1
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mariners Bancorp and Subsidiary
San Clemente, California
We have audited the accompanying consolidated balance sheets of Mariners
Bancorp and Subsidiary as of December 31, 1994, and December 31, 1993, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mariners Bancorp and
Subsidiary as of December 31, 1994, and December 31, 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
DAYTON & ASSOCIATES
January 13, 1995
Laguna Hills, California
F-28
2
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1994 1993
----------- -----------
ASSETS
Cash and Due from Banks........................................... $ 4,799,172 $ 3,095,600
Interest-Bearing Deposits......................................... 2,369,000 2,166,000
Securities Held to Maturity -- Note B............................. 14,251,185 8,345,352
Federal Funds Sold................................................ 6,950,000 15,400,000
Loans -- Note C:
Commercial...................................................... 7,434,083 5,961,875
Construction Financing.......................................... 15,133,598 13,889,363
Real Estate..................................................... 24,945,134 27,822,240
Consumer........................................................ 2,761,059 2,539,374
----------- -----------
TOTAL LOANS............................................. 50,273,874 50,212,852
Net Deferred Loan Fees.......................................... (215,282) (192,028)
Allowance for Possible Credit Losses............................ (807,000) (700,000)
----------- -----------
NET LOANS............................................... 49,251,592 49,320,824
Premises and Equipment -- Note D.................................. 1,596,127 1,807,954
Other Real Estate Owned........................................... 910,683 597,032
Accrued Interest and Other Assets................................. 1,664,131 1,406,898
----------- -----------
$81,791,890 $82,139,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand...................................... $16,616,647 $13,817,018
Money Market and NOW............................................ 29,250,115 29,364,397
Savings......................................................... 13,027,835 18,221,495
Time Deposits Under $100,000.................................... 10,423,600 9,931,253
Time Deposits $100,000 and Over................................. 4,644,036 3,302,559
----------- -----------
TOTAL DEPOSITS.......................................... 73,962,233 74,636,722
Accrued Interest and Other Liabilities............................ 506,572 335,480
----------- -----------
TOTAL LIABILITIES....................................... 74,468,805 74,972,202
Commitments and Contingencies -- Note J
Stockholders' Equity -- Note G:
Common Stock -- Authorized 1,500,000 Shares; Issued and
Outstanding; 630,276 in 1994 and 1993........................ 2,111,318 2,111,318
Retained Earnings............................................... 5,211,767 5,056,140
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.............................. 7,323,085 7,167,458
----------- -----------
$81,791,890 $82,139,660
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
3
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
INTEREST INCOME
Interest and Fees on Loans........................... $ 5,034,557 $ 5,490,219 $ 6,410,854
Interest on Investment Securities.................... 682,437 472,730 374,102
Other Interest Income................................ 510,827 443,254 358,238
----------- ----------- -----------
TOTAL INTEREST INCOME........................ 6,227,821 6,406,203 7,143,194
INTEREST EXPENSE
Interest on Demand Deposits.......................... 504,605 611,597 860,684
Interest on Savings Deposits......................... 386,168 603,001 832,743
Interest on Time Deposits............................ 501,747 551,939 849,172
Interest on Note Payable............................. -- -- 20,412
----------- ----------- -----------
TOTAL INTEREST EXPENSE....................... 1,392,520 1,766,537 2,563,011
----------- ----------- -----------
NET INTEREST INCOME.......................... 4,835,301 4,639,666 4,580,183
Provision for Credit Losses............................ 182,000 280,000 148,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES.................. 4,653,301 4,359,666 4,432,183
NONINTEREST INCOME
Voucher Control and Appraisal Fees................... 221,703 128,581 138,260
Mortgage Fees........................................ 468,080 1,800,530 1,579,111
Service Charges and Fees............................. 373,867 406,632 416,099
Other Income......................................... 566,841 427,806 286,681
----------- ----------- -----------
1,630,491 2,763,549 2,420,151
----------- ----------- -----------
6,283,792 7,123,215 6,852,334
NONINTEREST EXPENSE
Salaries and Employee Benefits....................... 2,334,001 2,405,970 2,188,126
Occupancy Expenses................................... 575,841 554,133 694,244
Furniture and Equipment.............................. 236,226 240,245 235,254
Other Expenses -- Note F............................. 2,804,069 2,732,132 2,371,508
----------- ----------- -----------
5,950,137 5,932,480 5,489,132
----------- ----------- -----------
INCOME BEFORE INCOME TAXES................... 333,655 1,190,735 1,363,202
Income Taxes -- Note E................................. 115,000 488,000 551,000
