UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June 30, 2004.

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                                .

 

Commission file number:  0-21815

 

FIRST MARINER BANCORP

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes  o  No  ý

 

The number of shares of common stock outstanding as of August 2, 2004 is 5,769,018 shares.

 

 

FIRST MARINER BANCORP
INDEX

 

PART I - FINANCIAL INFORMATION
Item 1 -		Financial Statements
		Consolidated Statements of Financial Condition at June 30, 2004 (unaudited) and at December 31, 2003
		Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003 (unaudited)
		Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)
		Notes to Consolidated Financial Statements (unaudited)
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk
Item 4 -	Controls and Procedures
PART II - OTHER INFORMATION
Item 1 -	Legal proceedings
Item 2 -	Changes in securities, use of proceeds and issuer purchases of equity securities
Item 3 -	Defaults upon senior securities
Item 4 -	Submission of matters to a vote of security holders
Item 5 -	Other information
Item 6 -	Exhibits and reports on Form 8-K
Signatures

 

2

 

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Financial Condition

 

(Dollars in thousands, except per share data)		June 30, 2004			December 31, 2003
		(unaudited)
ASSETS
Cash and due from banks		$	33,645		$	26,574
Federal funds sold and Interest-bearing deposits		31,158			20,105
Available-for-sale securities, at fair value		336,162			288,437
Loans held for sale		48,158			59,055
Loans receivable		633,539			609,847
Allowance for loan losses		(9,020		)	(8,692		)
Loans, net		624,519			601,155
Other real estate owned		92			296
Restricted stock investments		7,015			7,265
Property and equipment, net		17,458			18,001
Accrued interest receivable		5,651			4,955
Deferred income taxes		4,942			2,619
Bank owned life insurance		25,780			15,266
Prepaid expenses and other assets		10,381			14,125
Total assets		$	1,144,961		$	1,057,853
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		147,516			132,979
Interest-bearing		666,708			614,754
Total deposits		814,224			747,733
Borrowings		195,915			173,884
Repurchase agreements		25,000			25,000
Junior subordinated deferrable interest debentures		47,939			47,939
Accrued expenses and other liabilities		3,985			4,863
Total liabilities		1,087,063			999,419
Stockholders’ equity:
Common stock, $.05 par value; 20,000,000 shares authorized; 5,765,543 and 5,693,637 shares issued and outstanding, respectively		288			285
Accumulated other comprehensive (loss) income		(2,773		)	1,170
Additional paid-in capital		51,441			50,717
Retained earnings		8,942			6,262
Total stockholders’ equity		57,898			58,434
Total liabilities and stockholders’ equity		$	1,144,961		$	1,057,853

 

See accompanying notes to the consolidated financial statements

 

3

 

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
		(dollars in thousands except per share)						(dollars in thousands except per share)
Interest income:
Loans		$	12,306		$	12,053		$	24,410		$	23,374
Investments and interest-bearing deposits		3,392			1,715			6,429			3,571
Total interest income		15,698			13,768			30,839			26,945
Interest expense:
Deposits		3,139			3,447			6,249			6,640
Borrowed funds and repurchase agreements		2,332			1,877			4,442			3,721
Total interest expense		5,471			5,324			10,691			10,361
Net interest income		10,227			8,444			20,148			16,584
Provision for loan losses		489			902			789			1,452
Net interest income after provision for loan losses		9,738			7,542			19,359			15,132
Noninterest income:
Gain on sale of mortgage loans		769			1,339			1,695			2,634
Other mortgage banking revenue		477			510			842			941
ATM Fees		719			669			1,343			1,253
Service fees on deposits		1,693			1,668			3,241			3,203
Gain on sales of investment securities		—			143			340			189
Income from bank owned life insurance		282			175			515			370
Other		733			720			1,418			1,355
Total noninterest income		4,673			5,224			9,394			9,945
Noninterest expenses:
Salaries and employee benefits		6,413			5,431			12,952			10,853
Net occupancy		1,490			1,463			3,025			2,785
Furniture, fixtures and equipment		746			708			1,465			1,396
Professional services		238			226			429			539
Advertising		321			289			677			585
Data processing		530			511			1,045			986
Other		2,781			2,185			5,455			4,293
Total noninterest expenses		12,519			10,813			25,048			21,437
Income before taxes		1,892			1,953			3,705			3,640
Provision for income taxes		519			625			1,025			1,157
Net income		$	1,373		$	1,328		$	2,680		$	2,483
Net income per common share:
Basic		$	0.24		$	0.25		$	0.47		$	0.46
Diluted		0.22			0.23			0.42			0.43

 

See accompanying notes to the consolidated financial statements.

