**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.**

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FORM 10-K

**(Mark One)**
| x          | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934.**          |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | **For  the fiscal year ended December 31, 2004.**                                                  |
| ** ** | **or**                                                                                                  |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                          **

**Commissionfile number 0-21815**

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FIRST MARINER BANCORP

(Exact name of registrantas specified in its charter)

| **Maryland**                             | **52-1834860**                        |
|------------------------------------------|---------------------------------------|
| (State of incorporation)                 | (IRS Employer  Identification Number) |
| **3301 Boston Street, Baltimore, MD**    | **21224**                             |
| (Address of principal executive offices) | (zip code)                            |

 

**410-342-2600**

(Telephone number)

Securities registeredunder Section 12(b) of the Exchange Act: **NONE**

Securities registered under Section 12 (g) ofthe Exchange Act:

**COMMONSTOCK, par value $0.05 per share**(Title of Class)

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Indicate by check mark whetherthe registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such report,and (2) has been subject to such filing requirements for the past90 days. Yes x  No  ̈

Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 of Regulation S-Kis not contained in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x  Noo

The aggregate market valueof the voting stock held by non-affiliates of the registrant as of the lastbusiness day of the registrant’s most recently completed second fiscal quarterwas approximately $82.127 million. Shares of Common Stock owned by eachexecutive officer and directors have been included as such persons are deemedto be affiliates

The number of shares ofcommon stock outstanding as of March 1, 2005 is 5,824,927 shares.

Documents incorporated byreference:

Proxy Statement—Part III

 

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**FIRST MARINER BANCORP**Annual Report on Form 10-KDecember 31, 2004TABLE OF CONTENTS
|               | ** ** | ** **                                                                                                              | ** ** | **Page** |
|---------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I   |       |                                                                                                                    |       |     |
| Item 1        |       | Business                                                                                                                |       |     | 4 |   |
| Item 2        |       | Properties                                                                                                              |       |     | 15 |   |
| Item 3        |       | Legal  Proceedings                                                                                                      |       |     | 18 |   |
| Item 4        |       | Submission  of Matters to a Vote of Security Holders                                                                    |       |     | 18 |   |
| Item 4A       |       | Executive  Officers of the Registrant                                                                                   |       |     | 18 |   |
| PART II  |       |                                                                                                                    |       |     |
| Item 5        |       | Market  for the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       |     | 19 |   |
| Item 6        |       | Selected  Financial Data                                                                                                |       |     | 20 |   |
| Item 7        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       |     | 20 |   |
| Item 7A       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       |     | 44 |   |
| Item 8        |       | Financial  Statements and Supplementary Data                                                                            |       |     | 45 |   |
| Item 9        |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures                                  |       |     | 78 |   |
| Item 9A       |       | Controls  and Procedures                                                                                                |       |     | 78 |   |
| Item 9B       |       | Other Information                                                                                                       |       |     | 78 |   |
| PART III |       |                                                                                                                    |       |     |
| Item 10       |       | Directors  and Executive Officers of the Registrant                                                                     |       |     | 78 |   |
| Item 11       |       | Executive  Compensation                                                                                                 |       |     | 79 |   |
| Item 12       |       | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                   |       |     | 79 |   |
| Item 13       |       | Certain  Relationships and Related Transactions                                                                         |       |     | 79 |   |
| Item 14       |       | Principal  Accountant Fees and Services                                                                                 |       |     | 79 |   |
| PART IV  |       |                                                                                                                    |       |     |
| Item  15      |       | Exhibits and Financial Statement  Schedules                                                                             |       |     | 80 |   |

 

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**FORWARD-LOOKINGSTATEMENTS**

Part I and Part II of this Annual Report on Form 10-Kmay contain forward-looking statements within the meaning of The PrivateSecurities Litigation Reform Act of 1995. Readers of this report should beaware of the speculative nature of “forward-looking statements.”Statements that are not historical in nature, including the words “anticipate,”“estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions,are based on current expectations, estimates and projections about (among otherthings) the industry and the markets in which the Company operates; they arenot guarantees of future performance. Whether actual results will conform toexpectations and predictions is subject to known and unknown risks anduncertainties, including risks and uncertainties discussed in this Form 10-K,general economic, market or business conditions; changes in interest rates,deposit flow, the cost of funds, and demand for loan products and financialservices; changes in our competitive position or competitive actions by othercompanies; changes in the quality or composition of loan and investmentportfolios; the ability to mange growth; changes in laws or regulations orpolicies of federal and state regulators and agencies; and other circumstancesbeyond the Company’s control. Consequently, all of the forward-lookingstatements made in this document are qualified by these cautionary statements,and there can be no assurance that the actual results anticipated will berealized, or if substantially realized, will have the expected consequences onthe Company’s business or operations. Except as required by applicable laws, wedo not intend to publish updates or revisions of any forward-lookingstatements we make to reflect new information, future events or otherwise. Fora discussion of risks and uncertainties that could cause actual results todiffer materially from those contained in the forward looking statements, see “RiskFactors” filed as Exhibit 99.1 to this Form 10-K.

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**PART I**

**ITEM 1**                   BUSINESS

**General**

First Mariner Bancorp (“First Mariner”, on a parentonly basis, and “we”, “our” or “us”, on a consolidated basis) is a financialholding company whose business is conducted primarily through its wholly-ownedoperating subsidiaries, First Mariner Bank (the “Bank”), Finance Maryland LLC (“FinanceMaryland”), and FM Appraisals, LLC (“FM Appraisals”). We were formed in 1995and have grown to become the fourth largest publicly traded bank holdingcompany headquartered in Maryland, with total assets in excess of $1.250billion as of December 31, 2004. Our executive offices are located in theCanton area of Baltimore City at 3301 Boston Street, Baltimore, Maryland 21224and our telephone number is (410) 342-2600. We maintain internet siteslocated at www.1stmarinerbank.com, www.1stmarinerbancorp.com,www.1stmarinermortgage.com, www.vamortgage.com and www.financemaryland.com.

The Bank is our largest operating subsidiary withassets exceeding $1.199 billion as of December 31, 2004. The bank wasformed in 1995 through the merger of several small financial institutions. TheBank’s primary market area for it’s core banking operations, which consist oftraditional commercial and consumer lending, as well as retail and commercialdeposit operations, is central Maryland as well as portions of Maryland’seastern shore. The Bank’s mortgage division, First Mariner Mortgage, primarilyserves the same core market area as the Bank, while several sourcing units ofFirst Mariner Mortgage operate on a regional and even national basis. In 2004,approximately 70% of First Mariner Mortgage’s loan production came from the Bank’score market area. First Mariner Bank is an independent community bank, and itsdeposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). Thebank is engaged in the general commercial banking business, with particularattention and emphasis on the needs of individuals and small to mid-sizedbusinesses, and delivers a wide range of financial products and services thatare offered by many larger competitors. Products and services includetraditional deposit products, a variety of consumer and commercial loans,residential and commercial mortgage and construction loans, money transferservices, non-deposit investment products, and Internet banking and similarservices. Most importantly, the Bank provides customers with access to localBank officers who are empowered to act with flexibility to meet customers’needs in an effort to foster and develop long-term loan and depositrelationships.

Finance Maryland was formed in July 2002, andengages in traditional consumer finance activities, making small direct cashloans to individuals, the purchase of installment loan sales contracts fromlocal merchants and retail dealers of consumer goods, and loans to individualsvia direct mail solicitations. Finance Maryland currently operates 13 branchesin the State of Maryland and four branches in the state of Delaware, whichoperate under the trade name “Finance Delaware”. Finance Maryland had totalassets of $34.5 million as of December 31, 2004.

FM Appraisals, which commenced operations in fourthquarter of 2003, is an appraisal management company that is headquartered inBaltimore City. FM Appraisals offers appraisal management services forresidential real estate lenders, including the compliance oversight ofsub-contracted appraisers, appraisal ordering and administration, and appraisalreview services. FM Appraisals currently provides these services to FirstMariner Mortgage, but will begin to market appraisal management services tooutside lenders in 2005.

Since our formation in 1995, our business strategy hasfocused on development of an operational and retail distribution infrastructureto create a platform to support the generation of assets and deposits. At ourinception we had 20 employees, four full service branches and two ATM’s in theBaltimore region, with total assets of $35.2 million, loans of$20.4 million, and deposits of $24.6 million. Since that time, we 

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have grown assets at anaverage compound annual growth rate of 45%. At December 31, 2004, we hadover 700 employees, 24 full service bank branches, 14 mortgage loan offices, 17consumer finance offices, and approximately 188 ATMS (51 owned by us and 137available to our customers through third party agreements) with total assets of$1.251 billion, loans of $746.1 million and deposits of$825.4 million. We earned net income of $6.1 million for the yearending December 31, 2004.

We are not dependent on any single customer or smallgroup of customers and we do not experience any material seasonal variations inits business. We do not conduct any foreign operations.

Our annual report on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-Kand amendments to these reports are available, free of charge, in the investorrelations section of our internet site as soon as reasonably practicable afterwe have filed them with the Securities and Exchange Commission. The informationon the website listed above is not and should not be considered part of thisannual report on Form 10-K and is not incorporated by reference inthis document.

**Our BusinessStrategy**

Our initial strategy involved building a network ofbanking branches, mortgage loan offices, and ATMs to capture market shareand build a community franchise for our stockholders, customers and employees.Having developed this infrastructure, we are now focused on growing assets andearnings by capitalizing on the broad network of Bank branches, mortgageoffices, consumer finance offices and ATMs that we established during ourinfrastructure expansion phase.

To continue assetgrowth and profitability, our marketing strategy is targeted to:

·       Capitalizeon our personal relationship approach that we believe differentiates us fromour larger competitors;

·       Provideour customers with access to local executives who make key credit and otherdecisions;

·       Pursuecommercial lending opportunities with small to mid-sized businesses that areunderserved by our larger competitors;

·       Developinnovative financial products and services to generate additional sources ofrevenue;

·       Cross-sellour products and services to our existing customers to leverage relationshipsand enhance our profitability;

·       Reviewour branch performance to evaluate possible consolidations or relocations thatmay increase our efficiency; and

·       Adhereto rigorous credit standards to maintain the continued quality of our assets aswe implement our growth strategy.

**Financial ServicesWe Provide**

*Commercial Banking.  *Ourcommercial loan unit focuses on loan originations from small and mid-sizedbusinesses (generally up to $20.0 million in annual sales) and such loansare usually accompanied by significant related deposits. Our commercial loanproducts include commercial mortgage loans for the purchase or refinance ofcommercial properties; residential and commercial real estate constructionloans; working capital loans and lines of credit; demand, term and time loans;and equipment, inventory and accounts receivable financing. We also offer anarray of cash management services and deposit products to our commercialcustomers. Computerized on-line banking is currently available to our commercialcustomers.

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*Retail Banking.  *Ourretail banking activities emphasize consumer deposit and checking accounts. Weoffer an extensive range of services to meet the varied needs of our customersfrom young persons to senior citizens. In addition to traditional products andservices, we offer contemporary products and services, such as debit cards,mutual funds, annuities, insurance products and Internet banking and electronicbill payment services. Our consumer loan products include home equity lines ofcredit, fixed rate second mortgages, new and used auto loans, new and used boatloans, overdraft protection and unsecured personal credit lines.

*Mortgage Banking.  *Ourmortgage banking business is structured to provide a source of fee incomelargely from the process of originating residential mortgage loans for sale onthe secondary market, as well as the origination of loans to be held in ourloan portfolio. Mortgage banking products include Federal HousingAdministration (“FHA”) and the federal Veterans Administration (“VA”) loans,conventional and nonconforming first and second mortgages, reverse mortgages,and construction and permanent financing. We intend to improve our competitiveposition in our markets by streamlining the mortgage underwriting processthrough the introduction of advanced technology, and development of newproducts to meet our customers’ needs.

*Community Reinvestment Act.  *Wehave a strong commitment to our responsibilities under the federal CommunityReinvestment Act (the “CRA”) and actively search for opportunities to meet thedevelopment needs of all members of the communities we serve, including personsof low to moderate income in a manner consistent with safe and sound bankingpractices. We currently fulfill this commitment by participating in loanprograms sponsored or guaranteed by the FHA, the VA, the federal CommunityDevelopment Act, the Maryland Industrial Development Financing Authority, andthe Settlement Expense Loan Program.

*ConsumerFinance.  *We offer a wide variety of consumer financeproducts through Finance Maryland, which was formed in July 2002, and iscurrently focused on building market share by offering competitive products andservices, delivered by experienced personnel who provide responsive service.Loan sizes are generally smaller than those originated by the Bank(approximately $2,300), and Finance Maryland currently serves approximately15,000 customers in Maryland and Delaware.

**Our LendingActivities**

*Loan Portfolio Composition.  *AtDecember 31, 2004, our loan portfolio totaled $746.1 million,representing approximately 59.7% of our total assets of $1.251 billion.Our loans are generally secured by residential and commercial real estate, andover 86% of our total loans as of December 31, 2004 were secured by realestate. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations” for the year ended December 31, 2004 for moredetailed information concerning the composition of our loan portfolio.

*Commercial Loans.  *Weoriginate a variety of loans for business purposes. Less than one percent ofall our commercial loans are unsecured. We make loans to provide workingcapital to businesses in the form of lines of credit, which may be secured byreal estate, accounts receivable, inventory, equipment or other assets. Thefinancial condition and cash flow of our commercial borrowers are closelymonitored by the submission of corporate financial statements, personalfinancial statements and income tax returns. The frequency of submissions ofrequired financial information depends on the size and complexity of the creditand the collateral that secures our loan. It is our general policy to obtainpersonal guarantees from the principals of our commercial loan borrowers.

*Real Estate Development andConstruction Loans.  *We provide interim real estateacquisition development and construction loans to builders, developers, andpersons who will ultimately occupy their single family dwellings. Our realestate development and construction loans provide interim financing onproperties and are generally made for 80% or less of the appraised value of theproperty, taking into 

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consideration privatemortgage insurance. Our real estate development and construction loan funds aredisbursed periodically at pre-specified stages of completion. We carefullymonitor these loans with on-site inspections and control of disbursements.

Loans we provide to individuals for the constructionof their primary residences are typically secured by the property underconstruction, frequently include additional collateral (such as second mortgageon the borrower’s present home), and commonly have maturities of 9 to12 months.

Loans provided by us to residential builders for theconstruction of residential homes require binding sales contracts on theproperty and the prospective buyers have been pre-qualified for permanentmortgage financing. Development loans are made only to developers with a proventrack record. Generally, these loans are extended only when the borrowerprovides evidence that the lots under development will be sold to builderssatisfactory to us.

We secure development and construction loans with theproperties under development or construction and we typically obtain personalguarantees from the principals. Further, to assure that we do not placereliance solely in the value of the underlying property, we consider thefinancial condition and reputation of the borrower and any guarantors, theamount of the borrowers’ equity in the project, independent appraisals, costsestimates and pre-construction sale information.

See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” for the year ended December 31, 2004for more detailed information concerning our real estate development andconstruction lending.

*Residential Real Estate MortgageLoans.  *Our mortgage division originates adjustable andfixed-rate residential mortgage loans. Our mortgage loans are generallyoriginated under terms, conditions and documentation acceptable to thesecondary mortgage market. We will place some of these loans into ourportfolio, although the vast majority are eventually sold to investors.

*Commercial Real Estate MortgageLoans.  *We originate mortgage loans secured bycommercial real estate. These loans are primarily secured by office buildings,retail buildings, warehouses and general purpose business space. Although termsmay vary, our commercial mortgages generally have maturities of ten years orless.

We seek to reduce the risks associated with commercialmortgage lending by generally lending in our market area and obtaining periodicfinancial statements and tax returns from our borrowers. It is also our generalpolicy to obtain personal guarantees from the principals of the borrowers andassignments of all leases related to the collateral.

*ConsumerLoans.  *The Bank and Finance Maryland offer a variety ofconsumer loans. Consumer loans originated by the Bank are typically secured byresidential real estate or personal property, including automobiles and boats.Our home equity loans (closed-end and lines of credit) are typically made up to80% of the appraised value, less the amount of any existing prior liens on theproperty and generally have maximum terms of 10 years. We do offer homeequity products with loan to value products of up to 100%, and mitigate ourrisk of loss on higher loan to value products with private mortgage insurance.The interest rates on our closed-end home equity loans are generally fixed,while interest rates on our home equity lines of credit are variable. Consumerfinance products offered through Finance Maryland include loans for thepurchase of consumer goods, direct cash lending, loans for seasonal purposes,and loans originated though direct mail solicitation. Loans made by FinanceMaryland are generally for terms less than five years, carry a fixed rate ofinterest, and are generally secured by consumer goods, including automobiles.