----------- ----------- -----------
NET INCOME................................... $ 218,655 $ 702,735 $ 812,202
=========== =========== ===========
Per Share Data:
Net Income........................................... $ .35 $ 1.12 $ 1.29
=========== =========== ===========
Number of Shares Used in Computation................. 630,276 628,838 627,635
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
4
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ---------- ---------- ----------
BALANCE AT JANUARY 1, 1992................. 627,276 $2,090,318 $3,541,203 $5,631,521
Proceeds from the Exercise of Stock
Options.................................. 450 3,150 3,150
Net Income for the Year.................... 812,202 812,202
------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1992............... 627,726 2,093,468 4,353,405 6,446,873
Proceeds from the Exercise of Stock
Options.................................. 2,550 17,850 17,850
Net Income for the Year.................... 702,735 702,735
------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1993............... 630,276 2,111,318 5,056,140 7,167,458
Dividends Paid............................. (63,028) (63,028)
Net Income for the Year.................... 218,655 218,655
------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1994............... 630,276 $2,111,318 $5,211,767 $7,323,085
======= ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
5
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
OPERATING ACTIVITIES
Net Income........................................ $ 218,655 $ 702,735 $ 812,202
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................ 235,915 244,793 371,896
Deferred Income Taxes........................ (26,000) (15,000) (82,000)
Provision for Credit Losses.................. 182,000 280,000 148,000
Provision for Loss on Other Real Estate
Owned..................................... 18,000 148,000 --
Net Gain on Sale of Other Real Estate
Owned..................................... (110,241) -- --
Net Increase from Cash Surrender Value-Life
Insurance................................. (17,235) (17,651) (19,405)
Net Change in Accrued Interest, Other Assets,
and Other Liabilities..................... (42,906) (348,530) (66,567)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. 458,188 994,347 1,164,126
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits........... (203,000) (584,000) 1,559,000
Proceeds from Sales of Other Real Estate Owned.... 1,520,335 689,518 --
Purchases of Held-to-Maturity Securities.......... (9,724,485) -- --
Proceeds from Maturities of Held-to-Maturity
Securities..................................... 3,818,652 -- --
Proceeds from Maturities of Investment
Securities..................................... -- 2,420,317 1,539,190
Purchases of Investment Securities................ -- (6,550,755) (542,266)
Net Change in Loans............................... (1,854,513) 6,979,818 (609,590)
Increase in Other Real Estate Owned............... -- -- 601,088
Purchases of Premises and Equipment............... (24,088) (112,045) (1,335,564)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES.............................. (6,467,099) 2,842,853 1,211,858
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings
Accounts....................................... (2,508,313) (5,385,584) 16,900,871
Net Change in Time Deposits....................... 1,833,824 (2,469,209) (5,671,290)
Principle Payments on Note Payable................ -- (169,160) (160,960)
Payments for Dividends............................ (63,028) -- --
Proceeds from Exercise of Stock Options........... -- 17,850 3,150
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES..... (737,517) (8,006,103) 11,071,771
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (6,746,428) (4,168,903) 13,447,755
Cash and Cash Equivalents at Beginning of Year...... 18,495,600 22,664,503 9,216,748
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................... $11,749,172 $18,495,600 $22,664,503
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Loans Transferred to Other Real Estate Owned...... $ 1,741,744 $ 597,033 $ 236,430
Cash Paid During the Year for Interest............ $ 1,356,720 $ 1,976,578 $ 2,506,755
Cash Paid During the Year for Income Taxes........ $ 192,000 $ 609,000 $ 586,950
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
6
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Mariners
Bancorp (the Company), and its wholly-owned subsidiary, Mariners Bank (the
Bank).
Cash Equivalents
For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and Due from Banks" and "Federal Funds Sold"
Securities Held to Maturity
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
Loans Held for Sale
Mortgage and SBA loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure establishing a
new cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
minus estimated costs to sell. Revenue and expenses from operations and
additions to the valuation allowance are included in other expenses.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated depreciation and
amortization.
F-33
7
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
Net Income per Share
Net income per share of common stock has been computed on the basis of the
weighted average number of shares of common stock outstanding.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with current year classifications.
