000. The allowance for loan losses was increased to $5,524,000 and totaled 127.4% of nonperforming assets as of December 31, 2001 compared to 64.0% as of December 31, 2000. The ratio of net chargeoff to average total loans was .10% in 2001, compared to .02% in 2000.

        Capital adequacy levels improved in 2001, primarily due the additional capital raised in the fourth quarter of 2001. December 31, 2001 ratios for capital leverage, tier 1 capital to risk weighted assets, and total capital to risk weighted assets were 8.0%, 10.7%, and 12.9%, respectively. These ratio's improved from 6.0%, 9.0%, and 12.3%, respectively, at December 31, 2000 and continue to exceed the levels which qualify for "Well Capitalized" status under current regulatory guidelines.

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 $25,642,000 for 2001, a 23.1% increase from the net interest income of $20,838,000 earned for 2000. The increase was attributable to growth in average earning assets, which increased by $54,222,000 or 8.8% and an increase in the spreads realized between earning assets and interest bearing liabilities. Average loans and loans held for sale increased by 23.8% to $513,474,000 and average investments and other earning assets decreased by 22.2% to $156,339,000. The increase in average loans reflects the Company's expansion of its commercial and real estate lending activities among middle market borrowers in the Baltimore Metropolitan area, the growth of the Bank's mortgage banking activities, and the continued emphasis on consumer lending. The decrease in average investments and other earning assets was primarily the result of principal repayments in the Bank's mortgage-backed securities portfolio. Average earning asset growth was funded by an increase in average deposits of $90,406,000 or 21.3%. The increase in average deposits was due to the continued success of sales efforts in the Company's retail banking and commercial banking divisions, and the popularity of the Bank's "Money Market Maximizer" and "Flex CD" products. Average other borrowed funds decreased by $43,770,000 or 21.7%, as the Company repaid a significant portion of outstanding borrowings as deposit growth was more than sufficient to fund earning asset growth.

        For 2001, interest income on loans grew to $43,389,000, which represents an increase of $6,508,000 or 17.6% from $36,881,000 for 2000. While average balances on loans increased by $98,709,000 or 23.8%, yields decreased 44 basis points to 8.45%, as the Federal Reserve aggressively reduced market interest rates throughout 2001. Interest income on investment securities and other earning assets decreased $4,856,000 or 33.5% to $9,641,000 from $14,497,000. Average balances decreased on

18

investments and other earning assets by 22.2%, and yields on short-term investments decreased by 105 basis points which contributed to the decline in interest income. Interest expense on deposits increased to $18,384,000 in 2001, an increase of $196,000 or 1.1% from $18,188,000 for 2000. Growth in average interest bearing deposits of 20.5% was mostly offset by a decline in the average rates paid on deposits of 80 basis points. Interest expense on borrowings declined $3,348,000 to $9,004,000 for 2001, a decrease of 27.1% from $12,352,000 for 2000. The decline in average balances of 21.7%, as well as a decrease in the average rates paid on borrowings of 43 basis points contributed to the reduction.

        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 3.83% for the year ended December 31, 2001 as compared to 3.39% for 2000. Yields on average total earning assets decreased by 43 basis points, while the cost of interest bearing deposits decreased by 80 basis points and the cost of other borrowings decreased by 43 basis points. A higher mix of loans as a percentage of earning assets and higher proportion of deposit accounts as a percentage of funding contributed to the increase in the net interest margin.

        "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.

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Comparative Average Balances(1) Yields and Rates

(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.

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(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.

        "Rate/Volume Analysis" 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.

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Rate/Volume Analysis

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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, 2001 was $10,973,000, as compared to $9,105,000 for the year ended December 31, 2000, an increase of $1,868,000 or 20.5%. Core non interest income (excluding gains on sales of investment securities) increased 25.1%.