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**Our CreditAdministration Process**

Our lending activities are subject to written policiesapproved by our Board of Directors to ensure proper management of credit risk.We make loans that are subject to a well defined credit process that includescredit evaluation of borrowers, risk-rating of credits, establishment oflending limits and application of lending procedures, including the holding ofadequate collateral and the maintenance of compensating balances, as well asprocedures for on-going identification and management of credit deterioration.We conduct regular portfolio reviews to identify potential under-performingcredits, estimate loss exposure, geographic and industry concentrations, and toascertain compliance with our policies. For significant problem loans, wereview and evaluate the financial strengths of our borrower and the guarantor,the related collateral and the effects of economic conditions.

Our loan approval policies provides for various levelsof individual lending authority. The maximum lending authority granted to anyone individual is $500,000. Our loan committee of the Board of Directors isauthorized to approve loans up to our banking subsidiary’s legal lending limit,which currently approximates $13.3 million as of December 31, 2004.We have established an in-house limit of $3.0 million, which is reviewedperiodically by the Board of Directors, and do have loans to a limited numberof customers in excess of that amount.

We generally do not make loans to be held in our loanportfolio outside our market area unless the borrower has an establishedrelationship with us and conducts its principal business operations within ourmarket area. Consequently, we and our borrowers are affected by the economicconditions prevailing in our market area.

Finance Maryland’s lendingactivities are subject to written policies approved by our Board of Directors.These loans are subject to a well-defined credit process that includes a creditevaluation of the borrower and the adequacy of available collateral. FinanceMaryland’s loan policy provides various levels of individual lending authority.Finance Maryland purchases installment sales contracts from dealers applyingthe same criteria. Dealers are subject to pre-approval due diligence and musthave a proven track record with management.

**Our Competition**

We operate in a competitive environment, competing fordeposits and loans with commercial banks, thrifts, mortgage companies, financecompanies, Internet based financial companies and other financial entities. Ourprincipal competitors include other community commercial banks and largerfinancial institutions with branches in our market area. Numerous mergers andconsolidations involving banks in our market area have occurred recently,requiring us to compete with banks and finance companies with greaterresources.

The primary factors we face in competing for depositsare interest rates, personalized service, the quality and range of financialservices, convenience of office locations and office hours. Competition fordeposits comes primarily from other commercial banks, savings associations,credit unions, money market funds and other investment alternatives. Theprimary factors in competing for loans are interest rates, loan originationfees, the quality and range of lending services, responsiveness, andpersonalized service. Competition for loans comes primarily from othercommercial banks, savings associations, mortgage banking firms, credit unions,finance companies and other financial intermediaries. Many of the financialinstitutions operating in our market area offer certain services such as trustand international banking, which we do not offer, and have greater financialresources or have substantially higher lending limits.

To compete with other financial services providers, weprincipally rely upon local promotional activities, personal relationshipsestablished by our officers, directors and employees with our customers, andspecialized services tailored to meet our customers’ needs. In those instanceswhere we are unable to 

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accommodate a customers’needs, we will arrange for those services to be provided by other financialinstitutions with which we have a relationship.

Current banking lawsfacilitate interstate branching and merger activity among banks. SinceSeptember 1995, certain bank holding companies are authorized to acquire banksthroughout the United States. In addition, on and after June 1, 1997,certain banks are permitted to merge with banks organized under the laws ofdifferent states. These changes have resulted in an even greater degree ofcompetition in the banking industry and we may be brought into competition withinstitutions with which we do not currently compete. As a result, intensecompetition in our market area may be expected to continue for the foreseeablefuture.

**Supervision andRegulations**

First Mariner and its subsidiaries are extensivelyregulated under federal and state law. Generally, these laws and regulationsare intended to protect depositors and loan customers, not stockholders. Thefollowing is a summary description of certain provisions of certain laws thataffect the regulation of financial holding companies, finance companies, andbanks. The discussion is qualified in its entirety by reference to applicablelaws and regulations. Changes in such laws and regulations may have a materialeffect on the business and prospects of First Mariner and its subsidiaries.

*Federal Financial Holding CompanyRegulation and Structure.  *First Mariner is a financialholding company within the meaning of the Bank Holding Company Act of 1956, asamended, and as such, it is subject to regulation, supervision, and examinationby the Board of Governors of the Federal Reserve System. First Mariner isrequired to file annual and quarterly reports with the Federal Reserve and toprovide the Federal Reserve with such additional information as the FederalReserve may require. The Federal Reserve may conduct examinations of FirstMariner and its subsidiaries.

With certain limited exceptions, First Mariner isrequired to obtain prior approval from the Federal Reserve before acquiringdirect or indirect ownership or control of more than 5% of any votingsecurities or substantially all of the assets of a bank or bank holdingcompany, or before merging or consolidating with another bank holding company.In acting on applications for such approval, the Federal Reserve must considervarious statutory factors, including among others, the effect of the proposedtransaction on competition in the relevant geographical and product markets,each party’s financial condition and management resources and record ofperformance under the CRA. Additionally, with certain exceptions any personproposing to acquire control through direct or indirect ownership of 25% ormore of any voting securities of First Mariner is required to give 60 dayswritten notice of the acquisition to the Federal Reserve, which may prohibitthe transaction, and to publish notice to the public.

With prior approval of the Federal Reserve, FirstMariner may acquire more than 5% of the assets or outstanding shares of acompany engaging in nonbank activities determined by the Federal Reserve to beclosely related to the business of banking or of managing or controlling banks.Under current Federal Reserve regulations, such permissible nonbank activitiesinclude mortgage banking, equipment leasing, securities brokerage and consumerand commercial finance company operations.

First Mariner’s subsidiary bank is subject to certainquantitative and qualitative restrictions on extensions of credit to thefinancial holding company or its subsidiaries, investments in its securities,and the use of its securities as collateral for loans to any borrower. Theseregulations and restrictions may limit the ability to obtain funds from FirstMariner’s subsidiary bank for its cash needs including funds for the payment ofdividends, interest and operating expenses. Further, a financial holdingcompany and its subsidiaries are prohibited from engaging in certain tie-inarrangements in connection with any extension of credit, lease or sale ofproperty, or furnishing of services. For example, a bank may not generallyrequire a customer to obtain other services from itself or its affiliates, andmay not require that a customer promise not to obtain other services from acompetitor as a condition to and extension of credit to the customer. 

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The Federal Reserve hasended the anti-tying rules for financial holding companies and theirnon-banking subsidiaries. Such rules were retained for banks.

Under Federal Reserve policy, a bank holding companyis expected to act as a source of financial strength to its subsidiary banksand to make capital injections into a troubled subsidiary bank, and the FederalReserve may charge the financial holding company with engaging in unsafe andunsound practices for failure to commit resources to a subsidiary bank whenrequired. A required capital injection may be called for at a time when theholding company does not have the resources to provide it. In addition,depository institutions insured by the FDIC can be held liable for any lossesincurred by, or reasonably anticipated to be incurred by, the FDIC inconnection with the default of, or assistance provided to, a commonlycontrolled FDIC-insured depository institution. Accordingly, in the event thatany insured subsidiary of First Mariner causes a loss to the FDIC, otherinsured subsidiaries could be required to compensate the FDIC by reimbursing itfor the estimated amount of such loss. Such cross guaranty liabilitiesgenerally are superior in priority to the obligations of the depositoryinstitution to its stockholders due solely to their status as stockholders andobligations to other affiliates.

*State Bank Holding CompanyRegulation.  *As a Maryland bank holding company, FirstMariner is subject to various restrictions on its activities as set forth inMaryland law, in addition to those restrictions set forth in federal law. UnderMaryland law, a bank holding company that desires to acquire a bank or bankholding company that has its principal place of business in Maryland mustobtain approval from the Maryland Commissioner of Financial Regulation. Also, abank holding company and its Maryland chartered bank or trust company cannotdirectly or indirectly acquire banking or nonbanking subsidiaries or affiliatesuntil the bank or trust company receives the approval of the MarylandCommissioner.

*Federal and State Bank Regulation.  *FirstMariner’s banking subsidiary is a Maryland chartered trust company, with allthe powers of a commercial bank regulated and examined by the MarylandCommissioner and the FDIC. The FDIC has extensive enforcement authority overthe institutions it regulates to prohibit or correct activities that violatelaw, regulation or written agreement with the FDIC. Enforcement powers alsoregulate activities that are deemed to constitute unsafe or unsound practices.Enforcement actions may include the appointment of a conservator or receiver,the issuance of a cease and desist order, the termination of deposit insurance,the imposition of civil money penalties on the institution, its directors,officers, employees and institution-affiliated parties, the issuance ofdirectives to increase capital, the issuance of formal and informal agreements,the removal of or restrictions on directors, officers, employees andinstitution-affiliated parties, and the enforcement of any suchmechanisms through restraining orders or other court actions.

In its lending activities, the maximum legal rate ofinterest, fees, and charges that a financial institution may charge on aparticular loan depends on a variety of factors such as the type of borrower,the purpose of the loan, the amount of the loan and the date the loan is made.Other laws tie the maximum amount that may be loaned to any one customer andthe related interest to a financial institution’s capital levels. The Bank isalso subject to certain restrictions on extensions of credit to executiveofficers, directors, principal shareholders or any related interest of suchpersons which generally require that such credit extensions be made onsubstantially the same terms as are available to third persons dealing with theBank and not involve more than the normal risk of repayment.

The CRA requires that, in connection with theexamination of financial institutions within their jurisdictions, the FDICevaluate the record of the financial institution in meeting the credit needs oftheir communities including low and moderate income neighborhoods, consistentwith the safe and sound operation of those banks. These factors are alsoconsidered by all regulatory agencies in evaluating mergers, acquisitions andapplications to open a branch or facility. As of the date of its most recentexamination report, the Bank has a CRA rating of “Satisfactory.”

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Under the Federal Deposit Insurance CorporationImprovement Act of 1991 (“FDICIA”), each federal banking agency is required toprescribe, by regulation, noncapital safety and soundness standards forinstitutions under its authority. The federal banking agencies, including theFDIC, have adopted standards covering internal controls, information systemsand internal audit systems, loan documentation, credit underwriting, interestrate exposure, asset growth, and compensation, fees and benefits. FDICIA alsoimposed new capital standards on insured depository institutions. Institutionsthat fail to meet those standards may be required by the agency to develop aplan acceptable to the agency, specifying the steps that the institution willtake to meet the standards. Failure to submit or implement such a plan maysubject the institution to regulatory sanctions. Management believes the Bankmeets substantially all standards which have been adopted.

Before establishing newbranch offices, the Bank must meet certain minimum capital stock and surplusrequirements. With each new branch located outside the municipal area of theBank’s principal banking office, these minimal levels increase by $120,000 to$900,000, based on the population size of the municipal area in which thebranch will be located. Prior to establishment of the branch, the Bank mustobtain Commissioner and FDIC approval. If establishment of the branch involvesthe purchase of a bank building or furnishings, the total investment in bankbuildings and furnishings cannot exceed, with certain exceptions, 50% of theBank’s unimpaired capital and surplus.

**Financial ServicesModernization**

Effective in pertinentpart on March 11, 2000, the federal Gramm-Leach-Bliley Act (“GLBA”)revises the federal Bank Holding Company Act of 1956 and repeals theaffiliation provisions of the federal Glass-Steagall Act of 1933, which,taken together, limited the securities, insurance, and other non-bankingactivities of any company that controls a FDIC insured financial institution.Under GLBA, bank holding companies can elect, subject to certainqualifications, to become a “financial holding company.” First Mariner made anelection to become a financial holding company in 2002 and, as such, FirstMariner may engage in activities that are in addition to the business ofbanking. The GLBA provides that a financial holding company may engage in afull range of financial activities, including insurance and securities salesand underwriting activities, real estate development, and, with certainexceptions, merchant banking activities, with new expedited notice procedures.GLBA also permits certain qualified national banks to form “financialsubsidiaries,” which have broad authority to engage in all financial activitiesexcept insurance underwriting, insurance investments, real estate investment ordevelopment, and merchant banking, and expands the potential activities ofsubsidiaries of state banks, subject to applicable state law. The GLBA mayincrease the competition we encounter.

**Deposit Insurance**

As a FDIC member institution, deposits of the Bank arecurrently insured to a minimum of $100,000 per depositor through the Savings AssociationInsurance Fund (“SAIF”), administered by the FDIC. Insured financialinstitutions are members of either SAIF or the Bank Insurance Fund (“BIF”).SAIF members generally are savings and loan associations or savings banks,including banks and trust companies that have converted from a savings and loanassociation or savings bank to a commercial bank or trust company or bank andtrust companies that have acquired SAIF deposits. The Bank is a convertedfederal savings bank; therefore, its deposits are insured through SAIF. Mergersor transfers of assets between SAIF and BIF members generally are permittedwith the assuming or resulting depository institution making payments of SAIFassessments on the portion of liabilities attributable to the SAIF-insuredinstitution.

The FDIC is required toestablish the semi-annual assessments for BIF- and SAIF-insured depositoryinstitutions at a rate determined to be appropriate to maintain or increase thereserve ratio of the respective deposit insurance funds at or above 1.25% ofestimated insured deposits or at such higher 

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percentagethat the FDIC determines to be justified for that year by circumstances raisingsignificant risk of substantial future losses to the fund. Assessments are madeon a risk-based premium system with nine risk classifications based on certaincapital and supervisory measures. Financial institutions with higher levels ofcapital and involving a low degree of supervisory concern are assessed lowerpremiums than financial institutions with lower levels of capital or involvinga higher degree of supervisory concern.

**Limits on Dividendsand Other Payments**

First Mariner’s currentability to pay dividends is largely dependent upon the receipt of dividendsfrom its banking subsidiary. Both federal and state laws impose restrictions onthe ability of the Bank to pay dividends. Federal law prohibits the payment ofa dividend by an insured depository institution like the Bank if the depositoryinstitution is considered “undercapitalized” or if the payment of the dividendwould make the institution “undercapitalized”. See “Federal Deposit InsuranceCorporation Improvement Act of 1991” below. We do not anticipate that suchprovisions will be applied to the Bank. The Federal Reserve has issued a policystatement which provides that, as a general matter, insured banks and bankholding companies may pay dividends only out of prior operating earnings. For aMaryland chartered bank or trust company, dividends may be paid out ofundivided profits or, with the prior approval of the Commissioner, from surplusin excess of 100% of required capital stock. If however, the surplus of aMaryland bank is less than 100% of its required capital stock, cash dividendsmay not be paid in excess of 90% of net earnings. In addition to these specificrestrictions, bank regulatory agencies also have the ability to prohibitproposed dividends by a financial institution which would otherwise bepermitted under applicable regulations if the regulatory body determines thatsuch distribution would constitute an unsafe or unsound practice.

**CapitalRequirements**

The Federal Reserve and FDIC have adopted certainrisk-based capital guidelines to assist in the assessment of the capitaladequacy of a banking organization’s operations for both transactions reportedon the balance sheet as assets and transactions, such as letters of credit andrecourse arrangements, which are recorded as off balance sheet items. Underthese guidelines, nominal dollar amounts of assets and credit equivalent amountsof off balance sheet items are multiplied by one of several risk adjustmentpercentages, which range from 0% for assets with low credit risk, such ascertain U.S. Treasury securities to 100% for assets with relatively high creditrisk, such as business loans.

A banking organization’s risk-based capital ratio isobtained by dividing its qualifying capital by its total risk adjusted assets.The regulators measure risk-adjusted assets, which include off balance sheetitems, against both total qualifying capital (the sum of Tier 1 capital andlimited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1”, or corecapital includes common equity, perpetual preferred stock (excluding auctionrate issues), trust preferred securities (limited to one-third of other Tier 1components), and minority interest in equity accounts of consolidatedsubsidiaries (less goodwill and other intangibles), subject to certainexceptions. “Tier 2”, or supplementary capital, includes, among other thingslimited-life preferred stock, hybrid capital instruments, mandatory convertiblesecurities and trust preferred securities, (above amounts not qualifying as Tier1 capital) qualifying and subordinated debt, and the allowance for loan andlease losses, subject to certain limitations and less required deductions. Theinclusion of elements of Tier 2 capital is subject to certain otherrequirements and limitations of the federal banking agencies. Banks and bankholding companies, subject to the risk-based capital guidelines are required tomaintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and aratio of total capital to risk-weighted assets of at least 8%. The appropriateregulatory authority may set higher capital requirements when particularcircumstances warrant. In addition to risk-based capital banks and bank holdingcompanies are required to maintain a minimum amount of Tier 1 capital to fourthquarter average assets, referred to as the leverage capital ratio, of at least4%. First Mariner and The Bank maintained capital ratios that exceeded theseminimum standards. See “Management’s Discussion and Analysis of Financial Condition

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and Results of Operations”,for the year ended December 31, 2004 for more detailed informationconcerning capital adequacy.

Federal banking agencies have adopted regulationsspecifying that the agencies will include, in their evaluations of a Bank’scapital adequacy, an assessment of the Bank’s interest rate risk (“IRR”)exposure. The standards for measuring the adequacy and effectiveness of abanking organization’s interest rate risk management includes a measurement ofboard of director and senior management oversight, and a determination ofwhether a banking organization’s procedures for comprehensive risk managementare appropriate to the circumstances of the specific banking organization. TheBank maintains IRR models that are used to measure and monitor IRR.Additionally, the regulatory agencies have been assessing IRR on an informalbasis for several years.