Current Accounting Pronouncements
In May, 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114") and in October, 1994, the FASB issued
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures ("SFAS 118"). Under
the provisions of SFAS 114, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. SFAS
114 requires creditors to measure impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. If the measure of the impaired loan is less than the recorded investment
in the loan, a creditor shall recognize the impairment by recording a valuation
allowance with a corresponding charge to provision for estimated losses on
loans. This statement also applies to restructured loans and eliminates the
requirement to classify loans that are in-substance foreclosures as foreclosed
assets except for loans where the creditor has physical possession of the
underlying collateral but not legal title. SFAS 114 applies to financial
statements for fiscal years beginning after December 15, 1994. The Company
expects to adopt the statement on January 1, 1995 and does not expect that the
adoption of the statement will have a material impact on the Company's results
of operations or financial position.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans. In addition, SFAS 118 amends
certain disclosure requirements of SFAS 114.
In December, 1991, the FASB issued SFAS 107, Disclosures About Fair Value
of Financial Instruments ("SFAS 107"). Implementation of SFAS No. 107 is
required for fiscal years ending after December 15, 1992 for institutions with
assets greater than $150 million, and for fiscal years ending after December 15,
1995 for all other institutions, however, earlier adoption is permitted. SFAS
No. 107 requires disclosures about fair value for all financial instruments. The
Company will implement this statement in 1995.
In October, 1994, the FASB issued SFAS No. 119, Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments ("SFAS 119"). This
statement amends SFAS No. 105, Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk and SFAS 107 and provides specific disclosure
requirements for derivative financial instruments. The Company will implement
this statement in 1995, however, the Company has not engaged in any derivative
activities during the years ended December 31, 1994, 1993 and 1992.
In May of 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights ("SFAS 122"). This statement amends SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, by allowing for the capitalization as an
asset the mortgage servicing rights acquired through loan origination
activities. SFAS 122 applies to fiscal years beginning after December 15, 1995,
but earlier application is
F-34
8
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
encouraged. Application of SFAS 122 will not have a material impact on Mariners'
results of operations or financial position since Mariners does not retain
servicing rights on its sold mortgage loans.
NOTE B -- INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate market values at December 31 were as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1994:
U.S. Treasury Securities................. $ 5,385,647 $ 3,238 $ 97,885 $ 5,291,000
U.S. Government Agencies and
Corporations.......................... 5,461,722 13,424 235,146 5,240,000
Mortgage-Backed Securities............... 2,495,328 12,924 2,252 2,506,000
State and Municipal Securities........... 908,488 6,552 24,040 891,000
----------- --------- --------- -----------
$14,251,185 $ 36,138 $ 359,323 $13,928,000
=========== ========= ========= ===========
DECEMBER 31, 1993:
U.S. Treasury Securities................. $ 4,084,168 $ 46,832 $ -- $ 4,131,000
U.S. Government Agencies and
Corporations.......................... 500,517 13,483 -- 514,000
Mortgage-Backed Securities............... 3,165,328 39,461 19,789 3,185,000
State and Municipal Securities........... 595,339 22,661 -- 618,000
----------- --------- --------- -----------
$ 8,345,352 $ 122,437 $ 19,789 $ 8,448,000
=========== ========= ========= ===========
Investment securities carried at approximately $5,352,000 and $3,811,000,
at December 31, 1994 and December 31, 1993, respectively, were pledged to secure
public deposits and other purposes as required by law.
The scheduled maturities of securities held to maturity at December 31,
1994, are as follows:
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
Due in One Year or Less..................................... $ 8,777,068 $ 8,528,000
Due from One Year to Five Years............................. 2,666,791 2,586,000
Due from Five to Ten Years.................................. 126,276 116,000
Due after Ten Years......................................... 185,722 192,000
----------- -----------
11,755,857 11,422,000
Mortgage-Backed Securities.................................. 2,495,328 2,506,000
----------- -----------
$14,251,185 $13,928,000
=========== ===========
In May of 1993, the Financial Accounting Standards Board issued Statement
No. 115, Accounting for Certain Investments in Debt Securities. The Bank adopted
the provisions of the new standard in its financial statements as of January 1,
1994.
F-35
9
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within
the South Orange County area of Southern California. Although the Bank seeks to
avoid concentrations of loans to a single industry or based upon a single class
of collateral, real estate and real estate associated businesses are among the
principal industries in the Bank's market area and, as a result, the Bank's loan
and collateral portfolios are, to some degree, concentrated in those industries.