 

4

 

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30,

 

		2004			2003
		(dollars in thousands)
Cash flows from operating activities:
Net income		$	2,680		$	2,483
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		1,622			1,530
Amortization of unearned loan fees and costs, net		(518		)	(793		)
Amortization of premiums and discounts on loans		(378		)	(178		)
Amortization of premiums and discounts on mortgage-backed securities, net		507			277
Gain on available for sale securities		(340		)	(189		)
Gain on other real estate owned		(27		)	(161)
Valuation allowance of other real estate owned		4			45
Deferred income taxes		—			—
Increase in accrued interest receivable		(695		)	(2)
Provision for loan losses		789			1,452
Net decrease (increase) in mortgage loans held-for-sale		10,895			(39,060		)
Net increase in accrued expenses and other liabilities		302			658
Net decrease (increase)  in prepaids and other assets		4,001			(4,668		)
Net cash provided by (used by) operating activities		18,842			(38,606		)
Cash flows from investing activities:
Loan disbursements, net of principal repayments		(23,307		)	(12,639		)
Purchases of property and equipment		(1,078		)	(2,022		)
Sales of Federal Home Loan Bank of Atlanta stock		250			250
Purchases of available for sale securities		(198,972		)	(62,297		)
Sales of available for sale securities		14,961			1,194
Maturity of available for sale securities		108,236			31,437
Principal repayments of available for sale securities		21,617			32,247
Construction disbursements-other real estate owned		—			(62		)
Proceeds from sales of other real estate owned		277			523
Purchase of bank owned life insurance		(10,514		)	(369		)
Net cash (used in) provided by investing activities		(88,530		)	(11,738		)
Cash flows from financing activities:
Net increase in deposits		66,493			101,026
Net increase in other borrowings		25,592			14,157
Proceeds from issuance of preferred securities		—			14,500
Proceeds from advances from Federal Home Loan Bank of Atlanta		206,500			17,000
Repayment of advances from Federal Home Loan Bank of Atlanta		(211,500		)	(17,000		)
Proceeds from stock issuance, net		727			149
Net cash provided by financing activities		87,812			129,832
Increase in cash and cash equivalents		18,124			79,488
Cash and cash equivalents at beginning of period		46,679			75,806
Cash and cash equivalents at end of period		$	64,803		$	155,294
Supplemental information:
Interest paid on deposits and borrowed funds		$	10,866		$	10,325
Income taxes paid		1,252			1,659

 

See accompanying notes to consolidated financial statements.

 

5

 

FIRST MARINER BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION

 

The foregoing consolidated financial statements of First Mariner Bancorp (the “Company”) are unaudited; however, in the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of interim periods have been included.  The balances as of December 31, 2003 have been derived from audited financial statements.  There have been no significant changes to the Company’s accounting policies as disclosed in the 2003 annual report. These statements should be read in conjunction with the financial statements and accompanying notes included in First Mariner Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2003.  The results shown in this interim report are not necessarily indicative of results to be expected for the full year.

 

Consolidation of financial information has resulted in the elimination of all significant intercompany accounts and transactions. Certain reclassifications have been made to amounts previously reported to conform with the classifications made in 2004.

 

NOTE 2 – COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)

 

		Six months ended June 30,
		2004			2003
		(Unaudited) (dollars in thousands)
Net income		$	2,680		$	2,483
Other comprehensive income items:
Unrealized holding (losses) gains arising during the period (net of tax (benefit) expense of $(1,442) and $117, respectively)		(3,734		)	303
Less: reclassification adjustment for gains (net of taxes of $131 and $73, respectively) included in net income		209			116
Total other comprehensive (loss) income		(3,943		)	187
Total comprehensive (loss) income		$	(1,263	)	$	2,670

 

NOTE 3 – PER SHARE DATA

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding.  Diluted earnings per share is computed after adjusting the numerator and denominator of the basic earnings per share computation for the effects of all dilutive potential common shares outstanding during the period. All options and warrants as of June 30, 2004 are in the money and are included in the computation. The dilutive effects of options, warrants and their equivalents are computed using the “treasury stock” method.

 

Information relating to the calculation of earnings per common share is summarized as follows:

 

		Three Months Ended						Six Months Ended
(dollars in thousands)		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income-basic and diluted		$	1,373		$	1,328		$	2,680		$	2,483
Weighted-average shares outstanding-basic		5,743,659			5,401,633			5,728,560			5,398,331
Dilutive securities-options and warrants		603,789			464,782			628,779			426,203
Adjusted weighted-average shares outstanding-dilutive		6,347,448			5,866,415			6,357,339			5,824,534

 

NOTE 4 - STOCK BASED COMPENSATION

 

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Account Standards No. 148.  “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS No. 148) which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123).  SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires disclosure in annual and interim financial statements of the effects of stock-based compensation as reflected below.