Failure to meet applicablecapital guidelines could subject a banking organization to a variety ofenforcement actions, including limitations on its ability to pay dividends, theissuance by the applicable regulatory authority of a capital directive toincrease capital and, in the case of depository institutions, the terminationof deposit insurance by the FDIC, as well as the measures described under “FederalDeposit Insurance Corporation Improvement Act of 1991” below, as applicable toundercapitalized institutions. In addition, future changes in regulations orpractices could further reduce the amount of capital recognized for purposes ofcapital adequacy. Such a change could affect the ability of the Bank to growand could restrict the amount of profits, if any, available for the payment ofdividends to First Mariner.

**Federal DepositInsurance Corporation Improvement Act of 1991**

In December 1991, Congress enacted FDICIA, whichsubstantially revised the bank regulatory and funding provisions of the FederalDeposit Insurance Act and made significant revisions to several other federalbanking statutes. FDICIA provides for, among other things, (i) publiclyavailable annual financial condition and management reports for financialinstitutions, including audits by independent accountants, (ii) theestablishment of uniform accounting standards by federal banking agencies, (iii) theestablishment of a “prompt corrective action” system of regulatory supervisionand intervention, based on capitalization levels with more scrutiny and restrictionsplaced on depository institutions with lower levels of capital, (iv) additionalgrounds for the appointment of a conservator or receiver, and (v) restrictionsor prohibitions on accepting brokered deposits, except for institutions whichsignificantly exceed minimum capital requirements. FDICIA also provides forincreased funding of the FDIC insurance funds and the implementation of risked-basedpremiums.

A central feature of FDICIA is the requirement thatthe federal banking agencies take “prompt corrective action” with respect todepository institutions that do not meet minimum capital requirements. Pursuantto FDICIA, the federal bank regulatory authorities have adopted regulationssetting forth a five tiered system for measuring the capital adequacy of thedepository institutions that they supervise. Under these regulations, adepository institution is classified in one of the following capitalcategories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantlyundercapitalized,” and “critically undercapitalized.” An institution may bedeemed by the regulators to be in a capitalization category that is lower thanis indicated by its actual capital position if, among other things, it receivesan unsatisfactory examination rating with respect to asset quality, management,earnings or liquidity.

FDICIA generally prohibits a depository institutionfrom making any capital distribution (including payment of a cash dividend) orpaying any management fees to its holding company if the depository institutionwould thereafter be undercapitalized. Undercapitalized depository institutionsare subject to growth limitations and are required to submit capitalrestoration plans. If a depository institution fails to submit an acceptable plan,it is treated as if it is significantly undercapitalized. Significantlyundercapitalized depository institutions may be subject to a number of otherrequirements and restrictions including orders to sell sufficient voting stockto become adequately capitalized, requirements to reduce 

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total assets and stopaccepting deposits from correspondent banks. Critically undercapitalizedinstitutions are subject to the appointment of a receiver or conservator,generally within 90 days of the date such institution is determined to becritically undercapitalized.

FDICIA provides thefederal banking agencies with significantly expanded powers to take enforcementaction against institutions that fail to comply with capital or otherstandards. Such action may include the termination of deposit insurance by theFDIC or the appointment of a receiver or conservator for the institution.FDICIA also limits the circumstances under which the FDIC is permitted toprovide financial assistance to an insured institution before appointment of aconservator or receiver.

**Interstate BankingLegislation**

The Riegle-Neal Interstate Banking and BranchingEfficiency Act of 1994 (“Riegle-Neal”) was enacted into law on September 29,1994. Riegle-Neal authorized federal banking agencies to approve interstatebank merger transactions even if such transactions are prohibited by the lawsof a state. An exception to such authorization arises if the home state of oneof the banks that is a party to the merger transaction opted out of the mergerprovisions of Riegle-Neal by adopting a law after the date of the enactment ofthe Riegle-Neal and prior to June 1, 1997. These laws must apply equallyto all out-of-state banks and expressly prohibit merger transactions involvingout-of-state banks. Riegle-Neal also permits interstate branch acquisitions ifthe laws of the state where the branch is located permits interstate branchacquisitions. The interstate merger and branch acquisitions permitted byRiegle-Neal are subject to nationwide and statewide insured deposit limitationsas described in Riegle-Neal.

Riegle-Neal alsoauthorizes the federal banking agencies to approve *de novo* interstate branching by national and state banks instates which specifically allow for such branching. To our knowledge, only twostates, Texas and Montana, have opted out of the Riegle-Neal provisionsrelating to interstate mergers, acquisitions of branches and establishment ofde novo branches. We anticipate that Riegle-Neal may increase competitionwithin our market area, although we cannot predict the timing or the extent ofsuch increased competition.

**Privacy Legislation**

Current Federal banking rules limitthe ability of banks and other financial institutions to disclose non-publicfinancial information about customers to non-affiliated third parties. Underthese rules, financial institutions must provide initial notices to customersabout their privacy policies that provide a description of the conditions underwhich they may disclose non-public personal information to non-affiliated thirdparties and affiliates. Institutions must also provide annual notices tocurrent customers that provide a reasonable method for customers to “opt out”of disclosures to non-affiliated parties. These policies affect how customerinformation is transmitted through diversified financial companies and conveyedto third parties. We have implemented our privacy policies in accordance withthe law.

**USA Patriot Act**

The USA Patriot Act of2001 significantly increased the anti-money laundering and financialtransparency laws to require additional due diligence for financialinstitutions. The law set standards for verifying customer information ataccount opening and maintenance of records, and created rules to promotecooperation among financial institutions, regulators and law enforcement inidentifying parities that may be involved in terrorism or money laundering. Thelaw requires all reporting of financial businesses to report cash transactionsin excess of $10,000 to the U.S. Treasury Department, and also requiresreporting of suspicious customer activities.

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***Sarbanes-Oxley Act of 2002***

The Sarbanes-Oxley Act of2002 comprehensively revised the laws affecting corporate governance,accounting obligations and corporate reporting for companies, such as theCompany, with equity or debt securities registered under the SecuritiesExchange Act of 1934. In particular, the Sarbanes-Oxley Act established: 1) newrequirements for audit committees, including independence, expertise, andresponsibilities; 2) additional responsibilities regarding financial statementsfor the Chief Executive Officer and Chief Financial Officer of the reporting company;3) new standards for auditors and regulation of audits; 4) increased disclosureand reporting obligations for the reporting company and its directors andexecutive officers; and 5) new and increased civil and criminal penalties forviolation of the securities laws.

**ITEM 2**                   PROPERTIES

We occupy executive offices located at 3301 BostonStreet, Baltimore, Maryland. Currently, we lease approximately 58,000 squarefeet of space at this location. Annual rent for this space is approximately$1.1 million, of which $1.0 million is allocated for 55,000 squarefeet of office and $100,000 is allocated for 3,000 square feet of Bank branchspace and drive-up banking and customer parking facilities. In October of2004, the Company announced its agreement to purchase the headquarters locationat 3301 Boston Street for a purchase price of $20 million. We expect toclose on the purchase transaction on or about March 31, 2005.

We lease an operations facility at 1516 Baylis Street,Baltimore, Maryland. We occupy approximately 34,500 square feet of office space.Annual rent is approximately $405,000 for the office space.

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Weoperate retail bank branches at the following locations:*
| **Annapolis(2)**                       | ** ** | **Loch Raven(1)**                  |
|----------------------------------------|------------|------------------------------------|
| 161 A Jennifer  Road                   | ** ** | 1641 East Joppa Road               |
| Annapolis, MD  21401-7923              | ** ** | Baltimore, MD 21286-2300           |
| **Arbutus(2)**                         | ** ** | **Lutherville/Timonium(2)**        |
| 3720 Washington  Blvd., Suite 100 | ** ** | 1738 York Road                     |
| Baltimore, MD  21227-1656              | ** ** | Lutherville, MD 21093-5606         |
| **Bel  Air(1)**                        | ** ** | **Ocean  City(2)**                 |
| 12 A Bel Air  South Parkway            | ** ** | 12505 Coastal Highway              |
| Bel Air, MD  21015-3964                | ** ** | Ocean City, MD 21842-4781          |
| **Canton/Headquarters(2)**             | ** ** | **Owings  Mills(2)**               |
| 3301 Boston  Street                    | ** ** | 60 Painters Mill Road              |
| Baltimore, MD  21224-4974              | ** ** | Owings Mills, MD 21117-3604        |
| **Carroll  Island(2)**                 | ** ** | **Perry  Hall(1)**                 |
| 176 Carroll  Island Road               | ** ** | 8843 Bel Air Road                  |
| Baltimore, MD  21220-2208              | ** ** | Perry Hall, MD 21236-2403          |
| **Cockeysville(1)**                    | ** ** | **Pikesville(1)**                  |
| 9840 York Road                         | ** ** | 1013 Reisterstown Road             |
| Cockeysville, MD  21030-4914           | ** ** | Baltimore, MD 21208-4207           |
| **Crofton(1)**                         | ** ** | **Randallstown(1)**                |
| 1049 MD Route 3                        | ** ** | 9833 Liberty Road                  |
| Gambrills, MD  21054-1722              | ** ** | Randallstown, MD 21133-2034        |
| **Downtown  Baltimore(2)**             | ** ** | **Salisbury(2)**                   |
| 16 S. Calvert  Street                  | ** ** | 309 E. Main Street, Suite 101 |
| Baltimore, MD  21202-1305              | ** ** | Salisbury, MD 21801-4924           |
| **Dundalk(2)**                         | ** ** | **Severna  Park(2)**               |
| 7860 Wise Avenue                       | ** ** | 366A Gov Ritchie Highway           |
| Baltimore, MD  21222-3338              | ** ** | Severna Park, MD 21146-2911        |
| **Easton(2)**                          | ** ** | **Towson(1)**                      |
| 8133 Elliott  Road, Suite #1      | ** ** | 115 East Joppa Road                |
| Easton, MD  21601-7184                 | ** ** | Baltimore, MD 21286-3113           |
| **Ellicott  City(1)**                  | ** ** | **White  Marsh(1)**                |
| 10065 Baltimore  National Pike         | ** ** | 10101 Philadelphia Road            |
| Ellicott City, MD  21042-3611          | ** ** | Baltimore, MD 21237-3411           |
| **Glen  Burnie(2)**                    |       | **Woodlawn(1)**                    |
| 7400 L. Gov.  Ritchie Highway          |       | 7007 Security Boulevard            |
| Glen Burnie, MD  21061-3110            |       | Baltimore, MD 21244-2514           |

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*                    For our branchhours and remote ATM locations, please refer to our website at www.1stmarinerbank.com.

(1)          Bank owns branch

(2)          Bank leases branch

For more information on our lease commitments andcosts see Note 6 of the notes to the consolidated financial statements.

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Weoperate mortgage offices at the following locations:
| **Annadale, VA(2)**                         |       | **Fairfax Wholesale(2)**                 |
|---------------------------------------------|------------|------------------------------------------|
| 7010 Little River  Turnpike, Suite 140 |       | 3975 Fair Ridge Dr., Ste 300 North Tower |
| Annadale, VA 22003                          | ** ** | Fairfax, VA 22033                        |
| **Annapolis(2)**                            | ** ** | **Loch Raven(1)**                        |
| 2086 Generals Highway,  2nd Floor           | ** ** | 1641 East Joppa Road, 2nd Floor          |
| Annapolis, MD 21401                         | ** ** | Baltimore, MD 21286                      |
| **Canton  (VA Mortgage.Com)(2)**            | ** ** | **Prince Georges(2)**                    |
| 1511 A Highland Avenue                      | ** ** | 7905 Malcolm Road, Suite 101        |
| Baltimore, MD 21224                         | ** ** | Clinton, MD 20735                        |
| **Canton/Headquarters(2)**                  | ** ** | **Salisbury(2)**                         |
| 3301 Boston Street                          | ** ** | 309 E. Main Street, Suite 100       |
| Baltimore, MD 21224                         | ** ** | Salisbury, MD 21801                      |
| **Crofton(1)**                              | ** ** | **Waldorf(2)**                           |
| 1049 MD Route 3, 2nd  floor                 | ** ** | 3200 Crain Highway, Suite 102       |
| Gambrills, MD 21054                         | ** ** | Waldorf, MD 20603-4841                   |
| **Eldersburg(2)**                           | ** ** | **White Marsh(1)**                       |
| 1912 Liberty Road, Bldg.  2                 | ** ** | 10101 Philadelphia Road                  |
| Eldersburg, MD 21784                        | ** ** | White Marsh, MD 21162                    |
| **Ellicott  City(1)**                       | ** ** | **Wilmington(2)**                        |
| 10065 Baltimore National  Pike              | ** ** | 3301 Lancaster Pike, Suite 5B       |
| Ellicott City, MD 21042                     |       | Wilmington, DE 19805                     |

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(1)          Bank owns offices

(2)          Bankleases offices

We operate consumerfinance offices at the following locations which are leased by FinanceMaryland:
| **Bel Air**                          | ** ** | **Randallstown**                          |
|--------------------------------------|------------|-------------------------------------------|
| 225 Briarhill  Place, Suite I-1 | ** ** | 3537  Brenbrook Drive                     |
| Bel Air, MD 21015                    | ** ** | Randallstown, MD 21133                    |
| **Dundalk**                          | ** ** | **Salisbury**                             |
| 1770 Merritt  Blvd.                  | ** ** | 319 B Civic Avenue                        |
| Baltimore, MD  21222                 | ** ** | Salisbury, MD 21804                       |
| **Easton**                           | ** ** | **Woodlawn**                              |
| 8223-17 Elliott  Road                | ** ** | 6666 Security Blvd., Suite 16        |
| Easton, MD 21601                     | ** ** | Baltimore, MD 21207                       |
| **Frederick**                        | ** ** | **Canton/Headquarters/Central  Approval** |
| 454 Prospect Blvd                    | ** ** | 3301 Boston Street                        |
| Frederick, MD  21702                 | ** ** | Baltimore, MD 21224                       |
| **Glen  Burnie**                     | ** ** | **Bear,  Delaware**                       |
| 7400 Ritchie  Highway, Suite E  | ** ** | 1831 Pulaski Highway                      |
| Glen Burnie, MD  21061               | ** ** | Bear, DE 1970                             |

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| **Hagerstown**        | ** ** | **Dover, Delaware**        |
|-----------------------|------------|----------------------------|
| 1423 Dual Hwy         | ** ** | 222 S. Dupont Hwy, Ste 101 |
| Hagerstown, MD  21740 | ** ** | Dover, DE 19901            |
| **Laurel**            | ** ** | **Milford,  Delaware**     |
| 3421 Fort Meade  Rd   | ** ** | 975A Dupont Blvd           |
| Laurel, MD 20707      | ** ** | Milford, DE 19963          |
| **North  East**       | ** ** | **Seaford,  Delaware**     |
| 113 North East  Plaza | ** ** | 1026  W. Stein Highway     |
| North East, MD  21901 | ** ** | Seaford, DE 19973          |
| **Overlea**           | ** ** |                       |
| 7682 Belair Road      | ** ** |                       |
| Baltimore, MD  21236  | ** ** | ** **                 |

 

Our bank branches range intotal size from 2,000 to 4,000 square feet, mortgage offices generally range from1,200 to 2,000 square feet and our Finance Maryland offices from 800 to 1,600square feet. All of our locations are suitable and adequate to conduct businessand support growth in customer and transaction volume.

**ITEM 3**                   LEGALPROCEEDINGS

We are not a party to, noris any of our property the subject of, any material pending legal proceedingsincidental to our business other than those arising in the ordinary course ofbusiness. In the opinion of management no such proceeding will have a materialadverse effect on our financial position or results of operations.

**ITEM 4**                   SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

There was no submission ofmatters to a vote of securities holders during the fourth quarter of the yearended December 31, 2004.

**ITEM 4A**           EXECUTIVE OFFICERS OFTHE REGISTRANT

Edwin F. Hale, Sr.(age 58) has been Chairmanand Chief Executive Officer of First Mariner and of the Bank since 1995. JosephA. Cicero (age 60) has been the President of First Mariner and ChiefOperating Officer of the Bank since 1996. George H. Mantakos (age 62) hasbeen Executive Vice President of First Mariner, and the President of the Banksince 1995. Mark A. Keidel (age 43) has been Senior Vice President andChief Financial Officer of First Mariner and the Bank since June 2000, andprior to that Mr. Keidel was Senior Vice President and Chief Financial Officerof Mason-Dixon Bancshares.

