UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

 

FORM 10-Q

 

 

Commission file number:  0-21815

 

FIRST MARINER BANCORP

(Exact name of registrant as specified in its charter)

 

 

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 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 6, 2003 is 5,408,824 shares.

 

 

FIRST MARINER BANCORP

INDEX

 

PART I - FINANCIAL INFORMATION
Item 1 -		Financial Statements
		Consolidated Statements of Financial Condition at June 30, 2003 (unaudited) and at December 31, 2002	3
		Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2003 (unaudited) and June 30, 2002 (unaudited)	4
		Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2003 (unaudited) and June 30, 2002 (unaudited)	5
		Notes to Consolidated Financial Statements (unaudited)	6
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4 -	Controls and Procedures		19
PART II - OTHER INFORMATION			20
Item 1 -	Legal proceedings		20
Item 2 -	Changes in securities and use of proceeds		20
Item 3 -	Defaults upon senior securities		20
Item 4 -	Submission of matters to a vote of security holders		20
Item 5 -	Other information		20
Item 6 -	Exhibits and reports on Form 8-K		20
Signatures			21

 

2

 

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Financial Condition

 

(Dollars in thousands, except per share data)		June 30, 2003			December 31, 2002
		(unaudited)
ASSETS
Cash and due from banks		$	57,549		$	35,674
Federal funds sold and Interest-bearing deposits		97,745			40,132
Available-for-sale securities, at fair value		125,393			127,810
Loans held for sale		132,158			93,098
Loans receivable		547,141			533,965
Allowance for loan losses		(8,206		)	(7,188		)
Loans, net		538,935			526,777
Other real estate owned		1,902			2,247
Restricted stock investments		3,040			3,290
Property and equipment, net		18,063			17,571
Accrued interest receivable		4,542			4,540
Deferred income taxes		1,553			1,619
Prepaid expenses and other assets		22,471			17,434
Total assets		$	1,003,351		$	870,192
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits		$	769,195		$	668,169
Borrowings		103,981			89,824
Repurchase agreements		25,000			25,000
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the Company		45,950			31,450
Accrued expenses and other liabilities		5,281			4,623
Total liabilities		949,407			819,066
Stockholders’ equity:
Common stock, $.05 par value; 20,000,000 shares authorized; 5,408,824 and 5,394,586 shares issued and outstanding, respectively		270			270
Additional paid-in capital		48,088			47,939
Retained earnings		3,437			955
Accumulated other comprehensive income		2,149			1,962
Total stockholders’ equity		53,944			51,126
Total liabilities and stockholders’ equity		$	1,003,351		$	870,192

 

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,
		2003			2002			2003			2002
		(dollars in thousands except per share)						(dollars in thousands except per share)
Interest income:
Loans		$	12,053		$	10,165		$	23,374		$	20,246
Investments and interest-bearing deposits		1,715			2,766			3,571			5,057
Total interest income		13,768			12,931			26,945			25,303
Interest expense:
Deposits		3,447			3,557			6,640			7,238
Borrowed funds and repurchase agreements		1,877			1,735			3,721			3,466
Total interest expense		5,324			5,292			10,361			10,704
Net interest income		8,444			7,639			16,584			14,599
Provision for loan losses		902			335			1,452			635
Net interest income after provision for loan losses		7,542			7,304			15,132			13,964
Noninterest income:
Gain on sale of mortgage loans		1,339			402			2,634			1,333
Other mortgage banking revenue		510			560			941			807
ATM Fees		669			530			1,253			945
Service fees on deposits		1,668			952			3,203			1,855
Gain on sales of investment securities		143			94			189			94
Income from bank owned life insurance		175			133			370			267
Other		720			476			1,355			889
Total noninterest income		5,224			3,147			9,945			6,190
Noninterest expenses:
Salaries and employee benefits		5,431			4,702			10,853			9,137
Net occupancy		1,463			1,125			2,785			2,082
Furniture, fixtures and equipment		708			532			1,396			1,131
Professional services		226			499			539			719
Advertising		289			300			585			550
Data processing		511			427			986			820
Other		2,185			1,528			4,293			3,037
Total noninterest expenses		10,813			9,113			21,437			17,476
Income before taxes		1,953			1,338			3,640			2,678
Provision for income taxes		625			430			1,157			907
Net income		$	1,328		$	908		$	2,483		$	1,771
Net income per common share:
Basic		$	0.25		$	0.17		$	0.46		$	0.33
Diluted		0.23			0.16			0.43			0.31