 

The Company continues to account for its stock option and employee stock purchase plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related

 

6

 

Interpretations.  No stock-based employee compensation expense related to the Company’s stock option and stock purchase plans is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

 

		For three months ended June 30,
(dollars in thousands except per share data)		2004			2003
Net earnings, as reported		$	1,373		$	1,328
Deduct: Total stock-based employee compensation expense determined using the fair value based method for all awards, net of related tax effects		(16		)	(10		)
Pro forma net earnings		$	1,357		$	1,318
Earnings per share:
Basic - as reported		$	0.24		$	0.25
Basic - pro forma		$	0.24		$	0.24
Diluted - as reported		$	0.22		$	0.23
Diluted - pro forma		$	0.21		$	0.22

 

		For six months ended June 30,
(dollars in thousands except per share data)		2004			2003
Net earnings, as reported		$	2,680		$	2,483
Deduct: Total stock-based employee compensation expense determined using the fair value based method for all awards, net of related tax effects		(452		)	(475		)
Pro forma net earnings		$	2,228		$	2,008
Earnings per share:
Basic - as reported		$	0.47		$	0.46
Basic - pro forma		$	0.39		$	0.37
Diluted - as reported		$	0.42		$	0.43
Diluted - pro forma		$	0.35		$	0.34

 

NOTE 5 – SEGMENT INFORMATION

 

The Company is in the business of providing financial services, and operates in three business segments—commercial and consumer banking, consumer finance and mortgage banking.  Commercial and consumer banking is conducted through First Mariner Bank (the “Bank”) and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises.  This segment also includes the Company’s treasury and administrative functions.  Mortgage banking is conducted through First Mariner Mortgage, a division of the Bank, and involves originating residential single family mortgages for sale in the secondary market and to the Bank.  Consumer finance is conducted through Finance Maryland, and involves originating small direct consumer loans and the purchase of retail installment sales contracts.

 

7

 

For the six month period ended June 30, 2004:

 

(dollars in thousands)		Commercial and Consumer Banking			Consumer Finance			Mortgage Banking			Total
Interest income		$	26,450		$	3,377		$	1,012		$	30,839
Interest expense		9,743			468			480			10,691
Net interest income		16,707			2,909			532			20,148
Provision for loan losses		150			639			—			789
Net interest income after provision for loan losses		16,557			2,270			532			19,359
Noninterest income		6,330			683			2,381			9,394
Noninterest expense		17,810			2,688			4,550			25,048
Net intersegment income		40			—			(40)			—
Income before income taxes		$	5,117		$	265		$	(1,677	)	$	3,705
Total assets		$	1,069,335		$	27,468		$	48,158		$	1,144,961

 

For the six month period ended June 30, 2003:

 

(dollars in thousands)		Commercial and Consumer Banking			Consumer Finance			Mortgage Banking			Total
Interest income		$	22,659		$	1,832		$	2,454		$	26,945
Interest expense		8,766			284			1,311			10,361
Net interest income		13,893			1,548			1,143			16,584
Provision for loan losses		900			552			—			1,452
Net interest income after provision for loan losses		12,993			996			1,143			15,132
Noninterest income		5,749			581			3,615			9,945
Noninterest expense		16,461			1,626			3,350			21,437
Net intersegment income		54			—			(54		)	—
Income before income taxes		$	2,335		$	(49	)	$	1,354		$	3,640
Total assets		$	855,254		$	17,378		$	132,158		$	1,004,790

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read and reviewed in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Portions of this 10-Q 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 allowance for loan losses, adequacy of capital levels, and liquidity.  Such forward looking statements involve certain risks and uncertainties, 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.  For a more complete discussion of risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements, see “Risk Factors” filed as Exhibit 99 to the Company’s Form 10-K for the year ended December 31, 2003.  The Company assumes no obligation to update forward-looking statements at any time.

 

The Company

 

The Company is a financial 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, our 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. We are focusing on growing assets and earnings by capitalizing on the broad network of Bank branches, mortgage offices, consumer finance offices, and ATMs established during our infrastructure expansion phase.

 

First Mariner Bank (the “Bank”), the only bank subsidiary, offers consumer and commercial banking and real estate lending services throughout central Maryland, the Eastern Shore of Maryland, and in portions of Virginia. Finance Maryland, LLC (“Finance Maryland”), is a wholly owned subsidiary, and offers traditional consumer finance products and services through its’ branch network located in central Maryland, the Eastern Shore of Maryland, and Delaware. Branch locations in Delaware operate under the trade name of “Finance Delaware.”

 

8

 

 

The Company’s executive offices are located at 3301 Boston Street, Baltimore, Maryland 21224 and its telephone number is (410) 342 - 2600.