The Bank also originates mortgage and SBA loans for sale to institutional
investors. At December 31, 1994, and December 31, 1993, the Bank was servicing
approximately $4,818,000 and $2,961,000, respectively, in loans previously sold.
A summary of the changes in the allowance for possible credit losses for
the years ended December 31 follows:
1994 1993 1992
-------- ---------- --------
Balance at Beginning of Year...................... $700,000 $ 690,000 $687,000
Additions to the Allowance Charged to Expense... 182,000 280,000 148,000
Recoveries on Loans Charged Off................. 3,000 32,000 3,000
-------- ---------- --------
885,000 1,002,000 838,000
Less Loans Charged Off............................ 78,000 302,000 148,000
-------- ---------- --------
$807,000 $ 700,000 $690,000
======== ========== ========
A summary of loans past due 90 days or more and still accruing interest and
those loans on which the accrual of interest has been discontinued as of
December 31 follows:
1994 1993 1992
-------- ---------- --------
Loans Past Due 90 Days or More and Still Accruing
Interest........................................ $486,000 $1,478,000 $568,000
======== ========== ========
Loans on Nonaccrual............................... $ 42,000 $ 8,000 $ None
======== ========== ========
NOTE D -- PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
1994 1993
---------- ----------
Buildings and Improvements.................................. $ 775,000 $ 775,000
Leasehold Improvements...................................... 847,724 838,902
Furniture, Fixtures, and Equipment.......................... 1,071,585 1,058,990
---------- ----------
2,694,309 2,672,892
Less Accumulated Depreciation and Amortization.............. 1,098,182 864,938
---------- ----------
$1,596,127 $1,807,954
========== ==========
F-36
10
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- INCOME TAXES
The provisions for income taxes included in the consolidated statements of
income for the years ended December 31 consist of the following:
1994 1993 1992
-------- -------- --------
Current:
Federal..................................... $ 91,000 $360,000 $469,000
State....................................... 50,000 143,000 164,000
-------- -------- --------
141,000 503,000 633,000
Deferred.................................... (26,000) (15,000) (82,000)
-------- -------- --------
$115,000 $488,000 $551,000
======== ======== ========
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates follows:
1994 1993 1992
--------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
Federal Tax Rate........................... $113,000 34.0% $405,000 34.0% $463,000 34.0%
California Franchise Taxes, Net of Federal
Tax Benefit.............................. 24,000 7.2% 86,000 7.2% 98,000 7.2%
Other Items, Net........................... (22,000) (6.7%) (3,000) (0.2%) (10,000) (0.8%)
-------- ---- -------- ---- -------- ----
Bank's Effective Rate...................... $115,000 34.5% $488,000 41.0% $551,000 40.4%
======== ==== ======== ==== ======== ====
The following is a summary of the components of the net deferred tax asset
and liability accounts recognized in the accompanying consolidated balance
sheets:
1994 1993
-------- --------
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations........... $275,000 $229,000
Premises and Equipment Due to Depreciation Differences....... 16,000 --
Other Assets/Liabilities..................................... 13,000 61,000
-------- --------
304,000 290,000
-------- --------
Deferred Tax Liability:
Premises and Equipment Due to Depreciation Differences....... -- (12,000)
-------- --------
Net Deferred Taxes............................................. $304,000 $278,000
======== ========
F-37
11
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- OTHER EXPENSES
A summary of other expenses for the years ended December 31 is as follows:
1994 1993 1992
---------- ---------- ----------
Commissions.................................... $ 134,894 $ 616,548 $ 529,113
Data Processing................................ 363,409 362,785 345,567
Loan Processing................................ 113,412 249,175 112,275
Marketing Expenses............................. 103,240 99,551 103,005
Other Real Estate Owned........................ 73,818 173,926 3,563
Regulatory Assessments......................... 181,300 192,657 184,033
Settlement of Litigation....................... 785,000 -- --
Other Expenses................................. 1,048,996 1,037,490 1,093,952
---------- ---------- ----------
$2,804,069 $2,732,132 $2,371,508
========== ========== ==========
NOTE G -- STOCK OPTION PLAN
Under the 1982 Mariners Bancorp Stock Option Plan approved by shareholders,
options may be granted to salaried officers, key employees, and directors to
purchase a maximum of 76,500 shares of authorized but unissued common shares at
the fair market value at the date the options are granted. The terms and
conditions (including exercise date and number of shares) are determined by the
Board of Directors. The plan expired June 22, 1992, and no further options may
be granted thereafter.