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**PART II**

**ITEM 5**                   MARKET FOR THEREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market for Common Stock**

Ourcommon stock trades on The Nasdaq National Market under the symbol “FMAR.” Thetable below sets forth for the periods indicated the low and high market pricesof our common stock as reported on The Nasdaq National Market. Theseover-the-counter market quotations reflect inter-dealer prices and do notinclude retail mark-up, mark-down or commissions, and they may not necessarilyrepresent actual transactions. We currently have approximately 3,000stockholders, and we did not pay a cash dividend in 2003 or 2004.
| ** **          | ** ** | **Low** | ** ** | **High** | ** ** |
|---------------------|------------|---------|------------|----------|------------|
| 2004 Quarter ended: |       |    |       |     |       |
| Fourth quarter      |       | $       | 16.80      |     | $          | 17.91 |   |
| Third quarter       |       | 15.51   |       | 17.20    |       |
| Second quarter      |       | 15.65   |       | 19.75    |       |
| First quarter       |       | 17.65   |       | 20.03    |       |
| 2003 Quarter ended: |       |    |       |     |       |
| Fourth quarter      |       | $       | 15.00      |     | $          | 20.17 |   |
| Third quarter       |       | 12.70   |       | 17.70    |       |
| Second quarter      |       | 12.26   |       | 13.90    |       |
| First quarter       |       | 11.19   |       | 12.70    |       |

 

**EquityCompensation Plan Information**

Thefollowing table sets forth the securities authorized for issuance under theCompany’s equity compensation plans as of December 31, 2004:
| **Plan category**                                      | ** ** | ** ** | ** ** | **(A)  Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **(B)  Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **(C)  Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected  in column (A))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       |       | 738,239    |                                                                                                                                                      |       |                                                                                                                 | $          | 10.05                                                                                                                                                                                                                 |       |   |   | 565,954 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                      |       |                                                                                                                 | —     |                                                                                                                                                                                                                  |       |   | — |   |   |
| Total                                                       |       |       | 738,239    |                                                                                                                                                      |       |                                                                                                                 | $          | 10.05                                                                                                                                                                                                                 |       |   |   | 565,954 |   |   |

 

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**IssuerPurchases of Equity Securities**

Thefollowing table sets forth the Company’s purchases of its Common Stock for themost recent fiscal quarter:
| ** **    | ** ** | **Total  Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of Shares  Purchased  as Part of Plan** | ** ** | **Maximum  Number of  Shares Yet  to Purchase** | ** ** |
|---------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| October 2004  |       |                                         | 5,000      |                                         |       |                                                                             | 17.14      |                                                           |       |   | 34,150 |   |   |   | 265,850 |   |   |
| November 2004 |       |                                         | —     |                                         |       |                                                                             | —     |                                                           |       |   | 34,150 |   |   |   | 265,850 |   |   |
| December 2004 |       |                                         | 3,525      |                                         |       |                                                                             | 17.29      |                                                           |       |   | 37,675 |   |   |   | 262,325 |   |   |

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(1)   On July 20, 2004, the Company annouced thatits Board of Directors approved a share repurchase program of up to 300,000shares (approximately 5%) of the Company’s outstanding common stock, whichprovides for open market or private purchases of stock over the next 24 months.During the three months ended December 31, 2004, the Company repurchased atotal of 8,525 shares of our common stock at an approximate cost of $147,000.

**ITEM 6**                   SELECTEDFINANCIAL DATA
| ** **                                      | ** ** | **For the Year Ended December 31,**                            | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                                                                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands except for per share data)** | ** ** |
| Net Interest Income                             |       | $                                                                                       | 42,441     |   | $ | 34,411 |   | $ | 30,988 |   | $ | 25,874 |   | $ | 21,020 |   |
| Provision For Loan  Losses                      |       | 2,243                                                                                   |       | 2,536 |   | 2,175 |   | 1,625 |   | 1,105 |   |
| Noninterest Income                              |       | 19,190                                                                                  |       | 21,086 |   | 14,994 |   | 10,741 |   | 8,923 |   |
| Noninterest Expense                             |       | 50,926                                                                                  |       | 45,883 |   | 37,973 |   | 31,296 |   | 27,798 |   |
| Net Income                                      |       | 6,101                                                                                   |       | 5,307 |   | 3,904 |   | 2,304 |   | 640 |   |
| Dividends per Common  Share                     |       | —                                                                                  |       | — |   | — |   | — |   | 0.02 |   |
| Net Income per Common  Share—Basic         |       | 1.06                                                                                    |       | 0.97 |   | 0.73 |   | 0.58 |   | 0.20 |   |
| Net Income per Common  Share—Diluted  |       | 0.96                                                                                    |       | 0.88 |   | 0.69 |   | 0.57 |   | 0.20 |   |
| Total Assets                                    |       | $                                                                                       | 1,250,531  |   | $ | 1,057,853 |   | $ | 871,152 |   | $ | 778,525 |   | $ | 678,109 |   |
| Loans Receivable, Net                           |       | 736,566                                                                                 |       | 601,155 |   | 526,777 |   | 463,141 |   | 425,657 |   |
| Deposits                                        |       | 825,417                                                                                 |       | 747,733 |   | 668,169 |   | 600,588 |   | 476,882 |   |
| Long-term  Borrowings and Repurchase Agreements |       | 134,369                                                                                 |       | 110,000 |   | 85,000 |   | 85,000 |   | 75,000 |   |
| Stockholders’ Equity                       |       | 64,314                                                                                  |       | 58,434 |   | 51,126 |   | 44,008 |   | 27,849 |   |
| Allowance For Loan  Losses                      |       | 9,580                                                                                   |       | 8,692 |   | 7,188 |   | 5,524 |   | 4,341 |   |
| Net Chargeoffs                                  |       | 1,355                                                                                   |       | 1,032 |   | 511 |   | 442 |   | 86 |   |
| Nonperforming Assets to  Total Assets           |       | 0.38                                                                                    | %          | 0.48 | % | 0.40 | % | 0.56 | % | 1.00 | % |
| Return On Average Assets                        |       | 0.54                                                                                    | %          | 0.57 | % | 0.49 | % | 0.32 | % | 0.10 | % |
| Return On Average Equity                        |       | 10.11                                                                                   | %          | 9.76 | % | 8.20 | % | 6.98 | % | 2.85 | % |
| Dividend Payout Ratio                           |       | —                                                                                  |       | — |   | — |   | — |   | 10 | % |
| Average Equity to  Average Assets               |       | 5.36                                                                                    | %          | 5.83 | % | 5.99 | % | 4.65 | % | 3.45 | % |
| Regulatory Capital  Ratios:                     |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Leverage                                        |       | 7                                                                                       | %          | 8 | % | 8 | % | 8 | % | 6 | % |
| Tier 1 Capital To Risk  Weighted Assets         |       | 9                                                                                       | %          | 10 | % | 10 | % | 11 | % | 9 | % |
| Total Capital To Risk  Weighted Assets          |       | 14                                                                                      | %          | 15 | % | 13 | % | 13 | % | 12 | % |

 

**ITEM 7**                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**About First MarinerBancorp**

We are a financial holding company incorporated underthe laws of Maryland and registered under the federal Bank Holding Company Actof 1956, as amended. Our company was organized in 1994 and 

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changed its name to FirstMariner Bancorp in May 1995. Since 1995, our strategy has involvedbuilding a network of banking branches, ATMs and other financial servicesoutlets to capture market share and build a community franchise forstockholders, customers and employees. We are focusing on growing assets andearnings by capitalizing on the broad network of bank branches, mortgageoffices, consumer finance offices, and ATMs established during ourinfrastructure expansion phase.

First Mariner Bank is our largest operating subsidiaryof the Company with assets exceeding $1.199 billion as of December 31,2004. The Bank was formed in 1995 through the merger of several small financialinstitutions. The Bank’s primary market area for its core banking operations,which consist of traditional commercial and consumer lending, as well as retailand commercial deposit operations, is central Maryland as well as portions ofMaryland’s eastern shore. The Bank’s mortgage division, First Mariner Mortgage,primarily serves the same core market area as the Bank, while several sourcingunits of First Mariner Mortgage operate on a regional and even national basis. In2004, approximately 70% of First Mariner’s Mortgage’s loan production came fromthe core Bank’s market area. First Mariner Bank is an independent communitybank, and its’ deposits are insured by the Federal Deposit InsuranceCorporation (“FDIC”). The Bank is engaged in the general commercial bankingbusiness, with particular attention and emphasis on the needs of individualsand small to mid-sized businesses, and delivers a wide range of financialproducts and services that are offered by many larger competitors. Products andservices include traditional deposit products, a variety of consumer andcommercial loans, residential and commercial mortgage and construction loans,wire transfer services, non-deposit investment products, and Internet bankingand similar services. Most importantly, the Bank provides customers with accessto local Bank officers who are empowered to act with flexibility to meetcustomers’ needs in an effort to foster and develop long-term loan and depositrelationships.

Finance Maryland was formed in July 2002, andengages in traditional consumer finance activities, making small direct cashloans to individuals, the purchase of installment loan sales contracts fromlocal merchants and retail dealers of consumer goods, and loans to individualsvia direct mail solicitations. Finance Maryland currently operates 13 branchesin the State of Maryland and four branches in the state of Delaware, whichoperate under the trade name “Finance Delaware”. Finance Maryland had totalassets of $34.5 million as of December 31, 2004.

FM Appraisals, whichcommenced operations in the fourth quarter of 2003, is an appraisal managementcompany that is headquartered in Baltimore City. FM Appraisals offers appraisalmanagement services for residential real estate lenders, including the complianceoversight of sub-contracted appraisers, appraisal ordering and administration,and appraisal review services. FM Appraisals currently provides these servicesto First Mariner Mortgage, but will begin to market appraisal management servicesto outside lenders in 2005.

**Applicationof Critical Accounting Policies**

Our consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United Statesand follow general practices within the banking and financial servicesindustry. The application of these accounting principles requires ourmanagement to make estimates, judgments, and assumptions based upon informationavailable at the time the financial statements are prepared, and affect theamounts reported in the financial statements and the accompanying notes.

The most significant accounting policies we apply arediscussed in note 1 to the consolidated financial statements of thisdocument. These policies provide details on how certain assets and liabilitiesare valued in the financial statements and how those values are derived.Management believes that based upon the estimates, judgments and assumptionsused to determine the allowance for loan losses, that this accounting estimaterequires the most subjective and unpredictable judgments, and as such could besubject to revision as new information is available.

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The determination of theamount of the allowance for loan losses is considered by management as acritical accounting estimate, as it represents management’s estimate ofprobable loan losses, and loans outstanding comprise 59.7% of our total assetsas of December 31, 2004. The estimates used in the determination of ourallowance for loan losses include estimated losses on pools of homogeneousloans, losses estimated on specifically identified loans, and consideration ofcurrent economic trends and conditions, all of which may change significantlyover time. Note 1 to the consolidated financial statements describes themethodology used in determining the allowance for loan losses and a detaileddiscussion of factors influencing possible changes in this critical accountingestimate is included in the Credit Risk Management and the Allowance for loanlosses sections of Management’s Discussion and Analysis of Financial Conditionand Results of Operations.

The following discussion compares our financialcondition at December 31, 2004 to the financial condition at December 31,2003 and results of operations for the years ended December 31, 2004, 2003and 2002. This discussion should be read in conjunction with our accompanyingfinancial statements and related notes as well as statistical informationincluded in this report.

**PerformanceOverview**

We continued to achieve significant growth in loansand deposits while producing a record profit in 2004, leveraging ourinfrastructure to produce significant increases in revenue while maintainingthe growth rate of our operating expenses. This resulted in higher levels ofnet income, earnings per share, and improved return on average equity.

We recorded net income of $6.101 million for 2004compared to $5.307 million for 2003, an increase of 15.0% marking ourhighest net income for any year since First Mariner’s formation, and the fourthconsecutive year of record profits. Diluted earnings per share were also thehighest in our history, totaling $0.96 per share for 2004, an increase of 9.1%from $.88 per diluted share in 2003. The growth in net income and earnings pershare resulted as our gross revenue (net interest income and noninterestincome) increased $6.134 million or 11.1%, while our noninterest expenses,the provision for loan losses, and income tax expense increased by$5.340 million or 10.6%.

Our largest category of revenue, net interest income,grew $8.030 million or 23.3% due to growth in average earning assets of21.1%. Noninterest income decreased $1.896 million or 9.0% due to lowerlevels of mortgage banking revenue of $2.041 million and lower gains on salesof securities of $931 thousand. We experienced higher fee income from all othermajor sources of noninterest income.

Our increase in total expenses resulted from highernoninterest expenses of $5.043 million and an increase in our income taxexpense of $590,000. Our provision for loan losses decreased by $293,000. Noninterestexpense growth was primarily the result of higher salaries and benefit costs,and increased occupancy and equipment expenses to support our growth as well ascosts associated with our branch expansion and infrastructure development ofFinance Maryland for the year. The increase in income tax expense reflectshigher net income before taxes, and lower recognition of tax credits, as taxexpense in 2003 reflected new tax credits awarded in 2003 for both 2002 and2003. The decrease in our provision for loan losses reflects improved assetquality statistics, which resulted in a reduction in the allowance for loanlosses to 1.28% of total loans as of December 31, 2004 from 1.43% as of December 31,2003.

Return on average assets was 0.54% for 2004 comparedto 0.57% for 2003 and 0.49% for 2002. Return on average equity for 2004 was10.11% compared to 9.76% for 2003 and 8.20% for 2002. Average equity to averageassets was 5.36% for 2004 compared to 5.83% for 2003 and 5.99% for 2002.

Our total assets increased by $192.678 million or18.2%, reflecting significant increases in loans and investment securities, whichwere funded by increases in deposits and borrowed funds. Loans outstandingincreased by $136.299 million or 22.3%, while our deposits grew by$77.684 million or 10.4%. Our growth 

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statistics for loans anddeposits continue to compare favorably to industry averages, and reflect ourcontinued expansion efforts, execution of our relationship banking strategy,and successful advertising campaigns. Since our inception in 1995, totalassets, loans, and deposits have all increased at an average annual compound growthrate of 45%. Stockholders’ equity increased $5.880 million or 10.1%reflecting the retention of 2004’s earnings, shares sold and issued for theexercise of options and warrants and our employee stock purchase plan. Theseitems were offset somewhat by the shares repurchased under our stock repurchaseplan, and the reduction in other comprehensive income driven by the decline inthe market value of securities classified as available for sale.

We continued to enjoy favorable asset quality in 2004.Our allowance for loan losses was increased to $9.580 million and totaled 204.1% of nonperforming assets as of December 31, 2004, compared to 171.4% asof December 31, 2003. Our ratio of net chargeoffs to average total loanswas 0.21% in 2004, compared to 0.19% in 2003. Our ratio of nonperforming assetsto total assets decreased to 0.38% at December 31, 2004 from 0.48% at December 31,2003.

Capital adequacy levelsremained strong, exceeding the levels we are required to maintain for “well-capitalized”status as defined by Banking regulation. December 31, 2004 ratios for ourcapital leverage, Tier 1 capital to risk weighted assets, and total capital torisk weighted assets were 7.1%, 9.3%, and 14.1%, respectively, compared to7.7%, 10.2%, and 15.0%, respectively, at December 31, 2003. Our regulatorycapital levels declined as growth rates in total and risk-adjusted assetsexceeded the growth rate of regulatory capital.

**Net InterestIncome/Margins**

Our primary source of earnings is net interest income,which is the difference between the interest income we earn on interest-earningassets, such as loans and investment securities, and the interest expense wepay on interest-bearing sources of funds, such as deposits andborrowings. The level of net interest income we earn is determined mostly bythe average balances (“volume”) and the rate spreads between our interest-earningassets and our funding sources.

Our net interest income increased to$42.441 million for 2004, a 23.3% increase from our net interest income of$34.411 million earned for 2003. The increase was attributable to growthin our average earning assets, which increased by $181.959 million or21.1%. Our average loans and loans held for sale increased by 8.1% to $701.297 millionand our average investments and other earning assets increased by 60.2% to$343.931 million. The increase we achieved in average loans reflects ourexpansion of commercial and real estate lending activities among middle marketborrowers in the Baltimore Metropolitan area, the Bank’s continued emphasis onconsumer lending, and consumer finance receivables generated by FinanceMaryland. Our average earning asset growth was funded by an increase in ouraverage deposits of $79.423 million or 11.1% and average borrowed funds of$106.256 or 65.6%. We increased average deposits due to the continued successof sales and marketing efforts in our retail banking and commercial bankingdivisions, and emphasis on core deposit growth. Our average borrowed fundsincreased primarily due to additional short-term borrowed funds to supportsubstantial earning asset growth.

For 2004, our interest income increased to$65.270 million, which represents an increase of $9.645 million or17.3% from $55.625 million we earned for 2003. Interest income on loansand loans held for sale grew by $4.038 million or 8.5%. Our average balances onloans and loans held for sale increased by $52.698 million or 8.1%, andour yields increased 2 basis points to 7.35%. The Federal Reserve shifted itsmonetary policy during 2004 and began to increase market interest rates, whichbegan to stabilize the portion of our loans that are tied to the Prime rate.Additionally, increases in the mix of higher yielding loans improved overallyields. Interest income on our investment securities and other earning assetsincreased $5.607 million or 69.1% to $13.721million from$8.114 million. Our average balances on investments and other earningassets increased 60.2 % and our yields on these assets increased by 21 basis 

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points. Interest expenseon our deposits totaled $12.808 million in 2004, a decrease of $571,000 or4.3% from $13.379 million for 2003. Average interest bearing depositsincreased 9.3%, and the average rates we paid on interest-bearingdeposits declined 28 basis points. Interest expense on borrowed funds increased$2.186 million to $10.021 million for 2004, an increase of 27.9% from$7.835 million for 2003, as we increased the level of borrowed fundsduring 2004. Our average rate paid on borrowed funds decreased 110 basispoints.