        Gains on sales of loans increased by $336,000 or 21.3% from the year ended December 31, 2000. Total originations of mortgage loans increased 95%, and resulted in more loans sold into the secondary market than during the prior year. The increase in mortgage loan origination was the result of successful sales efforts, an increase in the number of mortgage loan offices and lower interest rates. Refinance activity accounted for just under 25% of the total mortgage loan origination activity for 2001. Other mortgage banking income increased by $405,000 or 25.5%. Origination related income increased by $633,000, while mortgage servicing revenue decreased by $228,000. Service fees on deposits increased by $587,000 or 16.8% as the Company increased the number of demand deposit accounts by 4,985 or 20.2%. Pricing on most deposit accounts remained unchanged throughout 2001. ATM fees increased by $178,000 or 12.2% due to increased transaction volume, higher transaction fee pricing for non customers, and added ATM locations. Net gains of $36,000 were realized on the sale of investment securities in 2001, compared to net gains of $359,000 for 2000. Other increases in non interest income included higher commissions earned on the sale of investment products of $500,000, and increased revenue from sales and issuances of official checks of $233,000. The increase in income generated from the sales of investment products resulted from more focused sales training and marketing efforts, while increases in official check income resulted from improved pricing negotiated with the Company's vendor and higher check issuance volume.

Noninterest Expense

        Noninterest expense totaled $31,296,000 for the year ended December 31, 2001, compared to $27,798,000 for 2000, an increase of $3,498,000 or 12.6%. This increase reflects management's continued emphasis on growth through bank branching, mortgage loan office increases, costs associated with the data processing conversion, as well as significant increases in loans, deposits and mortgage banking operational activities. While branch expansion slowed in 2001, 3 new bank branches were opened in 2000 and were included in non interest expenses for the full year of 2001. Five new mortgage offices were opened in 2001.

        Salaries and benefits increased $1,262,000 or 9.4% primarily due to additional staffing resulting from the branch expansion throughout 2000 which was incurred for the full year in 2001, staffing increases to support loan and deposit growth, as well as regular salary increases and higher benefit costs. 2001 occupancy costs grew $575,000 or 14.7% compared to 2000. The increase was due to the additional branches and mortgage offices, as well as costs to terminate leases of two branches (Dundalk

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Mars and Merritt Boulevard branches) that totaled $300,000. Excluding the cost associated with the lease terminations, occupancy expenses increased by $275,000 or 7.0%. Furniture, fixtures and equipment expense increased for the year ended 2001 by $426,000 or 25.6% due to the addition of new branches and mortgage offices, and due to increases in technology costs from the data processing conversion which occurred in November 2000, and is included for the full year of 2001.

        Professional services increased by $257,000 or 42.8% primarily as a result of increased legal fees associated with growth in lending activities. Advertising expenses grew by 1.7% and totaled $1,079,000 as the Company maintained most of its advertising campaigns from the prior year. Data processing expenses declined $58,000 as certain non-recurring expenses related to the systems conversion were incurred in 2000. All other non interest expenses increased $1,018,000 due to higher costs associated with Other Real Estate Owned of $377,000, deposit insurance increases of $251,000, increased bank security expenses of $138,000 and higher expenses for printing and office supplies of $100,000.

Noninterest expense

Income Tax Expenses

        The Company recorded tax expense of $1,390,000 in 2001 for an effective tax rate of 37.6% compared to income tax expense of $400,000 and an effective tax rate of 38.5% for 2000. The effective rate decreased due to higher levels of tax- exempt income.

        The Company has utilized all prior net operating loss carryforwards for federal income tax purposes at December 31, 2001. Net operating loss carryforwards for state income tax purposes approximated $4,800,000 and can 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 $219,000 has been established to reflect this uncertainty.