 

Financial Condition

 

The Company’s total assets were $1,144.961 million at June 30, 2004, compared to $1,057.853 million at December 31, 2003, increasing $87.108 million or 8.2% for the first six months of 2004.  Earning assets increased $71.323 million or 7.2% to $1,056.032 million from $984.709 million.  The growth in assets was primarily due to growth in loans outstanding (+$23.692 million), increases in the Company’s investment portfolio (+$47.725 million), and higher short-term investments (+$11.053 million).  Loans held for sale decreased by $10.897 million.  Growth in total assets was funded by an increased level of customer deposits of $66.491 million.  Borrowed funds increased by $22.031 million.

 

The investment portfolio composition is as follows:

 

		June 30, 2004			December 31, 2003
Investment securities-available for sale:
Mortgage-backed securities		$	213,152		$	149,763
Trust preferred securities		36,108			22,987
US Government agency notes		78,472			107,314
US Treasury securities		999			1,001
Equity securities		1,308			1,274
Foreign Government Bonds		1,250			1,250
Other investment securities		4,873			4,848
Total investment securities-available-for-sale		$	336,162		$	288,437

 

Total loans increased $23.692 million during the first six months of 2004.  Significant growth was realized in the Company’s commercial real estate loan portfolio (+$14.871 million) and consumer loans (+$5.416 million).  The total loan portfolio was comprised of the following:

 

9

 

		June 30, 2004			December 31, 2003
		(in thousands)
Loans secured by first mortgages on real estate:
Residential		$	41,729		$	40,231
Commercial		251,310			236,439
Consumer residential construction		122,524			119,834
Construction, net of undisbursed principal		49,870			47,723
		465,433			444,227
Commercial		67,500			79,063
Loans secured by second mortgages on real estate		59,452			50,906
Consumer loans		41,234			35,818
Loan secured by deposits and other		1,137			1,160
Total loans		634,756			611,174
Unamortized loan premiums		(271		)	(306		)
Unearned loan fees, net		(946		)	(1,021		)
		$	633,539		$	609,847

 

Credit Risk Management

 

The Company 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 provision for loan losses for the six months ended June 30, 2004 was $789,000 compared to $1.452 million for the same period ended June 30, 2003.  The lower provision for the six months of 2004 reflects lower levels of non-performing and delinquent loans compared to the same period last year. The allowance for loan losses totaled $9.020 million at June 30, 2004 compared to $8.692 million at December 31, 2003.  This represented an increase of 3.8%.  As of June 30, 2004 the allowance for loan losses is 1.42% of outstanding loans as compared to 1.43% at December 31, 2003.

 

10

 

Activity in the allowance for loan losses is as follows:

 

		Six Months Ended June 30,
		2004			2003
Allowance for loan losses, beginning of year		$	8,692		$	7,188
Loans charged off:
Commercial		(4		)	—
Commercial/Residential Construction		—			—
Commercial Mortgages		—			—
Residential Construction-Consumer		—			(29		)
Residential Mortgages		—			(1		)
Consumer		(546		)	(431		)
Total loans charged off		(550		)	(461		)
Recoveries
Commercial		—			—
Commercial/Residential Construction		—			—
Commercial Mortgages		—			—
Residential Construction-Consumer		—			—
Residential Mortgages		—			1
Consumer		89			26
Total recoveries		89			27
Net chargeoffs		(461		)	(434		)
Provision for loan losses		789			1,452
Allowance for loan losses, end of period		$	9,020		$	8,206
Loans (net of premiums and discounts)
Period-end balance		633,539			547,141
Average balance during period		625,865			539,352
Allowance as percentage of period-end loan balance		1.42		%	1.50		%
Percent of average loans:
Provision for loan losses (annualized)		0.25		%	0.54		%
Net chargeoffs (annualized)		0.15		%	0.16		%

 

During the first six months of 2004 net chargeoffs decreased as compared to average loans outstanding to 0.15%, as compared to 0.16% during the same period of 2003.  Non-performing assets, expressed as a percentage of total assets, decreased to 0.21% at June 30, 2004, down from 0.48% at December 31, 2003, and 0.45% at June 30, 2003, due to resolutions of loans placed on nonaccruing status during the quarter and a decrease of other real estate owned.  Loans past due 90 days or more and still accruing totaled $6.127 million compared to $2.258 million at December 31, 2003 and $9.688 million as of June 30, 2003.

 

11

 

Nonperforming Assets		June 30, 2004			December 31, 2003			June 30, 2003
(Dollars in thousands)
Nonaccruing loans		$	2,314		$	4,774		$	2,607
Real estate acquired by foreclosure		92			296			1,902
Total non-performing assets		$	2,406		$	5,070		$	4,509
Loans past-due 90 days or more and accruing		$	6,127		$	2,258		$	9,688

 

At June 30, 2004, the allowance for loan losses represented 374.9% of nonperforming assets compared to 171.4% at December 31, 2003.  Management believes the allowance for loan losses at June 30, 2004 is adequate.

