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 September 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)

 

Maryland				52-1834860
(State of Incorporation)				(I.R.S. Employer Identification Number)
3301 Boston Street, Baltimore, MD		21224		410-342-2600
(Address of principal executive offices)		(Zip Code)		(Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 October 31, 2004 is 5,801,151 shares.

 

 

FIRST MARINER BANCORP
INDEX

 

PART I - FINANCIAL INFORMATION
Item 1 -		Financial Statements
		Consolidated Statements of Financial Condition at September 30, 2004 (unaudited) and at December 31, 2003
		Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2004 and 2003 (unaudited)
		Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 2004 and September 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 -	Unregistered sales of equity securities and use of proceeds
Item 3 -	Defaults upon senior securities
Item 4 -	Submission of matters to a vote of security holders
Item 5 -	Other information
Item 6 -	Exhibits
Signatures

 

2

 

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Financial Condition

 

(Dollars in thousands, except per share data)		September 30, 2004			December 31, 2003
		(unaudited)
ASSETS
Cash and due from banks		$	30,852		$	26,574
Federal funds sold and interest-bearing deposits		31,226			20,105
Available-for-sale securities, at fair value		334,354			288,437
Loans held for sale		58,920			59,055
Loans receivable		676,467			609,847
Allowance for loan losses		(9,300		)	(8,692		)
Loans, net		667,167			601,155
Other real estate owned		45			296
Restricted stock investments		9,215			7,265
Property and equipment, net		17,389			18,001
Accrued interest receivable		5,948			4,955
Deferred income taxes		3,199			2,619
Bank owned life insurance		26,062			15,266
Prepaid expenses and other assets		11,312			14,125
Total assets		$	1,195,689		$	1,057,853
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		151,957			132,979
Interest-bearing		660,483			614,754
Total deposits		812,440			747,733
Borrowings		242,584			173,884
Repurchase agreements		25,000			25,000
Junior subordinated deferrable interest debentures		47,939			47,939
Accrued expenses and other liabilities		5,224			4,863
Total liabilities		1,133,187			999,419
Stockholders’ equity:
Common stock, $.05 par value; 20,000,000 shares authorized; 5,792,802 and 5,693,637 shares issued and outstanding, respectively		290			285
Accumulated other comprehensive income		211			1,170
Additional paid-in capital		51,484			50,717
Retained earnings		10,517			6,262
Total stockholders’ equity		62,502			58,434
Total liabilities and stockholders’ equity		$	1,195,689		$	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 September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(dollars in thousands except per share)						(dollars in thousands except per share)
Interest income:
Loans		$	13,206		$	12,353		$	37,614		$	35,727
Investments and interest-bearing deposits		3,659			1,807			10,088			5,378
Total interest income		16,865			14,160			47,702			41,105
Interest expense:
Deposits		3,203			3,520			9,452			10,160
Borrowed funds and repurchase agreements		2,598			2,141			7,040			5,862
Total interest expense		5,801			5,661			16,492			16,022
Net interest income		11,064			8,499			31,210			25,083
Provision for loan losses		692			655			1,481			2,107
Net interest income after provision for loan losses		10,372			7,844			29,729			22,976
Noninterest income:
Gain on sale of mortgage loans		762			2,053			2,457			4,687
Other mortgage banking revenue		289			482			1,131			1,423
ATM Fees		737			646			2,080			1,899
Service fees on deposits		1,781			1,758			5,022			4,961
Gain on sales of investment securities		100			741			440			930
Investment sales commission		152			211			569			567
Income from bank owned life insurance		282			182			797			552
Other		620			441			1,621			1,440
Total noninterest income		4,723			6,514			14,117			16,459
Noninterest expenses:
Salaries and employee benefits		6,817			5,811			19,769			16,664
Net occupancy		1,586			1,460			4,610			4,245
Furniture, fixtures and equipment		790			719			2,255			2,115
Professional services		160			157			589			696
Advertising		336			274			1,013			859
Data processing		513			535			1,558			1,521
Other		2,672			3,913			8,126			8,206
Total noninterest expenses		12,874			12,869			37,920			34,306
Income before taxes		2,221			1,489			5,926			5,129
Provision for income taxes		646			87			1,671			1,244
Net income		$	1,575		$	1,402		$	4,255		$	3,885
Net income per common share:
Basic		$	0.27		$	0.26		$	0.74		$	0.72
Diluted		0.25			0.23			0.67			0.66

 

See accompanying notes to the consolidated financial statements.