The key performancemeasure for our net interest income is the “net interest margin”, or netinterest income divided by average earning assets. Our net interest margin isaffected by our loan pricing, our mix of earning assets, and our distributionand pricing of deposits and borrowings. Our net interest margin was 4.06% forthe year ended December 31, 2004 as compared to 3.99% for 2003. The yieldswe earned on average total earning assets decreased by 20 basis points, whilethe cost of interest bearing deposits and borrowings we paid decreased by 32basis points.

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**Comparative Average Balances Yields and Rates**
|                                                                  | ** ** | **2004**                             | ** ** | **2003**             | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **Average  Balance**                 | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                                                          |       |                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Loans and loans  held for sale  (net of unearned income)(1) |       | $                                    | 701,297    |                 | $          | 51,549 |   | 7.35 | % | $ | 648,599 |   | $ | 47,511 |   | 7.33 | % |
| Mortgage-backed  securities available for sale              |       | 195,504                              |       | 8,563                |       | 4.38 | % | 75,920 |   | 3,646 |   | 4.80 | % |
| Interest-bearing  deposits                                       |       | 19,546                               |       | 235                  |       | 1.20 | % | 59,286 |   | 621 |   | 1.05 | % |
| Treasury notes and U.S.  government agency securities            |       | 82,461                               |       | 2,085                |       | 2.53 | % | 34,204 |   | 934 |   | 2.73 | % |
| Trust preferred  securities                                      |       | 30,679                               |       | 2,204                |       | 7.18 | % | 26,265 |   | 2,096 |   | 7.98 | % |
| Restricted stock investments                                     |       | 7,507                                |       | 267                  |       | 3.56 | % | 3,750 |   | 141 |   | 3.76 | % |
| Other earning assets                                             |       | 8,234                                |       | 367                  |       | 4.46 | % | 15,245 |   | 676 |   | 4.43 | % |
| Total earning assets                                             |       | 1,045,228                            |       | 65,270               |       | 6.24 | % | 863,269 |   | 55,625 |   | 6.44 | % |
| Allowance for loan  losses                                       |       | (8,995                               | )          |                 |       |   |   | (8,016 | ) |   |   |   |   |
| Other assets                                                     |       | 89,415                               |       |                 |       |   |   | 77,738 |   |   |   |   |   |
| Total assets                                                     |       | $                                    | 1,125,648  |                 |       |   |   |   | $ | 932,991 |   |   |   |   |   |
| Liabilities and stockholders’  equity:                      |       |                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Deposits:                                                        |       |                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Passbook/Savings                                                 |       | $                                    | 67,009     |                 | 235        |   | 0.35 | % | $ | 56,556 |   | 369 |   | 0.65 | % |
| NOW/MMDA                                                         |       | 214,290                              |       | 1,532                |       | 0.71 | % | 208,755 |   | 1,824 |   | 0.87 | % |
| Certificates                                                     |       | 367,847                              |       | 11,041               |       | 3.00 | % | 328,411 |   | 11,186 |   | 3.41 | % |
| Total interest-bearing  deposits                                 |       | 649,146                              |       | 12,808               |       | 1.97 | % | 593,722 |   | 13,379 |   | 2.25 | % |
| Other borrowed funds                                             |       | 268,249                              |       | 10,021               |       | 3.74 | % | 161,993 |   | 7,835 |   | 4.84 | % |
| Total interest-bearing  liabilities                              |       | 917,395                              |       | 22,829               |       | 2.49 | % | 755,715 |   | 21,214 |   | 2.81 | % |
| Noninterest-bearing  demand deposits                             |       | 143,706                              |       |                 |       |   |   | 119,707 |   |   |   |   |   |
| Other liabilities                                                |       | 4,204                                |       |                 |       |   |   | 3,220 |   |   |   |   |   |
| Stockholders’ equity                                        |       | 60,343                               |       |                 |       |   |   | 54,349 |   |   |   |   |   |
| Total liabilities and  stockholders’ equity                 |       | $                                    | 1,125,648  |                 |       |   |   |   | $ | 932,991 |   |   |   |   |   |
| Interest rate spread  (Average yield less average rate)          |       |                                 |       |                 |       | 3.75 | % |   |   |   |   | 3.63 | % |
| Net interest income  (Interest income less interest  expense)    |       |                                 |       | $                    | 42,441     |   |   |   |   |   | $ | 34,411 |   |   |   |
| Net Interest Margin  (Net interest income/total earning assets)  |       |                                 |       |                 |       | 4.06 | % |   |   |   |   | 3.99 | % |

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(1)          Loans held for sale areincluded in calculation of average balances, income and yield. Loans on non-accrualstatus are included in the calculation of average balances. Interest income onloans includes amortized loan fees, net of costs, and late fees of $3,282,$2,935, and $2,382 for 2004, 2003, and 2002 respectively.

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|                                                                 | ** ** | **2002**             | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** |
| Assets:                                                         |       |                 |       |   |   |   |   |
| Loans and loans held for sale  (net of unearned income)(1) |       | $                    | 550,688    |   | $ | 42,735 |   | 7.76 | % |
| Mortgage-backed  securities available for sale                  |       | 96,649               |       | 5,262 |   | 5.44 | % |
| Interest-bearing deposits                                       |       | 39,002               |       | 558 |   | 1.43 | % |
| Treasury notes and U.S.  government agency securities           |       | 15,615               |       | 709 |   | 4.54 | % |
| Trust preferred securities                                      |       | 26,026               |       | 2,233 |   | 8.58 | % |
| Restricted stock investments                                    |       | 3,868                |       | 206 |   | 5.33 | % |
| Other earning assets                                            |       | 10,950               |       | 628 |   | 5.74 | % |
| Total earning assets                                            |       | 742,798              |       | 52,331 |   | 7.05 | % |
| Allowance for loan losses                                       |       | (6,138               | )          |   |   |   |   |
| Other assets                                                    |       | 57,896               |       |   |   |   |   |
| Total assets                                                    |       | $                    | 794,556    |   |   |   |   |   |
| Liabilities and  stockholders’ equity:                     |       |                 |       |   |   |   |   |
| Deposits:                                                       |       |                 |       |   |   |   |   |
| Passbook/Savings                                                |       | $                    | 44,202     |   | 424 |   | 0.96 | % |
| NOW/MMDA                                                        |       | 203,969              |       | 2,589 |   | 1.27 | % |
| Certificates                                                    |       | 265,305              |       | 11,235 |   | 4.23 | % |
| Total interest-bearing deposits                                 |       | 513,476              |       | 14,248 |   | 2.77 | % |
| Other borrowed funds                                            |       | 132,539              |       | 7,095 |   | 5.35 | % |
| Total interest-bearing liabilities                              |       | 646,015              |       | 21,343 |   | 3.30 | % |
| Noninterest-bearing  demand deposits                            |       | 98,010               |       |   |   |   |   |
| Other liabilities                                               |       | 2,948                |       |   |   |   |   |
| Stockholders’ equity                                       |       | 47,583               |       |   |   |   |   |
| Total liabilities and stockholders’ equity                 |       | $                    | 794,556    |   |   |   |   |   |
| Interest rate spread  (Average yield less average rate)         |       |                 |       |   |   | 3.75 | % |
| Net interest income  (Interest income less interest expense)    |       |                 |       | $ | 30,988 |   |   |   |
| Net Interest Margin  (Net interest income/total earning assets) |       |                 |       |   |   | 4.17 | % |

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(1)          Loans held for sale areincluded in calculation of average balances, income and yield. Loans onnon-accrual status are included in the calculation of average balances. Interestincome on loans includes amortized loan fees, net of costs, and late fees of$3,282, $2,935, and $2,382 for 2004, 2003, and 2002 respectively.

“Rate/Volume Analysis”below indicates the changes in our net interest income as a result of changesin volume and rates. Changes in interest income and interest expense thatresult from variances in both volume and rates has been allocated to rate and volumechanges in proportion to the absolute dollar amounts of change in each. Wemaintain an asset and liability management policy designed to provide a properbalance between rate sensitive assets and rate sensitive liabilities to attemptto optimize interest margins and to provide adequate liquidity for ouranticipated needs.

 

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**Rate/Volume Analysis**
| ** **                                              | ** ** | **Year Ended December 31, 2004  Compared to  Year Ended December 31, 2003** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Variance due to changes in**                                                                       | ** ** | **Net** | ** ** |
| ** **                                              | ** ** | **Average**                                                                                                              | ** ** | **Average** | ** ** | **Increase/** | ** ** |
| ** **                                              | ** ** | **     Volume     **                                                   | ** ** | **     Rate     ** | ** ** | **(Decrease)** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                                                                                                  | ** ** |
| Interest Income:                                        |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Loans and loans  held for sale (net of unearned income) |       |                                                                                                                     | $          | 3,873 |   |   |   | $ | 165 |   |   |   | $ | 4,038 |   |   |
| Mortgage-backed  securities available for sale          |       |                                                                                                                     | 5,264      |   |   |   | (347 | ) |   |   | 4,917 |   |   |
| Interest-bearing  deposits                              |       |                                                                                                                     | (467       | ) |   |   | 81 |   |   |   | (386 | ) |   |
| Treasury notes  and U.S. government agency securities   |       |                                                                                                                     | 1,225      |   |   |   | (74 | ) |   |   | 1,151 |   |   |
| Trust preferred  securities                             |       |                                                                                                                     | 330        |   |   |   | (222 | ) |   |   | 108 |   |   |
| Other earning  assets                                   |       |                                                                                                                     | (133       | ) |   |   | (50 | ) |   |   | (183 | ) |   |
| Total interest  income                                  |       |                                                                                                                     | 10,092     |   |   |   | (447 | ) |   |   | 9,645 |   |   |
| Interest Expense:                                       |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Passbook                                                |       |                                                                                                                     | 59         |   |   |   | (193 | ) |   |   | (134 | ) |   |
| NOW/MMDA                                                |       |                                                                                                                     | 47         |   |   |   | (339 | ) |   |   | (292 | ) |   |
| Certificates                                            |       |                                                                                                                     | 1,263      |   |   |   | (1,408 | ) |   |   | (145 | ) |   |
| Other borrowed  funds                                   |       |                                                                                                                     | 4,270      |   |   |   | (2,084 | ) |   |   | 2,186 |   |   |
| Total interest  expense                                 |       |                                                                                                                     | 5,639      |   |   |   | (4,024 | ) |   |   | 1,615 |   |   |
| Change in net interest  income                          |       |                                                                                                                     | $          | 4,453 |   |   |   | $ | 3,577 |   |   |   | $ | 8,030 |   |   |

 
| ** **                                              | ** ** | **Year Ended December 31, 2003  Compared to  Year Ended December 31, 2002** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Variance due to changes in**                                                                       | ** ** | **Net** | ** ** |
| ** **                                              | ** ** | **Average**                                                                                                              | ** ** | **Average** | ** ** | **Increase/** | ** ** |
| ** **                                              | ** ** | **     Volume     **                                                   | ** ** | **     Rate     ** | ** ** | **(Decrease)** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                                                                                                  | ** ** |
| Interest Income:                                        |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Loans and loans  held for sale (net of unearned income) |       |                                                                                                                     | $          | 7,274 |   |   |   | $ | (2,498 | ) |   |   | $ | 4,776 |   |   |
| Mortgage-backed  securities available for sale          |       |                                                                                                                     | (1,043     | ) |   |   | (573 | ) |   |   | (1,616 | ) |   |
| Interest-bearing  deposits                              |       |                                                                                                                     | 238        |   |   |   | (183 | ) |   |   | 55 |   |   |
| Treasury notes  and U.S. government agency securities   |       |                                                                                                                     | 592        |   |   |   | (367 | ) |   |   | 225 |   |   |
| Trust preferred  securities                             |       |                                                                                                                     | 20         |   |   |   | (157 | ) |   |   | (137 | ) |   |
| Other earning  assets                                   |       |                                                                                                                     | 205        |   |   |   | (214 | ) |   |   | (9 | ) |   |
| Total interest  income                                  |       |                                                                                                                     | 7,286      |   |   |   | (3,992 | ) |   |   | 3,294 |   |   |
| Interest Expense:                                       |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Passbook                                                |       |                                                                                                                     | 101        |   |   |   | (156 | ) |   |   | (55 | ) |   |
| NOW/MMDA                                                |       |                                                                                                                     | 59         |   |   |   | (824 | ) |   |   | (765 | ) |   |
| Certificates                                            |       |                                                                                                                     | 2,385      |   |   |   | (2,434 | ) |   |   | (49 | ) |   |
| Other borrowed  funds                                   |       |                                                                                                                     | 1,467      |   |   |   | (727 | ) |   |   | 740 |   |   |
| Total interest  expense                                 |       |                                                                                                                     | 4,012      |   |   |   | (4,141 | ) |   |   | (129 | ) |   |
| Change in net interest  income                          |       |                                                                                                                     | $          | 3,274 |   |   |   | $ | 149 |   |   |   | $ | 3,423 |   |   |

 

**Noninterest Income**

We derive noninterest income principally from mortgagebanking activities, service fees on our deposit accounts, ATM fees, commissionswe earn on sales of insurance products and income from bank-owned lifeinsurance. Our noninterest income for the year ended December 31, 2004totaled 

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$19.190 million, ascompared to $21.086 million for the year ended December 31, 2003, adecrease of $1.896 million or 9.0%.

Lower revenue from our mortgage banking activities,and a decline in gains on sales of securities were the primary cause of thedecline in noninterest income. Gains on sales of loans decreased by$1.890 million or 36.1% compared to the year ended December 31, 2003.Total mortgage loans we sold into the secondary market decreased 26.7%, andpricing spreads on our loans sold decreased. The decrease in the volume ofloans sold was impacted by the rise in mortgage rates during 2004 thatsignificantly diminished the demand for refinancing. Our other mortgage bankingfees decreased by $141,000 or 8.3%. Origination related income decreased by$378,000, while our mortgage servicing revenue increased $81,000, and incomefrom reinsurance, appraisal and inspection activities increased by $156,000.The decline in our origination related income occurred primarily due to thedecline in demand for mortgage refinances. The increase in appraisal revenuereflects the increased volume of FM Appraisals that began operation in fourth quarter2003.

Service fees on our deposit accounts increased by$218,000 or 3.3% as we increased the number of demand deposit accounts by 1,255or 4.1%. Pricing on most deposit service charges was unchanged during 2004compared to 2003. Our ATM fees increased by $316,000 or 12.5%, due to increasedtransaction volume and higher transaction fee pricing for non-customers.

Werealized net gains of $440,000 from the sale of investment securities in 2004,compared to net gains of $1.371 million for 2003. The level of gains on salesof securities for 2003 was high from a historical perspective, and wasprimarily attributable to realized gains of $740,000 on sales of securities toraise proceeds for the redemption of our trust preferred securities during2003. Income from bank-owned life insurance grew by $335,000 due to purchasesof new policies in late 2003 and early 2004. Crediting rates for life insurancecontracts decreased slightly during 2004. Commissions earned on the sale ofnondeposit investment products (primarily fixed annuities) decreased $213,000due to lower rates offered by insurance carriers which reduced demand for theseproducts. Commissions from the sale of other insurance products (primarilyinsurance products offered through Finance Maryland) increased $470,000 due toexpansion of Finance Maryland’s locations.
| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2004  Amount**                            | ** ** | **2003  Amount** | ** ** | **2002  Amount** | ** ** |
| ** **                                                | ** ** | **(Dollars in thousands)**        | ** ** |
| Gain on sale of  loans                                    |       | $                                           | 3,349      |   | $ | 5,239 |   | $ | 3,622 |   |
| Service fees on  deposits                                 |       | 6,899                                       |       | 6,681 |   | 4,327 |   |
| ATM Fees                                                  |       | 2,836                                       |       | 2,520 |   | 2,109 |   |
| Gain on sale of  investment securities                    |       | 440                                         |       | 1,371 |   | 497 |   |
| Other mortgage  banking fees                              |       | 1,567                                       |       | 1,708 |   | 1,832 |   |
| Income from bank  owned life insurance                    |       | 1,072                                       |       | 737 |   | 529 |   |
| Commissions on  sales of nondepeposit investment products |       | 649                                         |       | 862 |   | 879 |   |
| Commissions on  sales of other insurance products         |       | 1,519                                       |       | 1,049 |   | 347 |   |
| Other                                                     |       | 859                                         |       | 919 |   | 852 |   |
| Total noninterest income                                  |       | $                                           | 19,190     |   | $ | 21,086 |   | $ | 14,994 |   |

 

**Noninterest Expense**

Our noninterest expense totaled $50.926 millionfor the year ended December 31, 2004, compared to $45.883 million for2003, an increase of $5.043 million or 11.0%. Noninterest expenses for2003 included non-recurring expenses related to the early payoff off trustpreferred securities, consulting fees related to obtaining tax credits, and establishmentof a charitable foundation which totaled $1.385 million. Excluding thenonrecurring expenses incurred in 2003, noninterest expense growth was $6.428or 14.4%. Growth in 

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noninterest expenses in2004 includes expense growth of Finance Maryland that totaled $2.039 millionand the expenses associated with opening a new wholesale mortgage originationgroup of $544,000.