 

Deposits

 

Deposits totaled $814.224 million as of June 30, 2004, increasing $66.491 million or 8.9% from the December 31, 2003 balance of $747.733 million.  The increase in deposits is attributable to management’s growth strategy, which includes significant marketing, promotion and cross selling of existing customers into additional products.  The mix of deposits has not significantly changed during 2004. Continued successful marketing campaigns have maintained a strong mix of non-interest checking accounts, NOW and money market accounts.

 

		June 30, 2004					December 31, 2003
(Dollars in thousands)		Balance			Percent of Total		Balance			Percent of Total
NOW & money market savings deposits		$	226,910		27.9	%	$	212,344		28.4	%
Regular savings deposits		68,133			8.4	%	61,110			8.2	%
Time deposits		371,665			45.6	%	341,300			45.6	%
Total interest-bearing deposits		666,708			81.9	%	614,754			82.2	%
Noninterest-bearing demand deposits		147,516			18.1	%	132,979			17.8	%
Total deposits		$	814,224		100.0	%	$	747,733		100.0	%

 

12

 

Results of Operations

 

Net Income.  For the six months ended June 30, 2004, net income totaled $2.680 million compared to $2.483 million for the six month period ended June 30, 2003.  Basic earnings per share for the first six months of 2004 totaled $.47 compared to $.46 per share for the same period of 2003.  Diluted earnings per share totaled $.42 for the first six months of 2004 compared to the first six months of 2003 of $.43.  Earnings for the six months ended June 30, 2004 reflected higher net interest income, a lower provision for credit losses, a decline in fee income and growth in noninterest expenses.

 

For the second quarter of 2004, net income totaled $1.373 million compared to $1.328 million for the three month period ended June 30, 2003.  Basic earnings per share for the three month period ended June 30, 2004 totaled $.24 compared to $.25 per share for the same period of 2003.  Diluted earnings per share totaled $.22 for the second quarter of 2004 compared to $.23 for the second quarter of 2003.  Increased net income for the second quarter of 2004 was attributable to increases in net interest income, while noninterest expense increased and the provision for loan losses and income tax expense decreased. 

 

Net Interest Income.  Net interest income for the first six months of 2004 totaled $20.148 million, an increase of 21.5% over $16.584 million for the six months ended June 30, 2003. The net interest margin for the six month period was 3.99% compared to 4.04% for the comparable period of 2003, while average earning assets increased by $185.523 million or 22.8%.

 

Total interest income increased by $3.894 million due to growth in average loans and investments.  Average loans outstanding increased by $86.513 million, average investment securities increased by $184.883 million while average loans held for sale decreased $54.016 million. Yields on earning assets for the period decreased to 6.15% from 6.61%. Interest expense increased by $330,000.  Average interest bearing liabilities increased by $165.083 million. Average interest bearing deposits increased by $71.492 million and average borrowings increased by $93.591 million.  Yields on interest bearing liabilities decreased to 2.45% from 2.93% for the same period in 2003 as a result of the decline in general interest rates.

 

Second quarter net interest income was $10.227 million in 2004, an increase of 21.1% over $8.444 million for the second quarter of 2003.  The net interest margin for the three month period was 3.92% compared to 3.95% for the comparable period of 2003. Interest income increased $1.930 million.  Average loans outstanding for the second quarter increased by $90.605 million and average investment increased $217.216 million.  Average loans held for sale decreased $62.746 million and average interest bearing deposits decreased by $56.667 million.  Yields on earning assets for the period decreased to 6.05% from 6.48%.  Interest expense increased by $147,000. Average interest bearing liabilities increased by $171.131 million, as average interest bearing deposits increased by $57.406 million and average borrowings increased by $113.725 million.  Rates paid on interest bearing liabilities for the quarter ended June 30, 2004 decreased to 2.41% from 2.88% for the same period in 2003 as a result of the decline in general interest rates.

 

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		For six months ended June 30,
		2004					2003
		Average Balance			Yield/ Rate		Average Balance			Yield/ Rate
Assets:
Loans
Commercial Loans and LOC		$	76,952		5.87	%	$	64,568		6.37	%
Comm/Res Construction		48,123			7.16	%	34,520			6.81	%
Commercial Mortgages		246,809			6.94	%	208,101			7.39	%
Residential Constr - Cons		118,150			7.20	%	122,627			7.92	%
Residential Mortgages		40,708			6.87	%	42,703			7.79	%
Consumer		95,123			10.63	%	66,833			10.31	%
Total Loans		625,865			7.43	%	539,352			7.75	%
Loans held for sale		42,366			4.76	%	96,382			5.06	%
Available for sale securities, at fair value		300,840			4.13	%	115,957			5.44	%
Interest bearing deposits		23,128			0.91	%	57,820			1.13	%
Restricted stock investments, at cost		6,281			3.45	%	3,446			4.32	%
Total earning assets		998,480			6.15	%	812,957			6.61	%
Allowance for loan losses		(8,790		)			(7,515		)
Cash and other non earning assets		87,150					75,274
Total Assets		$	1,076,840				$	880,716
Liabilities and Stockholders’ Equity
Interest bearing deposits
NOW deposits		62,985			0.39	%	60,943			0.54	%
Savings deposits		65,473			0.40	%	52,113			0.75	%
Money market deposits		151,789			0.81	%	147,243			1.04	%
Time deposits		361,336			3.00	%	309,792			3.60	%
Total interest bearing deposits		641,583			1.96	%	570,091			2.35	%
Borrowings		235,849			3.79	%	142,258			5.27	%
Total interest bearing liabilities		877,432			2.45	%	712,349			2.93	%
Noninterest bearing demand deposits		135,862					111,010
Other liabilities		4,651					3,742
Stockholders Equity		58,895					53,615
Total Liabilities and Stockholders’ Equity		$	1,076,840				$	880,716
Net Interest Spread					3.70	%				3.68	%
Net Interest Margin					3.99	%				4.04	%