 

4

 

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30,

 

		2004			2003
		(dollars in thousands)
Cash flows from operating activities:
Net income		$	4,255		$	3,885
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		2,469			2,309
Amortization of unearned loan fees and costs, net		(811		)	(1,038		)
Amortization of premiums and discounts on loans		(672		)	325
Amortization of premiums and discounts on mortgage-backed securities, net		465			438
Gain on available for sale securities		(440		)	(930		)
Gain on other real estate owned		(59		)	(225		)
Valuation allowance of other real estate owned		(41		)	(154		)
Deferred income taxes		15			—
Increase in accrued interest receivable		(993		)	(286		)
Provision for loan losses		1,481			2,107
Net decrease in loans held-for-sale		135			19,337
Net (decrease) increase in accrued expenses and other liabilities		361			(782		)
Net decrease (increase) in prepaids and other assets		2,813			(3,589		)
Net cash provided by operating activities		8,978			21,397
Cash flows from investing activities:
Loan disbursements, net of principal repayments		(66,610		)	(19,760		)
Purchases of property and equipment		(1,857		)	(2,633		)
Purchase of restricted stock investments		(1,950		)	(1,250		)
Purchases of available for sale securities		(207,442		)	(131,337		)
Sales of available for sale securities		18,674			3,236
Maturity of available for sale securities		108,736			36,037
Principal repayments of available for sale securities		32,536			50,679
Construction disbursements-other real estate owned		—			(170		)
Proceeds from sales of other real estate owned		351			964
Purchase of bank owned life insurance		(10,796		)	(552		)
Net cash used by investing activities		(128,358		)	(64,786		)
Cash flows from financing activities:
Net increase in deposits		64,707			74,991
Net increase in other borrowings		30,300			5,087
Proceeds from issuance of preferred securities		—			36,500
Proceeds from advances from Federal Home Loan Bank of Atlanta		288,000			79,000
Repayment of advances from Federal Home Loan Bank of Atlanta		(249,000		)	(49,000		)
Proceeds from stock issuance, net		772			221
Net cash provided by financing activities		134,779			146,799
Increase in cash and cash equivalents		15,399			103,410
Cash and cash equivalents at beginning of period		46,679			75,806
Cash and cash equivalents at end of period		$	62,078		$	179,216
Supplemental information:
Interest paid on deposits and borrowed funds		$	16,190		$	15,720
Income taxes paid		1,489			2,336

 

See accompanying notes to consolidated financial statements.

 

5

 

FIRST MARINER BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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)

 

		Nine months ended September 30,
		2004			2003
		(Unaudited) (dollars in thousands)
Net income		$	4,255		$	3,885
Other comprehensive income items:
Unrealized holding (losses) gains arising during the period (net of tax expense of ($423) and $44, respectively)		(689		)	71
Less: reclassification adjustment for gains (net of taxes of $170 and $359, respectively) included in net income		270			571
Total other comprehensive (loss) income		(959		)	(500		)
Total comprehensive income		$	3,296		$	3,385

 

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 September 30, 2004 that are “in the money” (market price per share exceeds exercise price per share) 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						Nine Months Ended
(dollars in thousands)		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
Net income-basic and diluted		$	1,575		$	1,402		$	4,255		$	3,885
Weighted-average shares outstanding-basic		5,772,195			5,409,073			5,743,231			5,401,951
Dilutive securities-options and warrants		526,451			616,498			595,264			490,048
Adjusted weighted-average shares outstanding-dilutive		6,298,646			6,025,571			6,338,495			5,891,999

 