 

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,

 

		2003			2002
		(dollars in thousands)
Cash flows from operating activities:
Net income		$	2,483		$	1,771
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization		1,530			1,301
Amortization of unearned loan fees and costs, net		(793		)	(1,031		)
Amortization of premiums and discounts on loans		(178		)	2
Amortization of premiums and discounts on mortgage-backed securities, net		277			294
Gain on available for sale securities		(189		)	(94		)
(Gain) loss on other real estate owned		(161		)	5
Valuation allowance of other real estate owned		45			50
Increase in accrued interest receivable		(2		)	(496		)
Provision for loan losses		1,452			635
Net (increase) decrease in mortgage loans held-for-sale		(39,060		)	40,870
Net increase (decrease) in accrued expenses and other liabilities		658			(538		)
Net (increase) decrease in prepaids and other assets		(5,037		)	867
Net cash (used in) provided by operating activities		(38,975		)	43,636
Cash flows from investing activities:
Loan disbursements, net of principal repayments		(12,639		)	(30,406		)
Purchases of property and equipment		(2,022		)	(2,809		)
Proceeds from redemption of Federal Home Loan Bank of Atlanta stock		250			—
Purchases of available for sale securities		(62,297		)	(71,284		)
Sales of available for sale securities		1,194			3,492
Maturity of available for sale securities		31,437			500
Principal repayments of available for sale securities		32,247			15,948
Construction disbursements-other real estate owned		(62		)	(134		)
Proceeds from sales of other real estate owned		523			408
Net cash used in investing activities		(11,369		)	(84,285		)
Cash flows from financing activities:
Net increase in deposits		101,026			24,361
Net increase in other borrowings		14,157			1,206
Proceeds from issuance of preferred securities		14,500			—
Proceeds from advances from Federal Home Loan Bank of Atlanta		17,000			—
Repayment of advances from Federal Home Loan Bank of Atlanta		(17,000		)	—
Proceeds from stock issuance, net		149			119
Net cash provided by financing activities		129,832			25,686
Increase (decrease) in cash and cash equivalents		79,488			(14,963		)
Cash and cash equivalents at beginning of period		75,806			71,382
Cash and cash equivalents at end of period		$	155,294		$	56,419
Supplemental information:
Interest paid on deposits and borrowed funds		$	10,325		$	10,842
Income taxes paid		1,659			1,384

 

See accompanying notes to consolidated financial statements.

 

5

 

FIRST MARINER BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION

 

The foregoing consolidated financial statements of First Mariner Bancorp (the “Company”) are unaudited; however, in the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of interim periods have been included.   These statements should be read in conjunction with the financial statements and accompanying notes included in First Mariner Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2002.  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 2003.

 

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the Financial Accounting Standard Board (FASB) issued Interpretation No. 46 (FIN46), Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of variable interest entities (VIE).  The provisions of FIN 46 are effective July 1, 2003, for VIE created on or before January 31, 2003, and immediately for VIE created after January 31, 2003.   We are currently assessing the application of FIN 46 as it relates to certain variable interests acquired before January 31, 2003, and any accounting impact will be reported in our third quarter 2003 financial statements.

 

In January 2003, the Emerging Issues Task Force (EITF) of the FASB released Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which is effective for revenue arrangements entered into on or after July 1, 2003.  This issue addresses certain aspects of the accounting for arrangements under which a company will perform multiple revenue-generating activities.  Specifically, it addresses whether and/or how to separate multiple-deliverable arrangements and how to allocate revenue among those deliverables.  We have determined that the implementation of EITF Issue No. 00-21 will not have a material effect on our financial statements.