 

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Noninterest Income —Noninterest income for the three months ended June 30, 2004 was $4.673 million, a decrease of $551,000 or 10.5% for the same comparable period of 2003.  Deposit service charges rose slightly as compared to the three months ending June 30, 2004 due to the increased number of deposit accounts offset by lower overdraft revenue.  ATM fees increased by $50,000 or 7.5% as a result of increased volume of ATM and debit card transactions.  As of June 30, 2004, the Bank has 49 ATM locations that it owns and operates and 146 ATM’s through the third party agreements.  Mortgage banking income and gain on sale of mortgage loans decreased by $603,000 (-32.6%) due to decreased volume of mortgage loans originated and loans sold into the secondary market.  The volume of mortgage loans sold into the secondary market for the three months ended June 30, 2004 was $152 million compared to $288 million for the same comparable period in 2003. 

 

		For six months ended June 30,
(Dollars in thousands)		2004			2003
		Amount			Amount
Gain on sale of mortgage loans		$	1,695		$	2,634
Service fees on deposits		3,241			3,203
ATM fees		1,343			1,253
Gain on sales of investment securities, net		340			189
Other mortgage banking revenue		842			941
Income from bank owned life insurance		515			370
Other operating income		1,418			1,355
Total noninterest income		$	9,394		$	9,945

 

For the six months ended June 30, 2004, noninterest income decreased $551,000 million or 5.5% to $9.394 million compared to $9.945 million for the same period of 2003, reflecting higher levels of revenue in most major categories.  Deposit service charges rose $38,000 or 1.2% as compared to the same period of 2003.  Gain of sale of mortgage loans decreased $939,000 or 35.6% due to decreased volume of mortgage originations and sales of mortgages.  Mortgages sold into the secondary market decreased 41.6% during the first six months of 2004.

 

Noninterest expenses - For the six months ended June 30, 2004 noninterest expenses increased $3.611 million or 16.8% to $25.048 million compared to $21.437 million for the same period of 2003.  Increased salary and employee benefits expenses of $2.099 million relate to additional personnel costs for new positions due to an increase in the number of loans and deposits, staffing hired to support the expansion of the consumer finance company and wholesale mortgage activities, and increased cost of employer provided health care.  Occupancy expenses increased $240,000 due to new offices of Finance Maryland, increased space occupied by administrative areas and higher utility costs.  Other noninterest expenses grew by $1.162 million due to increases in postage, security and administrative expenses.

 

For the second quarter of 2004, noninterest expenses increased $1.706 million or 15.8% to $12.519 million, compared to $10.813 million for the same quarter of 2003.  Increases in salary and employee benefits expenses is related to the increased personnel costs for the consumer finance company and wholesale mortgage operations, as well as, higher benefit expenses.  Increases in furniture and fixtures expenses as well as net occupancy is related to increased number of mortgage branches and consumer finance offices.

 

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		For six months ended June 30,
		2004			2003
Noninterest expense		Amount			Amount
(Dollars in thousands)
Salaries and employee benefits		$	12,952		$	10,853
Net occupancy		3,025			2,785
Furniture, fixtures and equipment		1,465			1,396
Professional services		429			539
Advertising		677			585
Data processing		1,045			986
Service and maintenance		730			676
Office supplies		346			346
ATM servicing expenses		598			444
Printing		426			331
Corporate insurance		128			104
OREO expense		(28		)	(142		)
FDIC Premiums		57			53
Consulting fees		139			110
Marketing/promotion		357			405
Courier/postage		647			565
Security		151			96
Other		1,904			1,305
Total noninterest expense		$	25,048		$	21,437

 

Income Taxes- The Company recorded income tax expense of $1.025 million on income before taxes of $3.705 million, resulting in an effective tax rate of 27.7% for the six month period ended June 30, 2004 in comparison to income tax expense of  $1.157 million on income before taxes of $3.640 million, resulting in an effective tax rate of 31.8% for the six month period ended June 30, 2003.  The decrease in the effective tax rate reflects higher levels of tax exempt interest income for state income tax purposes, increased income from Bank Owned Life Insurance which is exempt from both federal and state income taxes, and benefits of state and federal income tax credits awarded over the past year.