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 September 30,
(dollars in thousands except per share data)		2004			2003
Net earnings, as reported		$	1,575		$	1,402
Deduct: Total stock-based employee compensation expense determined using the fair value based method for all awards, net of related tax effects		—			—
Pro forma net earnings		$	1,575		$	1,402
Earnings per share:
Basic - as reported		$	0.27		$	0.26
Basic - pro forma		$	0.27		$	0.26
Diluted - as reported		$	0.25		$	0.23
Diluted - pro forma		$	0.25		$	0.23

 

		For nine months ended September 30,
(dollars in thousands except per share data)		2004			2003
Net earnings, as reported		$	4,255		$	3,885
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		$	3,803		$	3,410
Earnings per share:
Basic - as reported		$	0.74		$	0.72
Basic - pro forma		$	0.66		$	0.63
Diluted - as reported		$	0.67		$	0.66
Diluted - pro forma		$	0.60		$	0.58

 

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, a subsidiary of the holding company, and involves originating small direct consumer loans and the purchase of retail installment sales contracts.

 

7

 

For the nine month period ended September 30, 2004:

 

(dollars in thousands)		Commercial and Consumer Banking			Consumer Finance			Mortgage Banking			Total
Interest income		$	40,529		$	5,487		$	1,686		$	47,702
Interest expense		14,974			753			765			16,492
Net interest income		25,555			4,734			921			31,210
Provision for loan losses		400			1,081			—			1,481
Net interest income after provision for loan losses		25,155			3,653			921			29,729
Noninterest income		9,631			1,106			3,380			14,117
Noninterest expense		26,219			4,207			7,494			37,920
Net intersegment income		(836		)	—			836			—
Income before income taxes		$	7,731		$	552		$	(2,357	)	$	5,926
Total assets		$	1,105,946		$	30,823		$	58,920		$	1,195,689

 

For the nine month period ended September 30, 2003:

 

(dollars in thousands)		Commercial and Consumer Banking			Consumer Finance			Mortgage Banking			Total
Interest income		$	33,745		$	3,126		$	4,234		$	41,105
Interest expense		13,173			469			2,380			16,022
Net interest income		20,572			2,657			1,854			25,083
Provision for loan losses		1,300			807			—			2,107
Net interest income after provision for loan losses		19,272			1,850			1,854			22,976
Noninterest income		10,073			782			5,604			16,459
Noninterest expense		26,388			2,632			5,286			34,306
Net intersegment income		(505		)	—			505			—
Income before income taxes		$	2,452		$	0		$	2,677		$	5,129
Total assets		$	926,955		$	18,877		$	73,761		$	1,019,593

 

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 formed in Maryland in 1994 under the name MarylandsBank Corp. that later changed its name to First Mariner Bancorp in May 1995.  The business of the Company is conducted primarily through its wholly-owned subsidiaries, First Mariner Bank (the “Bank”), and Finance Maryland, LLC (“Finance Maryland”).

 

The Bank is an independent community bank engaged in the general commercial banking business with particular emphasis on the needs of individuals and small to mid-sized businesses.  The Bank emphasizes access to local management as well as personal attention and professional service to its customers while delivering a range of financial products. The Bank, which is headquartered in Baltimore City, serves the central region of the State of Maryland as well as portions of Maryland’s Eastern Shore through 24 full service branches and 206 Automated Teller Machines.

 

8

 

In July 2002, First Mariner Bancorp formed Finance Maryland, LLC, a consumer finance company headquartered at 3301 Boston Street, Baltimore, Maryland.  Finance Maryland engages in traditional consumer finance activities, sourcing small consumer loans through direct cash lending at branch locations, loan solicitations via direct mail, and the purchasing of installment loan contracts from various retailers.   Finance Maryland’s branch network is located in central Maryland, the Eastern Shore of Maryland, and Delaware. Branch locations in Delaware operate under the trade name of “Finance Delaware.”  At September 30, 2004, Finance Maryland had loans outstanding of $30.8 million and 13 branch locations.