We paid higher salaries and benefits costs of$3.842 million or 16.9% compared to 2003, primarily due to staffing ofFinance Maryland, new wholesale mortgage operations, additional staffing tosupport our loan and deposit growth, regular salary increases and higherbenefit costs. Our occupancy costs for 2004 grew $630,000 or 11.2% compared to2003, due to the additional Finance Maryland offices, one additional bankbranch, and office space for wholesale mortgage. Our furniture, fixtures andequipment expenses increased for the year ended 2004 by $130,000 or 4.5% alsodue to the addition of consumer finance offices, the additional bank branch andmortgage space.

Our professional servicesdecreased by $117,000 or 13.4% and totaled $756,000 for 2004 as a result oflower general legal expenses. Our advertising expenses increased by $262,000 or22.0% and totaled $1.455 million, as we increased product advertising andmarketing during the year. We experienced higher data processing expenses of$47,000 or 2.3%, due to the costs associated with account volume increases,offset somewhat by lower costs of check processing. Increased service and maintenancecost of $177,000 occurred due to an increase in our locations. Our postageexpenses increased by $226,000, as a result of increased production of directmail campaigns for mortgage lending and consumer finance. Our other noninterest expenses not detailed in the table below increased $738,000 whichincludes increased loan origination related expenses of $536,000, as well asincreases in our business development costs of $114,000.

**Noninterest Expense**
| ** **                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2004  Amount**                            | ** ** | **2003  Amount** | ** ** | **2002  Amount** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)**        | ** ** |
| Salaries and  employee benefits                   |       | $                                           | 26,523     |   | $ | 22,681 |   | $ | 19,761 |   |
| Net occupancy                                     |       | 6,255                                       |       | 5,625 |   | 4,991 |   |
| Furniture,  fixtures and equipment                |       | 3,005                                       |       | 2,875 |   | 2,443 |   |
| Professional  services                            |       | 756                                         |       | 873 |   | 1,254 |   |
| Advertising                                       |       | 1,455                                       |       | 1,193 |   | 1,071 |   |
| Data processing                                   |       | 2,079                                       |       | 2,032 |   | 1,746 |   |
| Service and  maintenance                          |       | 1,485                                       |       | 1,308 |   | 1,043 |   |
| Office supplies                                   |       | 697                                         |       | 691 |   | 550 |   |
| ATM servicing  expenses                           |       | 1,112                                       |       | 922 |   | 831 |   |
| Printing                                          |       | 712                                         |       | 795 |   | 459 |   |
| Corporate  insurance                              |       | 378                                         |       | 297 |   | 234 |   |
| OREO expense                                      |       | (73                                         | )          | 18 |   | (131 | ) |
| FDIC premiums                                     |       | 115                                         |       | 109 |   | 186 |   |
| Consulting fees                                   |       | 385                                         |       | 506 |   | 232 |   |
| Marketing/promotion                               |       | 722                                         |       | 825 |   | 625 |   |
| Postage                                           |       | 982                                         |       | 756 |   | 393 |   |
| Overnight  delivery/courier                       |       | 736                                         |       | 770 |   | 553 |   |
| Security                                          |       | 310                                         |       | 294 |   | 222 |   |
| Dues and  memberships                             |       | 341                                         |       | 248 |   | 187 |   |
| Writeoff of unamortized  trust preferred expenses |       | —                                      |       | 945 |   | — |   |
| Loan collection  expenses                         |       | 332                                         |       | 239 |   | 153 |   |
| Other                                             |       | 2,619                                       |       | 1,881 |   | 1,170 |   |
| Total noninterest  expense                        |       | $                                           | 50,926     |   | $ | 45,883 |   | $ | 37,973 |   |

 

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**Income Tax Expenses**

We recorded tax expense of $2.361 million in 2004for an effective tax rate of 27.9% compared to income tax expense of$1.771 million and an effective tax rate of 25.0% for 2003. Our effectiverate increased principally due to lower utilization of income tax credits in2004 ($200,000) compared to 2003 ($434,000). Tax credits in 2003 included$292,000 of prior period (2002) benefit.

In September of 2003, we announced that the Bankhad earned significant state tax incentives through its participation in theOne Maryland Economic Development and Job Creation Tax Credit programs. The taxincentives we earned total $5.5 million based upon a confirmation receivedfrom the Maryland Department of Business and Economic Development. We willrealize the benefits of the incentives in our reported earnings as the creditscan be utilized, in accordance with accounting standards that govern therecognition of investment tax credits. The amount of the credit that we canutilize will be determined by the level of Maryland taxable income for the Bankonly, and will be recognized as a reduction in our income tax expense. Anyunused One Maryland credits can be carried forward and will expire in 2016. TheJob Creation Tax Credit can be carried forward for five years. We expect theBank to fully realize the full value of the credits before their expiration.

We have utilized all priornet operating loss carryforwards for federal income tax purposes at December 31,2004. Our net operating loss carryforwards for state income tax purposesapproximated $ 7.491 million and can be offset by the future state taxableincome of First Mariner Bancorp only. Operating loss carry-forward taxbenefits are in addition to the tax credits discussed above. Currently, webelieve that it is more likely than not that the future operations of FirstMariner Bancorp will not generate sufficient taxable income to realize thepotential utilization of our net operating loss carryforward. Therefore, wehave established a valuation allowance equal to the deferred tax assetassociated with the net operating loss carryforward of $346,000 to reflect thisuncertainty.

**Financial Condition**

At December 31, 2004, our total assets were$1,250.531 million as compared to $1,057.853 million at December 31,2003, an increase of 18.2%. We continued to achieve growth through thedevelopment of our bank branching and mortgage loan office network, expansionof our commercial and retail business development efforts, our formation andexpansion of Finance Maryland and successful development and marketing of ourdeposit and loan products.

Our total loans at December 31, 2004 were$746.146 million, as compared to $609.847 million on December 31,2003, which represents an increase of $136.299 million or 22.3%. Weachieved growth in every major segment of our loan portfolio, except commercialbusiness loans. Loans held for sale increased by $20.900 million as weexperienced greater origination activity in the later part of 2004 compared to2003. Investment securities increased by $34.528 million as our growth infunding sources (deposits and borrowings) exceeded growth in our loans and weplaced our excess funds in investment securities. Our interest-bearingdeposits decreased by $14.423 million.

We increased totaldeposits by $77.684 million, an increase of 10.4% from $747.733 million atDecember 31, 2003. Our borrowings, repurchase agreements, and trustpreferred offerings increased by $108.087 million, and increased the mixof our borrowed funds to 28.4% of total assets as of December 31, 2004,compared to 23.3% as of December 31, 2003.

**Loan Portfolio**

Our loan portfolio is expected to produce higheryields than investment securities and other interest-earning assets, theabsolute volume and mix of loans and the volume and mix of loans as apercentage of total earning assets is an important determinant of our netinterest margin.

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Thefollowing table sets forth the composition of our loan portfolio.
| ** **                              | ** ** | **At December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                              | ** ** | **(in thousands)**       | ** ** |
| Loans:                                  |       |                          |       |   |   |   |   |   |   |   |   |
| Commercial Loans  and Lines of Credit   |       | $                             | 60,496     |   | $ | 65,934 |   | $ | 56,760 |   | $ | 64,157 |   | $ | 70,726 |   |
| Commercial/Residential  Construction    |       | 63,847                        |       | 51,225 |   | 31,878 |   | 34,411 |   | 34,832 |   |
| Commercial  Mortgages                   |       | 315,676                       |       | 244,316 |   | 202,994 |   | 144,836 |   | 101,601 |   |
| Residential  Construction—Consumer |       | 135,841                       |       | 119,973 |   | 135,189 |   | 125,954 |   | 82,318 |   |
| Residential  Mortgages                  |       | 41,589                        |       | 40,122 |   | 46,065 |   | 54,456 |   | 98,731 |   |
| Consumer                                |       | 128,697                       |       | 88,277 |   | 61,079 |   | 44,851 |   | 41,790 |   |
| Total Loans                             |       | $                             | 746,146    |   | $ | 609,847 |   | $ | 533,965 |   | $ | 468,665 |   | $ | 429,998 |   |

 

The largest increase in our loan portfolio occurred inthe commercial mortgage category, which increased by $71.360 million andcommercial/residential construction loans increased by $12.622 million.Growth in these types of our commercial loans reflected successful marketingand sales efforts of the Bank’s commercial lending unit, a strong regionaleconomy, as well as the continuation of a favorable interest rate environment.Our consumer loans increased by $40.420 million due to successfulmarketing campaigns, a favorable economic and interest rate environment, growthin consumer finance receivables generated by Finance Maryland, and successfulcross-selling of home equity products to first mortgage customers.Residential construction loans to consumers increased $15.868 million asour origination activity in this product line also increased and demand for newconstruction remained high. Our residential real estate loans, which consistprimarily of 3 and 5-year adjustable-rate mortgages, increased by $1.467 million.

During 2004, the Company identified certain loanspreviously classified as Commercial loans and reclassified them as eitherConstruction loans or Commercial Real Estate loans to more closely categorizethese loans with the loan purpose. Amounts presented for 2003 loan portfolioreflect $12.966 million reclassified out of the commercial loan category,mostly into the commercial real estate group.

Approximately 34.1% of ourloans have adjustable rates as of December 31, 2004 compared toapproximately 25.2% at December 31, 2003, including adjustable rate firstmortgages indexed to U.S. Treasury obligations and variable home equity linesof credit tied to the Prime interest rate. Our variable rate loans adjust tothe current interest rate environment, whereas fixed rates do not allow thisflexibility. If interest rates were to increase in the future, our interestearned on the variable rate loans would improve, and if rates were to fall theinterest we earn would decline, thus impacting our interest income. See ourdiscussion under “Liquidity and Interest Rate Sensitivity” below. The followingtable sets forth the maturity distribution, classified according to sensitivityto changes in interest rate, for our loan portfolio at December 31, 2004.Some of our loans may be renewed or repaid prior to maturity. Therefore, thefollowing table should not be used as a forecast of our future cashcollections. The scheduled repayments shown are reported in the maturitycategory in which the payment is due.

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**Maturity Schedule of Selected Loans**
| ** **                             | ** ** | **Up to 1  Year** | ** ** | **More Than  1 Year to  5 Years** | ** ** | **5 Years to  10 Years** | ** ** | **More Than  10 Years** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(in thousands)**     | ** ** |
| Total Loans:                           |       |                        |       |                                                  |       |                                    |       |                              |       |      |       |   |   |
| Residential Mortgages                  |       | $                           | 7,949      |                                                  | $          | 2,772                                   |       | $                                 | 3,980      |      |       | $ | 26,888 |   |   | $ | 41,589 |   |
| Commercial/Res Construction            |       | 15,099                      |       | 39,663                                                |       | 5,552                                   |       |                              | 3,533      |      |       | 63,847 |   |
| Residential Construction—Consumer |       | 135,434                     |       | 358                                                   |       | 49                                      |       |                              | —     |      |       | 135,841 |   |
| Commercial Mortgages                   |       | 45,616                      |       | 196,711                                               |       | 63,492                                  |       |                              | 9,857      |      |       | 315,676 |   |
| Commercial                             |       | 28,811                      |       | 24,622                                                |       | 5,610                                   |       |                              | 1,453      |      |       | 60,496 |   |
| Consumer                               |       | 76,847                      |       | 34,999                                                |       | 5,936                                   |       |                              | 10,915     |      |       | 128,697 |   |
| Total                                  |       | $                           | 309,756    |                                                  | $          | 299,125                                 |       | $                                 | 84,619     |      |       | $ | 52,646 |   |   | $ | 746,146 |   |
| Fixed Rate Loans:                      |       |                        |       |                                                  |       |                                    |       |                              |       |      |       |   |   |
| Residential Mortgages                  |       | $                           | 4,661      |                                                  | $          | 1,242                                   |       | $                                 | 1,667      |      |       | $ | 7,854 |   |   | $ | 15,424 |   |
| Commercial/Res Construction            |       | 3,808                       |       | 21,876                                                |       | —                                  |       |                              | —     |      |       | 25,684 |   |
| Residential Construction—Consumer |       | 135,434                     |       | 358                                                   |       | 49                                      |       |                              | —     |      |       | 135,841 |   |
| Commercial Mortgages                   |       | 40,244                      |       | 165,089                                               |       | 18,975                                  |       |                              | 1,278      |      |       | 225,586 |   |
| Commercial                             |       | 15,610                      |       | 8,961                                                 |       | 5,070                                   |       |                              | —     |      |       | 29,641 |   |
| Consumer                               |       | 7,715                       |       | 34,999                                                |       | 5,936                                   |       |                              | 10,915     |      |       | 59,565 |   |
| Total—Fixed Rate                  |       | 207,472                     |       | 232,525                                               |       | 31,697                                  |       |                              | 20,047     |      |       | 491,741 |   |
| Variable Rate Loans:                   |       |                        |       |                                                  |       |                                    |       |                              |       |      |       |   |   |
| Residential Mortgages                  |       | 3,288                       |       | 1,530                                                 |       | 2,313                                   |       |                              | 19,034     |      |       | 26,165 |   |
| Commercial/Res Construction            |       | 11,291                      |       | 17,787                                                |       | 5,552                                   |       |                              | 3,533      |      |       | 38,163 |   |
| Residential Construction—Consumer |       | —                      |       | —                                                |       | —                                  |       |                              | —     |      |       | — |   |
| Commercial Mortgages                   |       | 5,372                       |       | 31,622                                                |       | 44,517                                  |       |                              | 8,579      |      |       | 90,090 |   |
| Commercial                             |       | 13,201                      |       | 15,661                                                |       | 540                                     |       |                              | 1,453      |      |       | 30,855 |   |
| Consumer                               |       | 69,132                      |       | —                                                |       | —                                  |       |                              | —     |      |       | 69,132 |   |
| Total—Variable Rate               |       | 102,284                     |       | 66,600                                                |       | 52,922                                  |       |                              | 32,599     |      |       | 254,405 |   |
| Total—Fixed And  Variable         |       | $                           | 309,756    |                                                  | $          | 299,125                                 |       | $                                 | 84,619     |      |       | $ | 52,646 |   |   | $ | 746,146 |   |

 

**Credit RiskManagement**

We attempt to manage the risk characteristics of ourloan portfolio through various control processes, such as credit evaluation ofborrowers, establishment of lending limits and application of lendingprocedures, including the holding of adequate collateral and the maintenance ofcompensating balances. However, we seek to rely primarily on the cash flow ofour borrowers as the principal source of repayment. Although credit policiesare designed to minimize our risk, management recognizes that loan losses willoccur and the amount of these losses will fluctuate depending on the riskcharacteristics of our loan portfolio as well as general and regional economicconditions.

Our allowance for loan losses represents a reserve forpotential losses in the loan portfolio. We evaluate the adequacy of ourallowance for loan losses continually based on a review of all significantloans, with a particular emphasis on non-accruing, past due and other loansthat we believe require special attention.

For significant problem loans, our review consists ofevaluation of the financial strengths of the borrower and the guarantor, therelated collateral, and the effects of economic conditions. Reserves againstthe remaining loan portfolio are based on our analysis of historical loan lossratios, loan chargeoffs, delinquency trends, previous collection experience,and the risk rating we place on each individual loan 

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along with an assessmentof the effects of external economic conditions. “Allowance for Loan LossesAllocation,” which is set forth below, indicates the specific reserves weallocated by loan type and also the general reserves included in our allowancefor loan losses.

Our provision for loan losses is a charge applied toearnings in the current period to maintain our allowance at a level we havedetermined to be adequate based upon factors noted above. We decreased theamount of our provision in 2004 due to improving asset quality trends thatallowed us to decrease the ratio of our allowance for loan losses to our totalloans to 1.28% as of December 31, 2004 from 1.43% as of December 31,2003. Our provision for loan losses totaled $2.243 million for the yearended December 31, 2004, as compared to $2.536 million for the year ended December 31,2003.