 

In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which is effective for contracts entered into or modified and hedging relationships designated after June 20, 2003.  This Statement amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  We have determined that the implementation of this standard will not have a material effect on our financial statements.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which was effective May 31, 2003 for new or modified financial instruments and July 1, 2003 for existing financial instruments.  This standard addresses the classification and measurement of financial instruments with characteristics of both liabilities and equity.  We have determined that the implementation of this standard will not have a material effect on our financial statements.

 

NOTE 3 – COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)

 

		Six months ended June 30,
		2003			2002
		(Unaudited) (dollars in thousands)
Net income		$	2,483		$	1,771
Other comprehensive income items:
Unrealized holding gains arising during the period (net of tax of $117 and $1,171, respectively)		303			1,911
Less:  reclassification adjustment for gains (net of taxes of $73 and $36, respectively) included in net income		116			58
Total other comprehensive income		187			1,853
Total comprehensive income		$	2,670		$	3,624

 

6

 

NOTE 4 – 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.  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
		June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net income-basic and diluted		$	1,328		$	908		$	2,483		$	1,771
Weighted-average shares outstanding-basic		5,401,633			5,374,066			5,398,331			5,370,955
Dilutive securities-options and warrants		464,782			318,464			426,203			258,436
Adjusted weighted-average shares outstanding-dilutive		5,866,415			5,692,530			5,824,534			5,629,391

 

7

 

NOTE 5 - FAIR VALUE ACCOUNTING FOR STOCK PLANS.

 

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 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)		2003			2002
Net earnings, as reported		$	1,328		$	908
Deduct: Total stock-based employee compensation expense determined using the fair value based method for all awards, net of related tax effects		(10		)	(31		)
Pro forma net earnings		$	1,318		$	877
Earnings per share:
Basic - as reported		$	0.25		$	0.17
Basic - pro forma		$	0.24		$	0.16
Diluted - as reported		$	0.23		$	0.15
Diluted - pro forma		$	0.22		$	0.15

 

		For six months ended June 30,
(dollars in thousands except per share data)		2003			2002
Net earnings, as reported		$	2,483		$	1,771
Deduct: Total stock-based employee compensation expense determined using the fair value based method for all awards, net of related tax effects		(475		)	(320		)
Pro forma net earnings		$	2,008		$	1,451
Earnings per share:
Basic - as reported		$	0.46		$	0.33
Basic - pro forma		$	0.37		$	0.27
Diluted - as reported		$	0.43		$	0.31
Diluted - pro forma		$	0.34		$	0.26

 

NOTE 6 – 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.  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.

 

8

 

For the six month period ended June 30, 2003

 

(dollars in thousands)		Commercial and Consumer Banking			Consumer Finance			Mortgage Banking			Total
Interest income		$	22,596		$	1,895		$	2,454		$	26,945
Interest expense		8,777			273			1,311			10,361
Net interest income		13,819			1,622			1,143			16,584
Provisions for loan losses		900			552			—			1,452
Net interest income after provision for loan losses		12,919			1,070			1,143			15,132
Other operating income		5,796			534			3,615			9,945
Other operating expense		16,434			1,653			3,350			21,437
Net intersegment income		54			—			(54		)	—
Income before taxes		$	2,335		$	(49	)	$	1,354		$	3,640
Total assets		$	853,815		$	17,378		$	132,158		$	1,003,351

 

For the six month period ended June 30, 2002

 

(dollars in thousands)		Commercial and Consumer Banking			Consumer Finance			Mortgage Banking			Total
Interest income		$	24,077		$	—		$	1,226		$	25,303
Interest expense		10,234			—			470			10,704
Net interest income		13,843			—			756			14,599
Provisions for loan losses		635			—			—			635
Net interest income after provision for loan losses		13,208			—			756			13,964
Other operating income		4,010			—			2,180			6,190
Other operating expense		14,354			—			3,122			17,476
Net intersegment income		(335		)	—			335			—
Income before taxes		$	2,529		$	—		$	149		$	2,678
Total assets		$	764,231		$	—		$	42,406		$	806,637

 

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, 2002.