Options granted by the Board of Directors to salaried officers and key
employees are to be designated as "incentive stock options" (as defined in
Section 422A of the Internal Revenue Code). Options granted to directors are to
be designated as non-qualified options.
Changes in the number of shares subject to option during the years ended
December 31 are summarized as follows:
1994 1993 1992
------- ------- --------
Outstanding at Beginning of Year................... 8,400 10,950 3,000
Options Granted ($11.00 per Share)................. -- -- 8,400
Options Forfeited.................................. (1,200) -- --
Options Exercised.................................. (--) (2,550) (450)
------- ------- --------
Outstanding at End of Year......................... 7,200 8,400 10,950
======= ======= ========
Total Option Price................................. $79,200 $92,400 $110,250
======= ======= ========
Options Exercisable................................ 5,280 4,800 6,150
======= ======= ========
Available for Future Grants........................ None None None
======= ======= ========
F-38
12
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers and directors and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of comparable transactions with other persons. A summary
of activity with respect to these loans for the years ended December 31 follows:
1994 1993
---------- ----------
Balance Outstanding at Beginning of Year.................... $1,419,000 $1,345,000
Loans Granted............................................... -- 140,000
Repayments.................................................. (572,000) (66,000)
---------- ----------
Balance Outstanding at End of Year.......................... $ 847,000 $1,419,000
========== ==========
NOTE I -- RETIREMENT SAVINGS PLAN
In late 1988, the Company adopted a retirement savings plan, which allows
eligible employees to invest a portion of their base salary into the plan. The
Company may match 50% of the amount contributed by the employee up to a maximum
of 3% of their salary. In addition, the Company also adopted a profit sharing
plan whereby the Board of Directors may make an annual discretionary
contribution. The combined retirement expense was approximately $36,000 in 1994,
$57,000 in 1993, and $55,000 in 1992.
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company and its subsidiary have entered into leases for its branches
and operating facilities. These leases include provisions for periodic rent
increases as well as payment by the lessee of certain operating expenses.
Total rental expense included in occupancy expense and furniture and
equipment expense was approximately $296,000 in 1994 and $365,000 in 1993.
The approximate future minimum annual payments for these leases by year are
as follows:
1995............................................. $ 226,000
1996............................................. 195,000
1997............................................. 202,000
1998............................................. 209,000
1999............................................. 216,000
Thereafter....................................... 530,000
-----------
$1,578,000
===========
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
The Company is involved in various litigation which has arisen in the
ordinary course of its business. In the opinion of management, the disposition
of such pending litigation will not have a material effect on the Company's
financial statements.
In the normal course of business, the Bank enters into financial
commitments to meet the financing needs of its customers. These financial
commitments include commitments to extend credit and standby letters of credit.
Those instruments involve to varying degrees, elements of credit and interest
rate risk not recognized in the Company's consolidated financial statements.
F-39
13
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company's exposure to credit loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments as it does for loans reflected in the financial
statements.
The Company had the following outstanding financial commitments as of
December 31 whose contractual amount represents credit risk:
1994 1993
----------- -----------
Commitments to Extend Credit...................... $26,595,000 $18,228,000
Standby Letters of Credit......................... 651,000 316,000
----------- -----------
$27,246,000 $18,544,000
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since some of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the customer. The majority of the Bank's commitments to
extend credit and standby letters of credit are secured by real estate.
NOTE K -- OTHER MATTERS
Banker's Support Services (BSSC), a subsidiary of the holding company, was
merged with the Bank in 1994. BSSC provided voucher disbursement, inspection,
and appraisal services primarily to the Bank.
NOTE L -- REGULATORY MATTERS
All depository institutions are required by law to maintain reserves on
transaction accounts and nonpersonal time deposits in the form of cash balances
at the Federal Reserve Bank. These reserve requirements, which can be offset by
cash balances held at the Bank, totaled $611,000 at December 31, 1994.
Federal regulations require the Bank to meet certain capital standards. The
risk based capital standard requires the Bank to achieve a minimum ratio of
total capital to risk-weighted assets of 8% (of which at least 4% must contain
of common stock and retained earnings, less goodwill).
Tier 1 capital, which consists primarily The Bank is also required to
achieve a minimum leverage ratio of 3%. The leverage ratio basically consists of
Tier 1 capital divided by average total assets. As in the case of the risk-based
capital guidelines, the leverage ratio constitutes only a supervisory minimum,
and those institutions experiencing or anticipating significant growth or those
with high or inordinate levels of risk will be expected to maintain capital well
above the minimum level.