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Financial Condition

        At December 31, 2001, the Company's total assets were $777,865,000, as compared to $677,449,000 at December 31, 2000, an increase of 14.8%. This increase occurred as the Company continued to benefit from the development of its bank branching and mortgage loan office network, expansion of commercial and retail business development efforts, and successful development and marketing of deposit and loan products. The overall growth in 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, 2001 were $468,665,000, as compared to $429,998,000 on December 31, 2000, which represents an increase of $38,667,000 or 9.0%. Increases were realized in commercial real estate, residential construction, and consumer loans, while residential mortgage loans, commercial construction loans and commercial loans decreased. Loans held for sale increased by $47,455,000 as a result of significant mortgage loan origination volume, particularly in the fourth quarter. Investment securities decreased by $36,882,000 due to increases in principal repayments of mortgage-backed securities. Historically low mortgage interest rates resulted in higher mortgage refinance activity and increased the level of principal reduction in these securities. Interest bearing deposits increased by $32,274,000 due to growth in deposits in excess of loan growth and the increase in loans held for sale.

        Total deposits increased by $123,706,000, an increase of 25.9% from $476,882,000 at December 31, 2000. Borrowings and repurchase agreements decreased by $39,241,000, and reduced overall dependence on borrowed funds to 16.7% of total assets as of December 31, 2001, compared to 24.9% as of December 31, 2000.

Loan Portfolio

        The Company's loan portfolio is expected to produce higher yields than investment securities and other interest-earning assets, the absolute volume and mix of loans and the volume and mix of loans 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.

        The largest increase in the loan portfolio occurred in the Residential Construction—Consumer category, which increased by $43,636,000 and reflected successful marketing and sales efforts, a strong regional economy, and a favorable interest rate environment for this category of loans. The residential construction portfolio consists of loans to individuals for construction of their primary residence, are secured by the property under construction, and frequently include additional collateral such as a second mortgage on the borrower's current home. These loans are generally converted to a permanent first mortgage upon completion of the construction and are underwritten for eventual sale in the secondary market. Commercial real estate loans increased by $43,235,000 again due successful sales

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efforts, as well as a favorable economic and interest rate environment. Residential real estate loans, which consist primarily of 3-year and 5-year adjustable rate mortgages, decreased by $44,275,000. The decrease in this category of loans reflects higher payoffs and lower originations of adjustable rate loans as historically low mortgage interest rates encouraged borrowers to elect fixed rate 15- and 30-year loans. Consumer loans, comprised primarily of second mortgage loans, increased by $3,061,000. Commercial loans decreased by $6,569,000 while commercial construction loans decreased by $421,000.

        Approximately 29.5% of the Bank's loans have adjustable rates as of December 31, 2001 and approximately 30% at December 31, 2000, 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 following table sets forth the maturity distribution, classified according to sensitivity to changes in interest rate, for the Bank's loan portfolio at December 31, 2001. Some of the loans may be renewed or repaid prior to maturity. Therefore, the following table should not be used as a forecast of future cash collections. The scheduled repayments as shown above are reported in the maturity category in which the payment is due.

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Maturity Schedule of Selected Loans

Credit Risk Management

        The Bank attempts to manage the risk characteristics of its loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, the Bank seeks to rely primarily on the cash flow of its borrowers' as the principal source of repayment. Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio as well as general and regional economic conditions.

        The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require special attention.

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        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. "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.

        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 $1,625,000 for loan losses for the year ended December 31, 2001, as compared to $1,105,000 for the year ended December 31, 2000. The higher provision was primarily the result of an increase in the coverage ratio of the allowance for loan losses to total loans to 1.18% as of December 32, 2001 from 1.01% as of December 31, 2000. Management deemed this increase to be prudent to guard against a potential softening and uncertainty in the overall economy.

        As of December 31, 2001 the allowance for loan losses was $5,524,000, as compared with the December 31, 2000 balance of $4,341,000, an increase of $1,183,000 or 27.3%. Net charge-offs of $442,000 and $86,000 were recognized for 2001 and 2000, respectively. Net charge-offs as a percentage of average loans increased from 0.02% for 2000 to 0.10% in 2001.

        The following table, "Allowance for Loan Losses" summarizes the allowance activities.

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Allowance for Loan Losses