 

The Companies

 

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 22 full service branches and 207 Automated Teller Machines.

 

9

 

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.   At June 30, 2003, Finance Maryland had loans outstanding of $16.1 million and 8 branch locations.

 

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 $1.003 billion at June 30, 2003, compared to $870.192 million at December 31, 2002, increasing $133.159 million or 15.3% for the first six months of 2003.  Earning assets increased $107.182 million or 13.4% to $905.477 million from $798.295 million.  Short-term overnight investments increased $57.613 million, which was driven by deposit growth of $101.026 million and decreases in investment securities of $2.417 million. Loans outstanding have increased $13.176 million or 2.5% and loans held for sale increased by $39.060 million or 42.0% to $132.158 million.  Borrowings increased $14.157 million or 47.5% due to increased level of short-term customer repurchase agreements. Stockholders’ equity increased by $2.818 million or 5.5%, driven by retention of earnings.

 

Investment securities decreased by $2.417 million, primarily due to principal payments received on mortgage-backed securities during the first six months of 2003.  Historically low market interest rates continue to encourage refinancing activity which has accelerated principal repayment on these types of securities.  The investment portfolio composition is as follows:

 

		June 30, 2003			December 31, 2002
Investment securities—available for sale:
Mortgage-backed securities		$	55,871		$	73,842
Trust preferred securities		26,998			26,399
US Government agency bonds		27,142			12,159
US Treasury securities		1,010			1,015
Equity securities		3,007			2,824
Foreign Government Bonds		1,350			850
Other investment securities		10,015			10,721
Total investment securities—available-for-sale		$	125,393		$	127,810

 

Total loans increased $13.176 million during the first six months of 2003.  Significant growth was realized in the Company’s commercial loan portfolio which increased $9.605 million or 16.9% and consumer loan portfolio which grew by $11.092 million or 18.2%  The total loan portfolio was comprised of the following:

 

10

 

		June 30, 2003			December 31, 2002
		(in thousands)
Loans:
Commercial Loans and Lines of Credit		$	66,365		$	56,760
Commercial/Residential Construction		34,480			31,878
Commercial Mortgages		215,926			202,994
Residential Construction-Consumer		119,120			135,189
Residential Mortgages		39,079			46,065
Consumer		72,171			61,079
Total Loans		$	547,141		$	533,965

 

Credit Risk Management

 

The first six months provision for loan losses in 2003 was $1.452 million compared to $635,000 for the same period ended June 30, 2002. This increase reflected higher levels of net charge-offs and an increase in the allowance for loan losses as a percentage of total loans.  The allowance for loan losses increased 14.2%, and totaled $8.206 million at June 30, 2003 compared to $7.188 million at December 31, 2002.  As of June 30, 2003 the allowance for loan losses is 1.50% of outstanding loans as compared to 1.35% at December 31, 2002.  During the first six months of 2003, net chargeoffs increased to $434,000 compared to $99,000 during the same period of 2002, reflecting higher chargeoffs of consumer loans and customer overdrafts.

 

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.

 

Activity in the allowance for loan losses is as follows:

 

11

 

Allowance for Loan Losses		Six Months Ended June 30,
(Dollars in thousands)		2003			2002
Allowance for loan losses, beginning of year		$	7,188		$	5,524
Loans charged off:
Commercial		—			—
Commercial/Residential Construction		—			(65		)
Commercial Mortgages		—			—
Residential Construction-Consumer		(29		)	—
Residential Mortgages		(1		)	—
Consumer		(431		)	(51		)
Total loans charged off		(461		)	(116		)
Recoveries
Commercial		—			—
Commercial/Residential Construction		—			—
Commercial Mortgages		—			—
Residential Construction-Consumer		—			—
Residential Mortgages		1			—
Consumer		26			17
Total recoveries		27			17
Net chargeoffs		(434		)	(99		)
Provision for loan losses		1,452			635
Allowance for loan losses, end of year		$	8,206		$	6,060
Loans (net of premiums and discounts)
Period-end balance		547,141			500,002
Average balance during period		539,352			473,087
Allowance as percentage of period-end loan balance		1.50		%	1.21		%
Percent of average loans:
Provision for loan losses (annualized)		0.54		%	0.27		%
Net chargeoffs (annualized)		0.16		%	0.04		%