At December 31, 1994, the Bank's leverage ratio was 9.39%, Tier 1
risk-weighted ratio was 13.25%, and total risk-weighted ratio was 14.50%
(unaudited). At December 31, 1994, the Bank is in the "well-capitalized"
category.
F-40
14
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following are condensed balance sheets for Mariners Bancorp only as of
December 31, 1994 and 1993 and condensed statements of income and cash flows for
each of the three years in the period ended December 31, 1994.
BALANCE SHEETS
1994 1993
---------- ----------
Assets:
Cash............................................................ $ 68,208 $ 33,814
Investment in Bank.............................................. 7,255,877 7,133,644
---------- ----------
$7,324,085 $7,167,458
========== ==========
Liabilities and Stockholders' Equity:
Other Liabilities............................................... $ 1,000 $ --
Stockholders' Equity............................................ 7,323,085 7,167,458
---------- ----------
$7,324,085 $7,167,458
========== ==========
STATEMENTS OF INCOME
1994 1993 1992
-------- -------- --------
Other Income............................................. $ 1,023 $ 594 $ 2,892
Other Expenses........................................... (6,204) (6,080) (22,382)
Equity in Income of the Bank............................. 223,836 708,221 831,692
-------- -------- --------
Net Income..................................... $218,655 $702,735 $812,202
======== ======== ========
STATEMENTS OF CASH FLOWS
1994 1993 1992
--------- --------- ---------
Cash Flows from Operating Activities:
Net Income.......................................... $ 218,655 $ 702,735 $ 812,202
Equity in Income of the Bank........................ (223,836) (708,221) (831,692)
Change in Other Assets and Other Liabilities........ 1,000 4,566 (17,468)
--------- --------- ---------
(4,181) (920) (36,958)
Cash Flows from Investing Activities:
Dividends from the Bank............................. 101,603 145,000 120,000
Cash Flows from Financing Activities:
Principle Payment on Note Payable................... -- (169,160) (160,960)
Dividends Paid...................................... (63,028) -- --
Proceeds from Stock Options......................... -- 17,850 3,150
--------- --------- ---------
(63,028) (151,310) (157,810)
--------- --------- ---------
Increase (Decrease) in Cash......................... 34,394 (7,230) (74,768)
Cash at Beginning of Year........................... 33,814 41,044 115,812
--------- --------- ---------
Cash at End of Year................................. $ 68,208 $ 33,814 $ 41,044
========= ========= =========
F-41
15
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
1995 1994
--------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and Due from Banks.............................................. $ 3,674 $ 4,799
Interest-Bearing Deposits............................................ 586 2,369
Securities Held to Maturity.......................................... 11,787 14,251
Federal Funds Sold................................................... 3,245 6,950
Loans
Commercial......................................................... 4,588 7,434
Construction Financing............................................. 20,408 15,134
Real Estate........................................................ 25,926 24,945
Consumer........................................................... 3,198 2,761
------- -------
TOTAL LOANS................................................ 54,120 50,274
Net Deferred Loan Fees............................................. (217) (215)
Allowance for Possible Credit Losses............................... (685) (807)
------- -------
NET LOANS.................................................. 53,218 49,252
Premises and Equipment............................................... 1,498 1,596
Other Real Estate Owned.............................................. 1,531 911
Accrued Interest and Other Assets.................................... 1,682 1,664
------- -------
$77,221 $81,792
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand......................................... $15,076 $16,617
Money Market and NOW............................................... 25,811 29,250
Savings............................................................ 10,105 13,028
Time Deposits Under $100,000....................................... 13,378 10,423
Time Deposits $100,000 and Over.................................... 4,528 4,644
------- -------
TOTAL DEPOSITS............................................. 68,898 73,962
Accrued Interest and Other Liabilities............................... 665 507
------- -------
TOTAL LIABILITIES.......................................... 69,563 74,469
------- -------
Stockholders' Equity
Common Stock -- Authorized 1,500,000 Shares; Issued and
Outstanding; 630,276............................................ 2,111 2,111
Retained Earnings.................................................. 5,547 5,212
------- -------
TOTAL STOCKHOLDERS' EQUITY................................. 7,658 7,323
------- -------
$77,221 $81,792
======= =======
F-42
16
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS
ENDED
JUNE 30,
---------------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS, EXCEPT FOR
EARNINGS
PER SHARE)
INTEREST INCOME
Interest and Fees on Loans........................................... $ 2,934 $ 2,465