Our allowance for loan losses at December 31,2004 totaled $9.580 million, as compared with the December 31, 2003balance of $8.692 million, an increase of $888,000 or 10.2%. Werecognized net charge-offs of $1.355 million and $1.032 million for 2004 and2003, respectively. Our net charge-offs as a percentage of our average loanswere 0.21% for 2004 compared to 0.19% in 2003. Our net charge-off levels forthe Bank were $412,000 in 2004 compared to $516,000 in 2003, reflecting lowercharge-offs associated with overdrawn commercial and retail checking accountsand residential mortgage loans. Finance Maryland net charge-offs totaled$943,000 (3.5% of average consumer finance loans) in 2004 compared to $516,000(3.24% of average consumer finance loans).

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The following table, “Allowancefor Loan Losses” summarizes the activities in our allowance.

**Allowance for Loan Losses**
| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**        | ** ** |
| Allowance for  loan losses, beginning of year       |       | $                                           | 8,692      |   | $ | 7,188 |   | $ | 5,524 |   | $ | 4,341 |   | $ | 3,322 |   |
| Loans charged off:                                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | —                                      |       | — |   | — |   | (347 | ) | (62 | ) |
| Commercial/Residential Construction                 |       | (4                                          | )          | — |   | (65 | ) | (50 | ) | — |   |
| Commercial Mortgages                                |       | —                                      |       | — |   | — |   | — |   | — |   |
| Residential Construction—Consumer              |       | (251                                        | )          | (244 | ) | (200 | ) | — |   | — |   |
| Residential Mortgages                               |       | —                                      |       | (19 | ) | — |   | (5 | ) | (24 | ) |
| Consumer                                            |       | (1,318                                      | )          | (1,003 | ) | (288 | ) | (116 | ) | (12 | ) |
| Total loans charged off                             |       | (1,573                                      | )          | (1,266 | ) | (553 | ) | (518 | ) | (98 | ) |
| Recoveries                                          |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | —                                      |       | 17 |   | — |   | 69 |   | — |   |
| Commercial/Residential Construction                 |       | —                                      |       | 65 |   | — |   | — |   | — |   |
| Commercial Mortgages                                |       | —                                      |       | — |   | — |   | — |   | — |   |
| Residential Construction—Consumer              |       | 11                                          |       | — |   | — |   | — |   | — |   |
| Residential Mortgages                               |       | —                                      |       | 1 |   | 9 |   | 1 |   | 4 |   |
| Consumer                                            |       | 207                                         |       | 151 |   | 33 |   | 6 |   | 8 |   |
| Total recoveries                                    |       | 218                                         |       | 234 |   | 42 |   | 76 |   | 12 |   |
| Net chargeoffs                                      |       | (1,355                                      | )          | (1,032 | ) | (511 | ) | (442 | ) | (86 | ) |
| Provision for  loan losses                          |       | 2,243                                       |       | 2,536 |   | 2,175 |   | 1,625 |   | 1,105 |   |
| Allowance for  loan losses, end of year             |       | $                                           | 9,580      |   | $ | 8,692 |   | $ | 7,188 |   | $ | 5,524 |   | $ | 4,341 |   |
| Loans (net of premiums  and discounts)              |       |                                        |       |   |   |   |   |   |   |   |   |
| Period-end balance                                  |       | $                                           | 746,146    |   | $ | 609,847 |   | $ | 533,965 |   | $ | 468,665 |   | $ | 429,998 |   |
| Average balance during period                       |       | 652,507                                     |       | 552,528 |   | 496,486 |   | 455,780 |   | 383,719 |   |
| Allowance as  percentage of period-end loan balance |       | 1.28                                        | %          | 1.43 | % | 1.35 | % | 1.18 | % | 1.01 | % |
| Percent of average loans:                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                           |       | 0.34                                        | %          | 0.46 | % | 0.44 | % | 0.36 | % | 0.29 | % |
| Net chargeoffs                                      |       | 0.21                                        | %          | 0.19 | % | 0.10 | % | 0.10 | % | 0.02 | % |

 

We deploy a systematic methodology for determining ourallowance for loan losses that includes a quarterly review process andadjustment to our allowance. Our process includes updates on all loans that wehave rated for risk. Our commercial loans are generally reviewed individually,while large groups of homogeneous loans are reviewed as pools. Our methodologyincorporates a variety of risk considerations, both qualitative andquantitative. Quantitative factors include our historical loss experience byloan type, collateral values, financial condition of borrowers, and otherfactors. Qualitative factors include judgments concerning general economicconditions that may affect credit quality, credit concentrations, the pace ofportfolio growth and delinquency levels. These qualitative factors areevaluated in connection with our unallocated portion of our allowance for loanlosses. We periodically engage outside firms and experts to independentlyassess our methodology, and perform various loan review functions.

Our methodology employs management’s judgment as tothe level of future losses on existing loans based on our internal review ofthe loan portfolio, including an analysis of the borrowers’ current financialposition, the consideration of current and anticipated economic conditions andtheir potential effects on specific borrowers. In determining our ability tocollect certain loans, we also consider the fair value of any 

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underlying collateral.However, our determination of the appropriate allowance level is based upon anumber of assumptions we make about future events, which we believe arereasonable, but which may or may not prove valid. Thus, there can be noassurance that our charge-offs in future periods will not exceed our allowancefor loan losses or that we will not need to make additional increases in ourallowance for loan losses.

As a result of our ongoing review of the loanportfolio, we classify loans as nonaccrual even though the presence ofcollateral or the borrowers financial strength may be sufficient to provide forultimate repayment. We recognize interest on non-accrual residential realestate loans only when it is received.

The unallocated allowance is based upon management’sevaluation of various conditions that are not directly measured in thedetermination of the formula and specific allowances. Such conditions includegeneral economic and business conditions affecting key lending areas, creditquality trends (including trends in delinquencies and nonperforming loansexpected to result from existing conditions), loan volumes and concentrations,specific industry conditions within portfolio categories, recent lossexperience in particular loan categories, duration of the current businesscycle, bank regulatory examination results, findings of internal loanexaminers, and management’s judgment with respect to various other conditionsincluding loan administration and management and the quality of riskidentification systems. Executive management reviews these conditionsquarterly.

The following tablesummarizes our allocation of allowance by loan type.

**Allowance for Loan Losses Allocation (dollars inthousands)**
| ** **                             | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** | **December 31, 2002**                      | ** ** |
|----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **Amount**                      | ** ** | **Percent  of Total**      | ** ** | **Percent of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent of  Loans to  Total Loans** | ** ** |
| Commercial Loans and Lines of Credit   |       |                            | $          | 1,819                           |       |                                                 |       | 19.0 | % |   |   | 8.1 | % |   |   | $ | 978 |   |   |   | 11.3 | % |   |   | 10.8 | % |   |   | $ | 826 |   |   |   | 11.5 | % |   |   | 10.6 | % |   |
| Commercial/Residential Construction    |       |                            | 508        |                            |       |                                                 | 5.3        | % |   |   | 8.6 | % |   |   | 303 |   |   |   | 3.5 | % |   |   | 8.4 | % |   |   | 254 |   |   |   | 3.5 | % |   |   | 6.0 | % |   |
| Commercial Mortgages                   |       |                            | 2,804      |                            |       |                                                 | 29.3       | % |   |   | 42.3 | % |   |   | 2,481 |   |   |   | 28.5 | % |   |   | 40.0 | % |   |   | 1,632 |   |   |   | 22.7 | % |   |   | 38.0 | % |   |
| Residential Construction—Consumer |       |                            | 1,523      |                            |       |                                                 | 15.9       | % |   |   | 18.2 | % |   |   | 1,853 |   |   |   | 21.3 | % |   |   | 19.7 | % |   |   | 2,128 |   |   |   | 29.6 | % |   |   | 25.3 | % |   |
| Residential Mortgages                  |       |                            | 20         |                            |       |                                                 | 0.2        | % |   |   | 5.6 | % |   |   | 46 |   |   |   | 0.5 | % |   |   | 6.6 | % |   |   | 23 |   |   |   | 0.3 | % |   |   | 8.6 | % |   |
| Consumer                               |       |                            | 1,653      |                            |       |                                                 | 17.2       | % |   |   | 17.2 | % |   |   | 1,139 |   |   |   | 13.1 | % |   |   | 14.5 | % |   |   | 640 |   |   |   | 8.9 | % |   |   | 11.5 | % |   |
| Unallocated                            |       |                            | 1,253      |                            |       |                                                 | 13.1       | % |   |   | — |   |   |   | 1,892 |   |   |   | 21.8 | % |   |   | — |   |   |   | 1,685 |   |   |   | 23.5 | % |   |   | — |   |   |
| Total                                  |       |                            | $          | 9,580                           |       |                                                 |       | 100.0 | % |   |   | 100.0 | % |   |   | $ | 8,692 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |   | $ | 7,188 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |

 
| ** **                             | ** ** | **December 31, 2001** | ** ** | **December 31, 2000** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Amount**                      | ** ** | **Percent  of Total**      | ** ** | **Percent of  Loans to  Total Loans** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent of  Loans to  Total Loans** | ** ** |
| Commercial Loans and Lines of Credit   |       |                            | $          | 1,141                           |       |   |   | 20.7 | % |   |   | 13.7 | % |   |   | $ | 1,150 |   |   |   | 26.5 | % |   |   | 16.4 | % |   |
| Commercial/Residential Construction    |       |                            | 81         |                            |       |   | 1.5 | % |   |   | 7.3 | % |   |   | 191 |   |   |   | 4.4 | % |   |   | 8.1 | % |   |
| Commercial Mortgages                   |       |                            | 1,377      |                            |       |   | 24.9 | % |   |   | 30.9 | % |   |   | 1,106 |   |   |   | 25.5 | % |   |   | 23.6 | % |   |
| Residential Construction—Consumer |       |                            | 936        |                            |       |   | 16.9 | % |   |   | 26.9 | % |   |   | 734 |   |   |   | 16.9 | % |   |   | 19.2 | % |   |
| Residential Mortgages                  |       |                            | 99         |                            |       |   | 1.8 | % |   |   | 11.6 | % |   |   | 107 |   |   |   | 2.5 | % |   |   | 23.0 | % |   |
| Consumer                               |       |                            | 112        |                            |       |   | 2.0 | % |   |   | 9.6 | % |   |   | 127 |   |   |   | 2.9 | % |   |   | 9.7 | % |   |
| Unallocated                            |       |                            | 1,778      |                            |       |   | 32.2 | % |   |   | — |   |   |   | 926 |   |   |   | 21.3 | % |   |   | — |   |   |
| Total                                  |       |                            | $          | 5,524                           |       |   |   | 100.0 | % |   |   | 100.0 | % |   |   | $ | 4,341 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

**Nonperforming Assets**
| ** **                                   | ** ** | **December 31,**                | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Loans on  nonaccrual status                  |       | $                                    | 4,628      |   | $ | 4,774 |   | $ | 1,278 |   | $ | 1,652 |   | $ | 3,172 |   |
| Real estate  acquired by foreclosure         |       | 65                                   |       | 296 |   | 2,247 |   | 2,683 |   | 3,610 |   |
| Total non-performing  assets                 |       | $                                    | 4,693      |   | $ | 5,070 |   | $ | 3,525 |   | $ | 4,335 |   | $ | 6,782 |   |
| Loans past-due 90  days or more and accruing |       | $                                    | 1,658      |   | $ | 2,258 |   | $ | 9,346 |   | $ | 5,257 |   | $ | 701 |   |

 

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As of December 31, 2004, we had$4.628 million in nonaccrual loans, as compared with $4.774 millionat December 31, 2003. We held other real estate owned of $65,000 at December 31,2004, compared to $296,000 at December 31, 2003. Our nonperforming assets,the total of nonaccrual loans and other real estate owned, decreased to 0.38%of our total assets at December 31, 2004 from 0.48% of our total assets atDecember 31, 2003, reflecting the decrease in our total level ofnonperforming assets.

Our allowance for loan losses represented 204.1% ofnonperforming assets as of December 31, 2004 compared to 171.4% as of December 31,2003. Our loans past-due 90 days or more and accruing decreasedsignificantly, ending 2004 at $1.658 million, compared to$2.258 million at the end of 2003. We believe our allowance for loan lossesis adequate.

See Note 1, “LoansReceivable”, of the Consolidated Financial Statements for informationconcerning our policy for placing loans on nonaccrual status.

**ContractualObligations and Commitments**

First Mariner has certainobligations to make future payments under contract. At December 31, 2004,the aggregate contractual obligations and commitments are:

**Contractual Obligations**
| ** **                                                    | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **Total**                                 | ** ** | **Less than  One Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **After  5 Years** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                   | ** ** |
| Time Deposits and  Certificates of Deposits $100,000 and Over |       | $                                         | 145,079    |   | $ | 20,701 |   | $ | 66,425 |   | $ | 57,953 |   | $ | — |   |
| Borrowings and  repurchase agreements                         |       | 296,661                                   |       | 172,292 |   | 39,369 |   | 25,000 |   | 60,000 |   |
| Annual Rental  Commitments Under Non-Cancelable Leases        |       | 21,942                                    |       | 3,497 |   | 5,947 |   | 5,000 |   | 7,498 |   |
| Commitment to  Purchase Facilities                            |       | 20,000                                    |       | 20,000 |   | — |   | — |   | — |   |
| Total                                                         |       | $                                         | 483,682    |   | $ | 216,490 |   | $ | 111,741 |   | $ | 87,953 |   | $ | 67,498 |   |

 

**Other Commitments**
| ** **                    | ** ** | **Amount of Commitment—Expiration by Period** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                                              | ** ** | **Less than  One Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **After  5 Years** | ** ** |
| ** **                    | ** ** | **(in thousands)**                                                | ** ** |
| Commitments to  Extend Credit |       | $                                                                      | 310,308    |   | $ | 203,949 |   | $ | 13,544 |   | $ | 23,203 |   | $ | 69,612 |   |
| Standby Letters  of Credit    |       | 5,437                                                                  |       | 5,437 |   | — |   | — |   | — |   |
| Total                         |       | $315,745                                                               |       | $209,386 |   | $ | 13,544 |   | $ | 23,203 |   | $ | 69,612 |   |
|                               |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Capital Resources**

Our stockholders’ equity totaled $64.314 millionas of December 31, 2004 as compared to $58.434 million as of December 31,2003, an increase of $5.880 million or 10.1%. The increase resulted from thenet retention of our earnings of $6.101 million, and additional paid incapital of $1.690 million through the purchase of shares by our employeestock purchase plan and the exercise of stock options and warrants. Theseincreases were reduced by the decline in accumulated other comprehensive incomeof $1.302 million, and the repurchase of common stock under the stockrepurchase plan approved by the Board of Directors in 2004. The change in ouraccumulated other comprehensive income reflects the decrease in value of our availablefor sale securities of $1.027 million (net of taxes) and the realization ofsecurities gains of $275,000 (net of taxes).

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Our banking regulators have implemented strict capitalguidelines directly related to the credit risk associated with an institution’sassets. All banks and financial holding companies are required to maintaincapital levels based on their “risk adjusted” assets so that categories ofassets with higher “deemed” credit risks will require more capital support thanassets with lower risk. Additionally, capital must be maintained to supportcertain off-balance sheet instruments.

To date, we have provided for our capital requirementsmainly through the funds we received from stock offerings and issuances oftrust preferred securities. In the future, we may consider raising capital fromtime to time through an offering of common stock or other securities. Asreflected in the table for “Capital Ratios”, we exceeded our capital adequacyrequirements as of December 31, 2004 and 2003 and met the requirement for “wellcapitalized” under Federal Banking Regulation. We continually monitor ourcapital adequacy ratios to ensure that we exceed regulatory capitalrequirements.

In 2004 we issued trust preferred securities totaling$10.000 million which became eligible as total capital for regulatory purposes.In 2003, we issued $36.500 million in trust preferred securities and useda portion of these proceeds to redeem our June 1998 issuance of$21.450 million. The remaining amount of $15.050 million becameeligible as total capital for regulatory purposes. See note 9 of theConsolidated Financial Statements for more information concerning our trustpreferred securities.

Capital is classified as Tier 1 capital (commonstockholders’ equity less certain intangible assets plus a portion of the trustpreferred securities) and Total Capital (Tier 1 plus the allowed portion of theallowance for loan losses and the portion of trust preferred securities notincluded in Tier 1 capital). Minimum required levels must at least equal 4% forTier 1 capital and 8% for Total Capital. In addition, institutions mustmaintain a minimum of 4% leverage capital ratio (Tier 1 capital to averagetotal assets for the previous quarter).

Our capital position ispresented in the following table:

**Capital Ratios**
| ** **                              | ** ** | ** **            | ** ** | **Minimum  Requirements** | ** ** | **To be Well  Capitalized Under** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **December 31,** | ** ** | **for Capital**      | ** ** | **Prompt Corrective**                       | ** ** |
| ** **                              | ** ** | **2004**              | ** ** | **2003**                  | ** ** | **2002**                                         | ** ** | **Adequacy Purposes** | ** ** | **Action Provision** | ** ** |
| Total capital to  risk weighted assets  |       | 14.1                  | %          | 15.0                      | %          | 13.3                                             | %          |   | 8.0 | % |   |   | 10.0 | % |   |
| Tier 1 capital to  risk weighted assets |       | 9.3                   | %          | 10.2                      | %          | 9.9                                              | %          |   | 4.0 | % |   |   | 6.0 | % |   |
| Tier 1 capital leverage  ratio          |       | 7.1                   | %          | 7.7                       | %          | 7.8                                              | %          |   | 4.0 | % |   |   | 5.0 | % |   |

 

Our banking subsidiaryalso maintains capital levels that qualify for “Well Capitalized” status undercurrent regulatory guidelines. See note 14 to the consolidated financialstatements for more detailed information on the Bank’s capital adequacy ratios.