 

Non-performing assets (the total of nonaccruing loans and other real estate owned), expressed as a percentage of total assets, increased to 0.45% at June 30, 2003, up from 0.41% at December 31, 2002, and 0.41% at June 30, 2002, due to an increase in loans placed on nonaccruing status during the year.   Loans past due 90 days or more and still accruing totaled $9.688 million compared to $9.346 million at December 31, 2002 and $6.495 million as of June 30, 2002.   Residential Construction-Consumer loans totaled $6.226 million of the total 90 day delinquency as of June 30, 2003.  While there has been a significant increase in loans past due 90 days or more, the increases are in well secured residential real estate loans.  Management continues to pursue aggressive collection efforts and does not anticipate any material losses on these loans.

 

12

 

Nonperforming Assets (Dollars in thousands)		June 30, 2003			December 31, 2002			June 30, 2002
Nonaccruing loans		$	2,607		$	1,278		$	826
Real estate acquired by foreclosure		1,902			2,247			2,452
Total non-performing assets		$	4,509		$	3,525		$	3,278
Loans past-due 90 days or more and accruing		$	9,688		$	9,346		$	6,495

 

At June 30, 2003, the allowance for loan losses represented 182.0% of nonperforming assets compared to 203.9% at December 31, 2002 and 184.9% at June 30, 2002.  Management believes the allowance for loan losses at June 30, 2003 is adequate.

 

Deposits

 

Deposits totaled $769.195 million as of June 30, 2003, increasing $101.026 million or 15.1% from the December 31, 2002 balance of $668.169 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 2003.

 

		June 30, 2003					December 31, 2002
		Balance			Percent of Total		Balance			Percent of Total
NOW & money market savings deposits		$	234,826		30.5	%	$	216,889		32.5	%
Regular savings deposits		55,990			7.3	%	47,853			7.2	%
Time deposits		346,317			45.0	%	285,778			42.7	%
Total interest-bearing deposits		637,133			82.8	%	550,520			82.4	%
Noninterest-bearing demand deposits		132,062			17.2	%	117,649			17.6	%
Total deposits		$	769,195		100.0	%	$	668,169		100.0	%

 

13

 

Results of Operations

 

Net Income.  For the six months ended June 30, 2003, net income totaled $2.483 million compared to $1.771 million for the six month period ended June 30, 2002.  Basic earnings per share for the first six months of 2003 totaled $.46 compared to $.33 per share for the same period of 2002.  Diluted earnings per share totaled $.43 for the first six months of 2003 compared to the first six months of 2002 of $.31.  Increased net income for the first six months of 2003 was attributable to increases in revenue (net interest income and non interest income) of $5.740 million,  partially offset by an increase in noninterest expense of $3.961 million.

 

Second quarter 2003 net income was $1.328 million compared to earnings of $908,000 for the second quarter of 2002.  Basic earnings per share for the quarter increased to $.25 from $.17 for the second quarter of 2002, while diluted earnings per share increased to $.23 from $.16.  The increase in earnings was due to an increase in revenue of $2.882 million, partially offset by an increase in noninterest expenses of $1.700 million.

 

Net Interest Income.  Net interest income for the first six months of 2003 totaled $16.584 million, an increase of 13.6% over $14.599 million for the first six months of 2002. The net interest margin for the six month period was 4.04% compared to 4.03% for the comparable period of 2002, while average earning assets increased by $107.192 million or 13.4%.