 

9

 

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 $1,195.689 million at September 30, 2004, compared to $1,057.853 million at December 31, 2003, increasing $137.836 million or 13.0% for the first nine months of 2004.  Earning assets increased $125.473 million or 12.7% to $1,110.782 million from $984.709 million.  The growth in assets was primarily due to growth in loans outstanding (+$66.620 million), increases in the Company’s investment portfolio (+$45.917 million), and higher short-term investments (+$11.121 million).  Loans held for sale decreased by $135,000.  Growth in total assets was funded by an increased level of customer deposits of $64.707 million and borrowed funds increased by $69.300 million.

 

The investment portfolio composition is as follows:

 

		September 30, 2004			December 31, 2003
Investment securities-available for sale:
Mortgage-backed securities		$	210,754		$	149,763
Trust preferred securities		33,969			22,987
US Government agency notes		79,081			107,314
US Treasury securities		999			1,001
Municipal Bonds		2,020			—
Equity securities		1,246			1,274
Foreign Government Bonds		1,400			1,250
Other investment securities		4,885			4,848
Total investment securities-available-for-sale		$	334,354		$	288,437

 

Total loans increased $66.620 million during the first nine months of 2004.  Significant growth was realized in the Company’s commercial real estate loan portfolio (+$34.338 million) and second mortgages on real estate (+$19.334.million).  The total loan portfolio was comprised of the following:

 

10

 

		September 30, 2004			December 31, 2003
		(in thousands)
Loans secured by first mortgages on real estate:
Residential		$	40,434		$	40,231
Commercial		270,777			236,439
Consumer residential construction		125,788			119,834
Construction, net of undisbursed principal		51,120			47,723
		488,119			444,227
Commercial		74,472			79,063
Loans secured by second mortgages on real estate		70,240			50,906
Consumer loans		44,790			35,818
Loan secured by deposits and other		1,115			1,160
Total loans		678,736			611,174
Unamortized loan premiums		(917		)	(306		)
Unearned loan fees, net		(1,352		)	(1,021		)
		$	676,467		$	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 nine months ended September 30, 2004 was $1.481 million compared to $2.107 million for the same period ended September 30, 2003.  The lower provision for the nine 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 $9.300 million at September 30, 2004 compared to $8.692 million at December 31, 2003.  This represented an increase of 7.0%.  As of September 30, 2004 the allowance for loan losses is 1.37% of outstanding loans as compared to 1.43% at December 31, 2003.

 

11

 

Activity in the allowance for loan losses is as follows:

 

		Nine Months Ended September 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		(64		)	(88		)
Residential Mortgages		—			(1		)
Consumer		(962		)	(732		)
Total loans charged off		(1,030		)	(821		)
Recoveries
Commercial		—			—
Commercial/Residential Construction		11			—
Commercial Mortgages		—			—
Residential Construction-Consumer		—			—
Residential Mortgages		—			1
Consumer		146			50
Total recoveries		157			51
Net chargeoffs		(873		)	(770		)
Provision for loan losses		1,481			2,107
Allowance for loan losses, end of period		$	9,300		$	8,525
Loans (net of premiums and discounts)
Period-end balance		676,467			553,668
Average balance during period		635,982			543,549
Allowance as percentage of period-end loan balance		1.37		%	1.54		%
Percent of average loans:
Provision for loan losses (annualized)		0.31		%	0.52		%
Net chargeoffs (annualized)		0.18		%	0.19		%

 

During the first nine months of 2004 net chargeoffs as a percentage of average loans outstanding decreased to 0.18%, from 0.19% during the same period of 2003.  Non-performing assets, expressed as a percentage of total assets, decreased to 0.16% at September 30, 2004, down from 0.48% at December 31, 2003, and 0.63% at September 30, 2003, due to resolutions of loans placed on nonaccruing status during the quarter and a decrease of other real estate owned.  The following table provides a summary of No-accruing loans, other real estate owned, and accruing loans that are 90 days or more delinquent.