Interest on Investment Securities.................................... 328 304
Other Interest Income................................................ 180 252
------- -------
TOTAL INTEREST INCOME........................................ 3,442 3,021
INTEREST EXPENSE
Interest on Demand Deposits.......................................... 257 243
Interest on Savings Deposits......................................... 131 202
Interest on Time Deposits............................................ 383 232
------- -------
TOTAL INTEREST EXPENSE....................................... 771 677
------- -------
NET INTEREST INCOME.......................................... 2,671 2,344
Provision for Credit Losses............................................ 90 108
------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES........ 2,581 2,236
NONINTEREST INCOME
Voucher Control and Appraisal Fees................................... 101 126
Mortgage Fees and SBA Premiums....................................... 261 406
Service Charges and Fees............................................. 186 191
Other Income......................................................... 136 220
------- -------
684 943
------- -------
3,265 3,179
NONINTEREST EXPENSE
Salaries and Employee Benefits....................................... 1,148 1,251
Occupancy Expenses................................................... 332 325
Furniture and Equipment.............................................. 120 117
Other Expenses....................................................... 967 1,033
------- -------
2,567 2,726
------- -------
INCOME BEFORE INCOME TAXES................................... 698 453
Income Taxes........................................................... 298 189
------- -------
NET INCOME................................................... $ 400 $ 264
------- -------
Per Share Data:
Net Income........................................................... $ .63 $ .42
======= =======
Number of Shares Used in Computation................................. 630,276 630,276
======= =======
F-43
17
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
COMMON STOCK
--------------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------ -------- ------
(DOLLARS IN THOUSANDS)
BALANCE AT JANUARY 1, 1993........................... 627,726 $2,093 $4,353 $6,446
Proceeds from the Exercise of Stock Options.......... 2,550 18 18
Net Income for the Year.............................. 703 703
------- ------ ------ ------
BALANCE AT DECEMBER 31, 1993......................... 630,276 2,111 5,056 7,167
Dividends............................................ (63) (63)
Net Income for the Year.............................. 219 219
------- ------ ------ ------
BALANCE AT DECEMBER 31, 1994......................... 630,276 2,111 5,212 7,323
Dividends............................................ (65) (65)
Net Income for Six Months............................ 400 400
------- ------ ------ ------
BALANCE AT JUNE 30, 1995............................. 630,276 $2,111 $5,547 $7,658
======= ====== ====== ======
F-44
18
MARINERS BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net Income................................................... $ 400 $ 264
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization............................. 135 137
Provision for Credit Losses............................... 90 108
Provision for Loss on Other Real Estate Owned............. 60 18
Net Gain on Sale of Other Real Estate Owned............... -- (110)
Net Change in Accrued Interest, Other Assets and Other
Liabilities............................................. 109 89
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 794 506
INVESTING ACTIVITIES
Net (Increase) Decrease in Interest-Bearing Deposits......... 1,783 (485)
Proceeds from Sales of Other Real Estate Owned............... -- 1,520
Purchases of Held-to-Maturity Securities..................... (1,006) (8,406)
Proceeds from Maturities of Held-to-Maturity Securities...... 3,444 1,909
Net Change in Loans.......................................... (4,738) 735
Purchases of Premises and Equipment.......................... (11) (22)
------- -------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES.............................. (528) (4,749)
FINANCING ACTIVITIES
Net Decrease in Demand Deposits and Savings Accounts......... (7,902) (236)
Net Change in Time Deposits.................................. 2,838 294
Payments for Dividends....................................... (32) (63)
------- -------
NET CASH USED BY FINANCING ACTIVITIES................ (5,096) (5)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS................ (4,830) (4,248)
Cash and Cash Equivalents at Beginning of Year................. 11,749 18,496
------- -------
CASH AND CASH EQUIVALENTS
AT JUNE 30........................................... 6,919 14,248
======= =======
F-45
19
MARINERS BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The financial statements for interim periods are unaudited. In the opinion
of management, all material adjustments necessary for fair presentation of the
interim financial statements have been included.
Interim period financial statements are not necessarily indicative of
results to be expected for the entire year.
NOTE B -- EARNINGS PER SHARE
Net earnings per common share are based upon the weighted average number of
shares outstanding during each period.
F-46