 

Total interest income increased by $1.642 million due to growth in average earning assets.  Average loans outstanding increased by $66.265 million while average investment securities decreased by $28.351 million and average loans held for sale increased $53.729 million. Yields on earning assets for the period decreased to 6.61% from 7.00% due to a decline in market interest rates. Interest expense decreased by $343,000.  Average interest bearing liabilities increased by $84.646 million. Average interest bearing deposits increased by $68.489 million and average borrowings increased by $16.157 million.  Yields on interest bearing liabilities decreased to 2.93% from 3.44% for the same period in 2002, also as a result of the decline in general interest rates.

 

Second quarter net interest income was $8.444 million in 2003, an increase of 10.5% over $7.639 million for the second quarter of 2002.  The net interest margin for the three month period was 3.95% compared to 4.15% for the comparable period of 2002. Interest income increased $837,000.   Average loans outstanding for the second quarter increased by $69.169 million.   Average loans held for sale increased $74.783 million and average interest bearing deposits grew by $22.117 million.  Yields on earning assets for the period decreased to 6.48% from 7.06%.  Interest expense increased by $32,000 and average interest bearing liabilities increased by $108.634 million, as average interest bearing deposits increased by $90.863 million and average borrowings increased by $17.771 million.  Rates paid on interest bearing liabilities for the quarter ended June 30, 2003 decreased to 2.88% from 3.36% for the same period in 2002 as a result of the decline in general interest rates, and a higher mix of deposits in the overall funding sources.

 

14

 

		For the six months ended June 30,
		2003					2002
		Average Balance			Yield/ Rate		Average Balance			Yield/ Rate
Assets:
Loans
Commercial Loans and LOC		$	64,568		6.37	%	$	49,896		7.99	%
Comm/Res Construction		34,520			6.81	%	35,838			7.01	%
Commercial Mortgages		208,101			7.39	%	168,481			8.04	%
Residential Constr - Cons		122,627			7.92	%	121,426			8.94	%
Residential Mortgages		42,703			7.79	%	50,022			8.20	%
Consumer		66,833			10.31	%	47,424			6.33	%
Total Loans		539,352			7.75	%	473,087			8.03	%
Loans held for sale		96,382			5.06	%	42,653			5.74	%
Available for sale securities, at fair value		115,957			5.44	%	144,308			6.27	%
Interest bearing deposits		57,820			1.13	%	55,208			1.53	%
Restricted stock investments, at cost		3,446			4.32	%	4,000			5.45	%
Total earning assets		812,957			6.61	%	719,256			7.00	%
Allowance for loan losses		(7,515		)			(5,768		)
Cash and other non earning assets		75,274					53,839
Total Assets		$	880,716				$	767.327
Liabilities and Stockholders’ Equity
Interest bearing deposits
NOW deposits		60,943			0.54	%	38,214			0.79	%
Savings deposits		52,113			0.75	%	41,743			1.00	%
Money market deposits		147,243			1.04	%	168,541			1.45	%
Time deposits		309,792			3.60	%	253,104			4.52	%
Total interest bearing deposits		570,091			2.35	%	501,602			2.91	%
Borrowings		142,258			5.27	%	126,101			5.55	%
Total interest bearing liabilities		712,349			2.93	%	627,703			3.44	%
Noninterest bearing demand deposits		111,010					91,302
Other liabilities		3,742					2,885
Stockholders Equity		53,615					45,437
Total Liabilities and Stockholders’ Equity		$	880,716				$	767,327
Net Interest Spread					3.68	%				3.59	%
Net Interest Margin					4.04	%				4.03	%

 

15

 

Noninterest Income —Noninterest income increased $3.755 million or 60.7% for the six months ended June 30, 2003 to $9.945 million from $6.190 million for the same period of 2002, reflecting higher levels of revenue in all major categories. Deposit service charges rose $1.348 million or 72.7% as compared to the six months ending June 30, 2002 due to the increased number of deposit accounts and fees generated by the Bank’s Cash Advantage product which was introduced in December 2002.  ATM fees increased by $308,000 or 32.6% as a result of increased volume of ATM and debit card transactions.  As of June 30, 2003, the Bank has 23 ATM locations that it owns and operates and 184 ATM’s through the third party agreements.  Mortgage banking income and gain on sale of mortgage loans increased by $1.435 million or 67% due to increased volume of mortgage loans originated and sold into the secondary market.  The volume of mortgage loans sold during the first six months of 2003 increased 86%.   Other sources of noninterest income increased by $466,000 or 52.4% due to higher sales of insurance products, and income from bank owned life insurance increased $103,000.