 

12

 

Nonperforming Assets		September 30, 2004			December 31, 2003			September 30, 2003
(Dollars in thousands)
Nonaccruing loans		$	1,836		$	4,774		$	4,598
Real estate acquired by foreclosure		45			296			1,832
Total non-performing assets		$	1,881		$	5,070		$	6,430
Loans past-due 90 days or more and accruing		$	4,262		$	2,258		$	8,310

 

At September 30, 2004, the allowance for loan losses represented 494.4% of nonperforming assets compared to 171.4% at December 31, 2003.  Management believes the allowance for loan losses at September 30, 2004 is adequate.

 

Deposits

 

Deposits totaled $812.440 million as of September 30, 2004, increasing $64.707 million or 8.7% from the December 31, 2003 balance of $747.733 million.  The increase in deposits is attributable to continued success of marketing campaigns, account opening promotions and cross selling of existing customers into additional deposit products.  The mix of deposits has not significantly changed during 2004, and the Company continues to maintain a strong mix of non-interest checking accounts, NOW and money market accounts.

 

		September 30, 2004					December 31, 2003
(Dollars in thousands)		Balance			Percent of Total		Balance			Percent of Total
NOW & money market savings deposits		$	217,529		26.8	%	$	212,344		28.4	%
Regular savings deposits		67,671			8.3	%	61,110			8.2	%
Time deposits		375,283			46.2	%	341,300			45.6	%
Total interest-bearing deposits		660,483			81.3	%	614,754			82.2	%
Noninterest-bearing demand deposits		151,957			18.7	%	132,979			17.8	%
Total deposits		$	812,440		100.0	%	$	747,733		100.0	%

 

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Results of Operations

 

Net Income.  For the nine months ended September 30, 2004, net income totaled $4.255 million compared to $3.885 million for the nine month period ended September 30, 2003.  Basic earnings per share for the first nine months of 2004 totaled $.74 compared to $.72 per share for the same period of 2003.  Diluted earnings per share totaled $.67 for the first nine months of 2004 compared to the first nine months of 2003 of $.66.  Earnings for the nine months ended September 30, 2004 reflected higher net interest income, a lower provision for credit losses, a decline in gain on loan sales and growth in noninterest expenses.

 

For the third quarter of 2004, net income totaled $1.575 million compared to $1.402 million for the three month period ended September 30, 2003.  Basic earnings per share for the third quarter ended September 30, 2004 totaled $.27 compared to $.26 per share for the same period of 2003.  Diluted earnings per share totaled $.25 for the third quarter of 2004 compared to $.23 for the third quarter of 2003.  Increased net income for the third quarter of 2004 was attributable to increases in net interest income, while noninterest income decreased and the provision for loan losses and income tax expense increased.

 

 Reported results for the third quarter of 2003 were affected by several significant events, which had little impact on overall net income, but had significant effects on various components of net income, and therefore affect comparisons to 2004’s third quarter reported results.

 

In September of 2003, the Company recognized state tax credits of $480,000, which reflected the actual amount of tax credits that were used to reduce the Company’s Maryland state tax liability for the year 2002 and the nine months ended September 30, 2003.   The realization of the credits was recognized as a reduction to income tax expense.  Third quarter 2003 other operating expenses included non-recurring consulting fees of $265,000 that were incurred for consulting services rendered in securing the tax incentives. The recognition of the tax credits and the consulting expenses (net of income tax consequences of $60,000) added approximately $155,000 to after-tax profits to reported results for the quarter ended September 30, 2003.

 

Also during the third quarter of 2003, the Company elected to redeem its $21,450,000 Trust Preferred offering issued in June of 1998, which resulted in the write-off the unamortized portion of the original issuance costs of $945,000. The Company also realized gains on sales of securities sold to help fund a portion of the redemption of $741,000.  The cost of the write-off and recognition of security gains (net of income tax consequences of $78,000) reduced after tax net income by $126,000 for the quarter ended September 30, 2003.