 

The Company recorded income tax expense of $519,000 on income before taxes of $1.892 million, resulting in an effective tax rate of 27.4% for the three month period ended June 30, 2003 in comparison to income tax expense of $625,000 on income before taxes of $1.953 million, resulting in an effective tax rate of 32.0% for the three month period ended June 30, 2003.  The decrease in the effective tax rate reflects higher levels of tax exempt interest income for state income tax purposes, increased income from Bank Owned Life Insurance which is exempt from both federal and state income taxes and recognition of newly acquired state and federal income tax credit over the past year.

 

Liquidity and Capital Resources

 

Stockholders’ equity decreased $536,000 in the first six months of 2004 to $57.898 million from $58.434 million as of December 31, 2003.  Other comprehensive income decreased by $3.943 million due to the decrease in market values of securities classified as available for sale. Retained earnings grew by the retention of net income of $2.680 million for the first six months of 2004.  Common stock and additional paid in capital increased by $727,000 reflecting proceeds from the sale of stock under the Company stock purchase plan and the exercise of options and warrants.

 

Banking regulatory authorities have implemented strict capital guidelines directly related to the credit risk associated with an institution’s assets.  Banks and bank holding companies are required to maintain capital levels based on their “risk adjusted” assets so that categories of assets with higher “defined” credit risks will require more capital support than assets with lower risk.  Additionally, capital must be maintained to support certain off-balance sheet instruments.

 

The Company and the Bank have exceeded its capital adequacy requirements to date.  The Company regularly monitors its capital adequacy ratios to assure that the Bank exceeds its regulatory capital requirements.  The regulatory capital ratios are listed below:

 

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		At June 30,
		2004			2003
		(unaudited)
Regulatory capital ratios
Leverage
Consolidated		7.3	%		7.5	%
The Bank		6.7	%		7.2	%
Tier 1 capital to risk weighted assets
Consolidated		10.0	%		9.8	%
The Bank		9.4	%		9.4	%
Total capital to risk weighted assets
Consolidated		14.4	%		15.0	%
The Bank		11.1	%		10.5	%

 

The Bank’s principal sources of liquidity are cash and cash equivalents (which are cash on hand or amounts due from financial institutions, federal funds sold, money market mutual funds, and interest bearing deposits), and available for sale securities.  The levels of such assets are dependent on the Bank’s operating, financing and investing activities at any given time and are influenced by anticipated deposit flows and loan growth.  Cash and cash equivalents totaled $64.803 million at June 30, 2004 compared to $46.679 million as of December 31, 2003.  The Company’s loan to deposit ratio stood at 77.8% as of June 30, 2004 and 81.6% at December 31, 2003.

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report filed on Form 10-Q 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.”  Statement 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 Form 10-Q, 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 manage 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.  For a more complete discussion of these risk factors, see “Risk Factors” filed as Exhibit 99 to the Company’s Form 10-K for the year ended December 31, 2003.  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

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Results of operations for financial institutions, including the Company, may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates and the monetary and fiscal policies of the federal government.  The profitability of the Company is in part a function of the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities (net interest income), including advances from Federal Home Loan Bank of Atlanta (“FHLB”) and other borrowings.  Interest rate risk arises from mismatches (i.e., the interest sensitivity gap) between the dollar amount of repricing or maturing assets and liabilities and is measured in terms of the ratio of the interest rate sensitivity gap to total assets.  More assets repricing or maturing than liabilities over a given time period is considered asset-sensitive and is reflected as a positive gap, and more liabilities repricing or maturing than assets over a give time period is considered liability-sensitive and is reflected as negative gap.  An asset-sensitive position (i.e., a positive gap) will generally enhance earnings in a rising interest rate environment and will negatively impact earnings in a falling interest rate environment, while a liability-sensitive position (i.e., a negative gap) will generally enhance earnings in a falling interest rate environment and negatively impact earnings in a rising interest rate environment.  Fluctuations in interest rates are not predictable or controllable.  The Company has attempted to structure its asset and liability management strategies to mitigate the impact on net interest income of changes in market interest rates.  However, there can be no assurance that the Company will be able to manage interest rate risk so as to avoid significant adverse effects on net interest income.  At June 30, 2004, the Company had a one year cumulative positive gap of approximately $215 million.