 

		For six months ended June 30,
		2003			2002
(Dollars in thousands)		Amount			Amount
Gain on sale of mortgage loans		$	2,634		$	1,333
Service fees on deposits		3,203			1,855
ATM fees		1,253			945
Gain on sales of investment securities, net		189			94
Other mortgage banking revenue		941			807
Income from bank owned life insurance		370			267
Other operating income		1,355			889
Total noninterest income		$	9,945		$	6,190

 

For the second quarter of 2003, noninterest income increased $2.077 million or 66.0% to $5.224 million compared to $3.147 million for the same quarter of 2002, reflecting higher levels of revenue in most major categories.  Deposit service charges rose $716,000 or 75.2% as compared to the same quarter of 2002.  Gain of sale of mortgage originations rose $937,000 or 233.1% due to increased volume of mortgage originations and sales of mortgages.  Mortgages sold into the secondary market increased 125% and pricing spreads increased during the quarter.

 

Noninterest expenses - For the six months ended June 30, 2003 noninterest expenses increased $3.961 million or 22.7% to $21.437 million compared to $17.476 million for the same period of 2002.  The increase in expenses includes costs associated with the newly formed finance company which added approximately $1.650 million to the growth in noninterest expenses. Increased salary and employee benefits expenses of $1.716 million relate to additional personnel costs for new positions due to an increase in the number of loans and deposits, higher commissions paid on mortgage loan originations, and staffing hired for the newly formed consumer finance company.  Occupancy expenses increased $703,000 due to new offices of Finance Maryland, increased space occupied by administrative areas and higher utility costs.

 

For the second quarter of 2003, noninterest expenses increased $1.700 million or 18.7% to $10.813 million, compared to $9.113 million for the same quarter of 2002.   Increases in salary and employee benefits expenses related to the increased personnel costs for the consumer finance company, as well as higher mortgage commissions paid on mortgage loan originations.  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,
Noninterest expense		2003			2002
(Dollars in thousands)		Amount			Amount
Salaries and employee benefits		$	10,853		$	9,137
Net occupancy		2,785			2,082
Furniture, fixtures and equipment		1,396			1,131
Professional services		539			719
Advertising		585			550
Data processing		986			820
Service and maintenance		676			482
Office supplies		346			272
ATM servicing expenses		444			410
Printing		331			187
Corporate insurance		104			101
OREO expense		(142		)	(24		)
FDIC Premiums		53			134
Consulting fees		110			93
Marketing/promotion		405			218
Courier/postage		565			263
Security		96			44
Other		1,305			857
Total noninterest expense		$	21,437		$	17,476

 

Income Taxes- The Company recorded 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 in comparison to income tax expense of $907,000 on income before taxes of $2.678 million, resulting in an effective tax rate of 33.9% for the six month period ended June 30, 2002.  The decrease in the effective tax rate reflects higher levels of tax exempt interest income for state income tax purposes, as well as increased income from Bank Owned Life Insurance which is exempt from both federal and state income taxes.

 

The Company recorded 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 in comparison to income tax expense of $430,000 on income before taxes of $1.338 million, resulting in an effective tax rate of 32.1% for the three month period ended June 30, 2002.  The decrease in the effective tax rate reflects higher levels of tax exempt interest income for state income tax purposes, as well as increased income from Bank Owned Life Insurance which is exempt from both federal and state income taxes.