 

Net Interest Income.  Net interest income for the first nine months of 2004 totaled $31.210 million, an increase of 24.4% over $25.083 million for the nine months ended September 30, 2003. The net interest margin for the nine month period was 4.03% compared to 3.93% for the comparable period of 2003, while average earning assets increased by $180.589 million or 21.5%.

 

Total interest income increased by $6.597 million due to growth in average loans and investments.  Average loans outstanding increased by $92.433 million, average investment securities increased by $189.187 million while average loans held for sale decreased $67.090 million. Yields on earning assets for the period decreased to 6.18% from 6.48%, reflecting a lower interest rate environment, and a somewhat lower mix of loans as a percentage of earning assets. Interest expense increased by $470,000.  Average interest bearing liabilities increased by $162.047 million. Average interest bearing deposits increased by $59.167 million and average borrowings increased by $102.880 million.  Yields on interest bearing liabilities decreased to 2.45% from 2.91% for the same period in 2003 as a result of the decline in general interest rates.

 

Third quarter net interest income was $11.064 million in 2004, an increase of 30.2% over $8.499 million for the third quarter of 2003.  The net interest margin for the three month period was 4.08% compared to 3.72% for the comparable period of 2003. Interest income increased $2.705 million.  Average loans outstanding for the third quarter increased by $102.635 million and average investments increased $193.273 million.  Average loans held for sale decreased $92.775 million and average interest bearing deposits decreased by $43.076 million.  Yields on earning assets for the period increased to 6.24% from 6.21%, reflecting a modest increase in general interest rates during the quarter and a higher mix of loans as a percentage of earning assets.  Interest expense increased by $140,000. Average interest bearing liabilities increased by $151.331 million, as average interest bearing deposits increased by $34.969 million and average borrowings increased by $116.362 million.  Rates paid on interest bearing liabilities for the quarter ended September 30, 2004 decreased to 2.45% from 2.84% for the same period in 2003 as a result of the decline in the cost of retail deposits, and the refinance of higher cost trust preferred securities.

 

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		For nine months ended September 30,
		2004						2003
		Average Balance				Yield/ Rate		Average Balance				Yield/ Rate
Assets:
Loans
Commercial Loans and Lines of Credit		$	73,976			5.80	%	$		64,234		6.34	%
Comm/Res Construction		49,030				7.33	%	34,744				6.96	%
Commercial Mortgages		251,309				6.89	%	211,772				7.26	%
Residential Constr – Cons		120,721				7.24	%	121,816				7.77	%
Residential Mortgages		41,254				6.71	%	40,877				7.71	%
Consumer		99,692				10.78	%	70,106				10.35	%
Total Loans		635,982				7.46	%	543,549				7.68	%
Loans held for sale		45,131				4.97	%	112,221				5.03	%
Available for sale securities, at fair value		312,993				4.16	%	123,805				5.17	%
Interest bearing deposits		20,248				0.96	%	57,754				1.05	%
Restricted stock investments, at cost		6,951				3.46	%	3,387				3.87	%
Total earning assets		1,021,305				6.18	%	840,716				6.48	%
Allowance for loan losses		(8,893			)			(7,799			)
Cash and other non earning assets		87,921						76,861
Total Assets		$	1,100,333					$	909,778
Liabilities and Stockholders’ Equity
Interest bearing deposits
NOW deposits		63,718				0.35	%	60,932				0.53	%
Savings deposits		66,424				0.37	%	54,036				0.69	%
Money market deposits		150,090				0.80	%	148,120				1.03	%
Time deposits		365,466				3.00	%	323,443				3.51	%
Total interest bearing deposits		645,698				1.96	%	586,531				2.32	%
Borrowings		252,189				3.73	%	149,309				5.26	%
Total interest bearing liabilities		897,887				2.45	%	735,840				2.91	%
Noninterest bearing demand deposits		139,051						116,452
Other liabilities		3,742						3,639
Stockholders Equity		59,653						53,847
Total Liabilities and Stockholders’ Equity		$		1,100,333				$	909,778
Net Interest Spread						3.73	%					3.57	%
Net Interest Margin						4.03	%					3.93	%

 

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