 

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In addition to the use of interest rate sensitivity reports, the Company tests its interest rate sensitivity through the deployment of a simulation analysis.  Earnings simulation models are used to estimate what effect specific interest rate changes would have on the Company’s net interest income and 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.  The simulation model also includes the estimated effect of rate changes on the Company’s fee income and net income produced by the Company’s mortgage banking operations. At June 30, 2004, the Company’s estimated earnings sensitivity profile reflected a minimal sensitivity to interest rate changes.  Based on an assumed increase/decrease of 200 basis points over a one year period, the Company’s net income would decrease by 7% if rates were to increase and net income would increase by 7% if rates were to decline.  Based on an assumed increase/decrease of 200 basis points over a one year period, the Company’s net interest income would increase by 0% if rates were to increase and net interest income would decrease by 0% if rates were to decline.

 

Item 4.  Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures.  The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow for timely decisions regarding required disclosure.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

An evaluation of the effectiveness of these disclosure controls, as of the end of the period covered by this Quarterly Report on Form 10-Q, was carried out under the supervision and with the participation of the Company’s management, including the CEO and CFO.  Based on that evaluation, the Company’s management, including the CEO and CFO, has concluded that the Company’s disclosure controls and procedures are effective.

 

(b) Changes in Internal Control Over Financial Reporting.  There were no significant changes in our internal control over financial reporting or in other factors during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - Other Information

 

Item 1 -		Legal proceedings - None
Item 2 -		Changes in securities, use of proceeds and issuer purchases of equity securities - None
Item 3 -		Defaults upon senior securities – None
Item 4 -		Submission of matters to a vote of security holders-None
Item 5 -		Other information - None
Item 6 -		Exhibits and reports on Form 8-K
		(a)	Exhibits Required to be filed by Item 601 of Regulation S-K
			See Exhibit Index following signatures
		(b)	Reports on Form 8-K
			On July 21, 2004, the Company furnished on Form 8-K a press release concerning the Company’s earnings for second quarter earnings under item 12 and reporting the Company’s adoption of a stock repurchase program under item 5.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

				FIRST MARINER BANCORP
Date:	8/16/04			By:	/s/ Edwin F. Hale Sr.
				Edwin F. Hale Sr.
				Chairman and Chief Executive Officer
Date:	8/16/04			By:	/s/ Mark A. Keidel
				Mark A. Keidel
				Chief Financial Officer

 

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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 First Mariner’s Form 10-Q for the quarter ended September 30, 2002)
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)
10.8		Lease Agreement dated June 18, 2002 between Hale Properties, LLC and First Mariner Bank (Incorporated by reference to Exhibit 10.8 to First Mariner’s Form 10-Q for the quarter ended March 31, 2002.)
10.9		First Mariner Bancorp 2002 Stock Option Plan (Incorporated by reference to Attachment A to First Mariner’s Definitive Proxy Statement filed on 4/5/02)
10.10		Lease Agreement dated as of March 1, 2003 between Building No. 2 LLC and First Mariner Bank (Incorporated by reference to Exhibit 10.10 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.11		Lease Agreement dated March 1, 2003 between Canton Crossing LLC and First Mariner Bank (Incorporated by reference to Exhibit 10.11 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.12		Change of Control Agreement dated April 2, 2003 between First Mariner Bancorp and Edwin F. Hale, Sr. (Incorporated by reference to Exhibit 10.12 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.13		Change of Control Agreement dated April 2, 2003 between First Mariner Bancorp and Joseph A. Cicero (Incorporated by reference to Exhibit 10.13 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.14		Change of Control Agreement dated April 2, 2003 between First Mariner Bancorp and George H. Mantakos (Incorporated by reference to Exhibit 10.14 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.15		Change of Control Agreement dated April 2, 2003 between First Mariner Bancorp and Mark A. Keidel (Incorporated by reference to Exhibit 10.15 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.16		Change of Control Agreement dated April 2, 2003 between First Mariner Bancorp and Dennis E. Finnegan (Incorporated by reference to Exhibit 10.16 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.17		Change of Control Agreement dated April 2, 2003 between First Mariner Bancorp and Brett J. Carter (Incorporated by reference to Exhibit 10.17 to the Company’s Form 10-Q for the quarter ended March 31, 2003.)
10.18		Lease Agreement dated June 2, 2003 between Canton Crossing LLC and First Mariner Bank (Incorporated by reference to Exhibit 10.18 to the Company’s Form 10-Q for the quarter ended September 30, 2003.)
10.19		First Mariner Bancorp 2004 Long Term Incentive Plan (Incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement filed on 4/1/04)
10.20		First Mariner Bancorp 2003 Employee Stock Purchase Plan (Incorporated by reference to Appendix C to the Company’s Definitive Proxy Statement filed on 4/1/04)

 

20

 

31		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended, filed herewith
32		Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
99		Risk Factors (incorporated by reference to Exhibit 99 to the Company’s Form 10-K for the year ended December 31, 2003.)

 

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