 

Liquidity and Capital Resources

 

Stockholders’ equity increased $2.818 million in the first six months of 2003 to $53.944 million from $51.126 million as of December 31, 2002.   Contributing to the increased stockholders’ equity is the retention of net income of $2.483 million for the first six months of 2003 and $149,000 of proceeds from the sale of stock under the company stock purchase plan and exercise of options.  Other comprehensive income increased by $187,000 due to the increase in market values of securities classified as available for sale.

 

In June 2003, the Company issued $14,500,000 (14,500 shares $1,000 par value) Preferred Securities due in July of 2033.  These securities bear interest at a fixed annual rate of 5.66% until July 7, 2008, then convert to a floating rate of LIBOR plus 3.25% reset quarterly until maturity.  A portion of these preferred securities may qualify for inclusion in Tier 1 capital under current capital guidelines and any amount not qualifying as tier 1capital is included in Total capital.  The securities are callable at their par value beginning in July 2008.

 

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,
		2003		2002
		(unaudited)
Regulatory capital ratios
Leverage
Consolidated		7.5	%	8.0	%
The Bank		7.2	%	7.4	%
Tier 1 capital to risk weighted assets
Consolidated		9.8	%	10.7	%
The Bank		9.4	%	9.8	%
Total capital to risk weighted assets
Consolidated		15.0	%	12.7	%
The Bank		10.5	%	10.8	%

 

Liquidity describes the ability of the Company and the Bank to meet the financial obligations that arise out of the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Bank’s customers and to fund current and planned expenditures. Liquidity is derived from increased customer deposits, the maturity distribution of the investment portfolio, loan repayment and income from earning assets.  The Bank’s principal sources of short-term 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 $155.294 million at June 30, 2003 compared to $75.806 million as of December 31, 2002.  The Company’s loan to deposit ratio stood at 71.1% as of June 30, 2003 and 79.9% at December 31, 2002.

 

Longer-term liability needs can be obtained through advances from the Federal Home Loan Bank (FHLB) or term repurchases agreements and other credit facilities.  The Bank maintains lines of credit totaling $370.503 million with a remaining borrowing capability of $43.165 million based upon qualifying assets not currently pledged.

 

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, 2002.  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

 

18

 

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 given 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, 2003, the Company had a one year cumulative positive gap of approximately $265 million.

 

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 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.  At June 30, 2003, the Company’s estimated earnings sensitivity profile reflected a minimal sensitivity to interest rate changes.  Based on an assumed increase of 200 basis points over a one year period, the Company’s net interest income would increase by 3% if rates were to increase and decrease by 6% 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, control 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.

 

19

 

PART II - Other Information

 

Item 1 -	Legal proceedings - Neither the Company or its subsidiaries 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 2 -	Changes in securities and use of proceeds - None
Item 3 -	Defaults upon senior securities - None
Item 4 -	Submission of matters to a vote of security holders-The information required by Item 4 with respect to the Company’s Annual Meeting of Stockholders held on May 6, 2003 is included in Item 4 of the Company’s quarterly report on Form 10Q for the quarter ended March 31, 2003.
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
		Form 8-K filed on June 30, 2003

 

20

 

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:	August 14, 2003			By:	/s/ Edwin F. Hale Sr.
				Edwin F. Hale Sr.
				Chairman and Chief Executive Officer
Date:	August 14, 2003			By:	/s/ Mark A. Keidel
				Mark A. Keidel
				Chief Financial Officer

 

21

 

EXHIBIT INDEX

 

3.1		Amended and Restated Articles of Incorporation of First Mariner Bancorp (Incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form SB-2, as amended, file no. 333-16011 (the “1996 Registration Statement”))
3.2		Amended and Restated Bylaws of First Mariner Bancorp (Incorporated by reference to Exhibit 3.2 of the Company’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 the Company’s Form 10-Q for the quarter ended June 30, 2002.)
10.9		First Mariner Bancorp 2002 Stock Option Plan (Incorporated by reference to Attachment A to the Company’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.)
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

 

22

 

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, 2002.)

 

23