**Interest RateSensitivity and Liquidity**

Interest rate sensitivity is an important factor inthe management of the composition and maturity configurations of our earningassets and our funding sources. The primary objective of our asset/liabilitymanagement is to ensure the steady growth of our primary earnings component,net interest income. Our net interest income can fluctuate with significantinterest rate movements. We may attempt to structure the statement of financialcondition so that repricing opportunities exist for both assets and liabilitiesin roughly equivalent amounts at approximately the same time intervals.However, imbalances in these repricing opportunities at any point in time maybe appropriate to mitigate risks from fee income subject to interest rate risksuch as mortgage banking activities.

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The measurement of our interest rate sensitivity, or “gap,”is one of the techniques used in asset/liability management. Interest sensitivegap is the dollar difference between our assets and liabilities which aresubject to interest rate pricing within a given time period, including bothfloating rate or adjustable rate instruments and instruments which areapproaching maturity.

Our management and our board of directors oversee theasset/liability management function and meet periodically to monitor and managethe statement of financial condition, control interest rate exposure, andevaluate pricing strategies. We evaluate the asset mix of the statement offinancial condition continually in terms of several variables: yield, creditquality, funding sources and liquidity. Our management of the liability mix ofthe statement of financial condition focuses on expanding our various fundingsources and promotion of deposit products with desirable repricing or maturitycharacteristics.

In theory, we can diminish interest rate risk throughmaintaining a nominal level of interest rate sensitivity. In practice, this ismade difficult by a number of factors including cyclical variation in loandemand, different impacts on our interest-sensitive assets andliabilities when interest rates change, and the availability of our fundingsources. Accordingly, we strive to manage the interest rate sensitivity gap byadjusting the maturity of and establishing rates on the earning asset portfolioand certain interest-bearing liabilities commensurate with ourexpectations relative to market interest rates. Additionally, we may employ theuse of off balance sheet instruments, such as interest rate swap or caps, tomanage our exposure to interest rate movements. Generally, we attempt tomaintain a balance between rate-sensitive assets and liabilities that isappropriate to minimize our overall interest rate risk, not just our netinterest margin.

Our interest rate sensitivity position as of December 31,2004 is presented in the following table, “Rate Sensitivity Analysis”. Ourassets and liabilities are scheduled based on maturity or repricing data exceptfor mortgage loans and mortgage backed securities that are based on prevailingprepayments assumptions and core deposits which are based on core depositstudies done for banks in the Mid-Atlantic region. The difference between ourrate-sensitive assets and rate-sensitive liabilities or the interest ratesensitivity gap, is shown at the bottom of the table. As of December 31,2004, our interest sensitive assets exceeded our interest sensitive liabilitieswithin a one year period by $170.058 million or 13.6% of total assets. Asof December 31, 2003, our interest rate sensitive assets exceeded ourinterest-sensitive liabilities by $135.449 million or 12.8% of totalassets. The change in our interest rate sensitivity gap occurred due to growthin our earning assets repricing in one year or less, and increases in ourfunding sources repricing beyond one year.

While we monitor interestrate sensitivity reports, we primarily test our interest rate sensitivitythrough the deployment of simulation analysis. We use earnings simulationmodels to estimate what effect specific interest rate changes would have on ournet interest income and net income. Simulation analysis provides us with a morerigorous and dynamic measure of interest sensitivity. Derivative financialinstruments, such as interest rate caps, are included in the analysis. Changesin prepayments have been included where changes in behavior patterns areassumed to be significant to the simulation, particularly mortgage relatedassets. Call features on certain securities and borrowings are based on theircall probability in view of the projected rate change, and pricing featuressuch as interest rate floors are incorporated. Our fee income produced bymortgage banking operations may also be impacted by changes in rates. Aslong-term rates increase, the volume of fixed rate mortgage loans originatedfor sale in the secondary market may decline and reduce our revenues generatedby this line of business. We employ the use of a statistical model to forecastthe effects interest rate changes may have on our mortgage loan volume andrevenue. We attempt to structure our asset and liability management strategiesto mitigate the impact on net income by changes in market interest rates.However, there can be no assurance that we will be able to manage interest raterisk so as to avoid significant adverse effects on net interest income or netincome. At December 31, 2004, in an assumed increase of 100 basis pointsover a one year period, our net interest income would decline by 1%, while ournet income would decrease by 13%. If rates were to 

38

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declineby 100 basis points, our net interest income would increase by 2% and net ournet income would increase by 18%. The difference in results between changes inour net interest income and our net income reflect the forecasted effects onchanges in our mortgage banking revenue (net of variable costs) due to projectedchanges in interest rates, and does not include strategies we may implement toincrease volume or reduce our semi-variable or fixed costs should ratesincrease and revenue decline.

**Rate Sensitivity Analysis**
| ** **                                                    | ** ** | **As of December 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                    | ** ** | **180 Days  or Less**                 | ** ** | **181 Days-  One Year** | ** ** | **One-Five  Years** | ** ** | **Five-Ten  Years** | ** ** | **Longer Than  10 Years  or Non-  Sensitive** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**            | ** ** |
| Interest-earning  assets:                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                     |       | $                                               | 5,682      |   | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   | $ | 5,682 |   |
| Investment securities                                         |       | 33,176                                          |       | 29,070 |   | 189,218 |   | 43,256 |   |   | 28,245 |   |   | 322,965 |   |
| Restricted stock investments                                  |       | 11,886                                          |       | — |   | — |   | — |   |   | — |   |   | 11,886 |   |
| Loans held for sale                                           |       | 79,955                                          |       | — |   | — |   | — |   |   | — |   |   | 79,955 |   |
| Loans                                                         |       | 404,026                                         |       | 84,985 |   | 217,568 |   | 16,919 |   |   | 22,648 |   |   | 746,146 |   |
| Total interest-earnings assets                                |       | $                                               | 534,725    |   | $ | 114,055 |   | $ | 406,786 |   | $ | 60,175 |   |   | $ | 50,893 |   |   | $ | 1,166,634 |   |
| Interest-bearing liabilities:                                 |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                                                       |       | $                                               | 2,189      |   | $ | 5,020 |   | $ | 27,030 |   | $ | 34,403 |   |   | $ | — |   |   | 68,642 |   |
| NOW accounts                                                  |       | 743                                             |       | 2,234 |   | 11,998 |   | 15,201 |   |   | — |   |   | 30,176 |   |
| Money market accounts                                         |       | 136,499                                         |       | 5,598 |   | 30,219 |   | 20,076 |   |   | — |   |   | 192,392 |   |
| Certificates of Deposit                                       |       | 36,549                                          |       | 34,480 |   | 302,638 |   | — |   |   | — |   |   | 373,667 |   |
| Borrowings                                                    |       | 255,410                                         |       | — |   | 39,500 |   | 60,000 |   |   | — |   |   | 354,910 |   |
| Total interest-bearing liabilities                            |       | 431,390                                         |       | 47,332 |   | 411,385 |   | 129,680 |   |   | — |   |   | 1,019,787 |   |
| Interest rate  sensitive gap                                  |       | $                                               | 103,335    |   | $ | 66,723 |   | $ | (4,599 | ) | $ | (69,505 | ) |   | $ | 50,893 |   |   | $ | 146,847 |   |
| Cumulative  interest rate gap                                 |       | $                                               | 103,335    |   | $ | 170,058 |   | $ | 165,459 |   | $ | 95,954 |   |   | $ | 146,847 |   |   |   |   |
| Ratio of rate sensitive  assets to rate sensitive liabilities |       | 124                                             | %          | 241 | % | 99 | % | 46 | % |   | — | % |   |   |   |

 

Liquidity describes our ability to meet the financialobligations that arise out of the ordinary course of business. Liquidity isprimarily needed to meet the borrowing and deposit withdrawal requirements ofour customers and to fund current and planned expenditures. For the most part,our liquidity is derived from increased customer deposits, the maturitydistribution of our investment portfolio, loan repayment and income from our earningassets. Our loan to deposit ratio was 90.4% and 81.6% for December 31,2004 and 2003, respectively. Funds we received from new and existing depositorsand borrowing in the wholesale and capital markets provided large source ofliquidity for the years ended December 31, 2004 and December 31,2003. We continue to primarily rely on core deposits from customers to providestable and cost-effective sources of funding to support our loan growth. Wealso seek to augment such deposits with longer term and higher yieldingcertificates of deposit. Our CD’s of $100,000 or more are summarized bymaturity in the table, “Maturity of Certificates of Deposit $100,000 or More”,below. To the extent that our deposits are not adequate to fund our customerloan demand, we may meet liquidity needs in the short-term funds market.We can obtain longer term funding through advances from the Federal Home LoanBank (“FHLB”). Our banking subsidiary maintains lines of credit with the FHLBof $250.106 million, under which we may borrow a remaining$27.023 million as of December 31, 2004 based 

39

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upon available assets topledge. Other lines of credit available to the Bank totaled$135.000 million at year-end. Most of our borrowing facilities require thepledging of certain qualifying assets in order to access funding. As of December 31,2004, our borrowing capacity totaled $37.023 million based upon qualifyingassets that we have not pledged to support existing borrowings.

At December 31, 2004, we held short-term interest-bearingdeposits totaling $5.682 million compared to $20.105 million at December 31,2003. These deposits have immediate availability to meet our short-termfunding needs. Also, our investment securities portfolio includes$201.610 million of mortgage-backed securities that providesignificant cash flow each month. Our entire investment portfolio is classifiedas available for sale, is highly marketable, and available to meet ourliquidity needs. Loans held for sale, which totaled $79.955 million at December 31,2004 are committed to be sold into the secondary market and generally arefunded within 60 days. Our residential real estate portfolio includesloans that are underwritten to secondary market criteria and provide us anadditional source of liquidity. Additionally, our residential construction loanportfolio provides a source of liquidity as construction periods generallyrange from 9-12 months, and these loans are subsequently financed withpermanent first mortgages and sold into the secondary market.

In the ordinary course ofbusiness, we make commitments to fund approved loans or make materialcommitments for capital expenditures such as new facilities or computersystems. As of December 31, 2004, we had outstanding loan commitments of $310.308 millionand $20.000 million commitment for new facilities. At December 31, 2003our unfunded loan commitments were $175.803 million and we had nocommitments for material capital expenditures. We are not aware of any knowntrends, demands, commitments, or uncertainties that are reasonably likely toresult in material changes in our liquidity.

**Deposits**

We use deposits as theprimary source of funding of our loans. The following table describes thematurity of our Certificates of Deposit of $100,000 or more at the datesindicated.

**Maturity of Certificates of Deposit $100,000 or More**
| ** **     | ** ** | **December 31,**                | ** ** |
|----------------|------------|--------------------------------------|------------|
| ** **     | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **     | ** ** | **(Dollars in thousands)** | ** ** |
| Under 3 months |       | $                                    | 3,636      |   | $ | 7,223 |   | $ | 8,070 |   |
| 3 to 6 months  |       | 5,411                                |       | 6,310 |   | 5,062 |   |
| 6 to 12 months |       | 11,654                               |       | 8,856 |   | 23,653 |   |
| Over 12 months |       | 124,378                              |       | 93,438 |   | 44,843 |   |
| Total          |       | $                                    | 145,079    |   | $ | 115,827 |   | $ | 81,628 |   |

 

We offer individuals andbusinesses a wide variety of accounts. These accounts include checking,savings, money market and CD’s and are obtained primarily from communities weserve. We have no brokered deposits. The following table details the averageamount, the average rate paid and the percentage of each category to our totaldeposits for the years ended December 31, 2004, 2003 and 2002.

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**Average Deposit Composition and Cost**
| ** **                             | ** ** | **Year Ended December 31, 2004** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **Average  Balance**                                 | ** ** | **Average  Rate** | ** ** | **Percent of  Total** | ** ** |
| ** **                             | ** ** | **(Dollars  in thousands)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| NOW and money  market savings deposits |       |                                                 | $          | 214,290 |   |   |   | 0.71 | % |   |   | 27.0 | % |   |
| Regular savings  deposits              |       |                                                 | 67,009     |   |   |   | 0.35 | % |   |   | 8.5 | % |   |
| Certificates of  Deposit               |       |                                                 | 367,847    |   |   |   | 3.00 | % |   |   | 46.4 | % |   |
| Total interest-bearing  deposits       |       |                                                 | 649,146    |   |   |   | 1.97 | % |   |   | 81.9 | % |   |
| Noninterest-bearing  demand deposits   |       |                                                 | 143,706    |   |   |   | — |   |   |   | 18.1 | % |   |
| Total deposits                         |       |                                                 | $          | 792,852 |   |   |   | 1.62 | % |   |   | 100.0 | % |   |

 
| ** **                             | ** ** | **Year Ended December 31, 2003** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **Average  Balance**                                 | ** ** | **Average  Rate** | ** ** | **Percent of  Total** | ** ** |
| ** **                             | ** ** | **(Dollars  in thousands)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| NOW and money  market savings deposits |       |                                                 | $          | 208,755 |   |   |   | 0.87 | % |   |   | 29.4 | % |   |
| Regular savings  deposits              |       |                                                 | 56,556     |   |   |   | 0.65 | % |   |   | 7.8 | % |   |
| Certificates of Deposit                |       |                                                 | 328,411    |   |   |   | 3.41 | % |   |   | 46.0 | % |   |
| Total interest-bearing  deposits       |       |                                                 | 593,722    |   |   |   | 2.25 | % |   |   | 83.2 | % |   |
| Noninterest-bearing  demand deposits   |       |                                                 | 119,707    |   |   |   | — |   |   |   | 16.8 | % |   |
| Total deposits                         |       |                                                 | $          | 713,429 |   |   |   | 1.88 | % |   |   | 100.0 | % |   |

 
| ** **                                  | ** ** | **Year Ended December 31, 2002** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **Average  Balance**                                 | ** ** | **Average  Rate** | ** ** | **Percent of  Total** | ** ** |
| ** **                                  | ** ** | **(Dollars  in thousands)**                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| NOW and  money market savings deposits |       |                                                 | $          | 203,969 |   |   |   | 1.27 | % |   |   | 33.4 | % |   |
| Regular savings  deposits                   |       |                                                 | 44,202     |   |   |   | 0.96 | % |   |   | 7.2 | % |   |
| Certificates of  Deposit                    |       |                                                 | 265,305    |   |   |   | 4.23 | % |   |   | 43.4 | % |   |
| Total interest-bearing  deposits            |       |                                                 | 513,476    |   |   |   | 2.77 | % |   |   | 84.0 | % |   |
| Noninterest-bearing  demand deposits        |       |                                                 | 98,010     |   |   |   | — |   |   |   | 16.0 | % |   |
| Total deposits                              |       |                                                 | $          | 611,486 |   |   |   | 2.33 | % |   |   | 100.0 | % |   |

 

Our total deposits as of December 31,2004 were $825.417 million compared to $747.733 million as of December 31,2003, an increase of $77.684 million or 10.4%. Rates paid on our depositsdecreased significantly with the overall decrease in market interest rates thatcontinued until the middle portion of 2004. On an average balance, allcategories of our deposits increased, with the largest growth occurring in ourcertificates of deposit with maturities beyond one year and non-interestbearing demand deposits. NOW and money market savings deposits increasedslightly. Our deposit growth reflects our growth strategy, which includessignificant marketing and promotion, cross-selling, product development,and the development of our banking branch network.

41

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**InvestmentSecurities**

Thefollowing table presents the composition of our investment securities portfolioas of December 31, 2004, 2003 and 2002:
| ** **                                           | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **(in thousands)** | ** ** |
| Investment  securities—available for sale:      |       |                    |       |   |   |   |   |
| Mortgage-backed  securities                          |       | $                       | 200,708    |   | $ | 149,763 |   | $ | 73,842 |   |
| Trust preferred  securities                          |       | 31,507                  |       | 22,987 |   | 26,399 |   |
| U.S. Government  agency notes                        |       | 78,949                  |       | 107,314 |   | 12,159 |   |
| Obligations of  state and municipal subdivisions     |       | 2,973                   |       | — |   | — |   |
| U.S. Treasury Securities                             |       | 1,000                   |       | 1,001 |   | 1,015 |   |
| Equity securities                                    |       | 1,531                   |       | 1,274 |   | 2,824 |   |
| Foreign  Government Bonds                            |       | 1,400                   |       | 1,250 |   | 850 |   |
| Other bonds and  annuities                           |       | 4,897                   |       | 4,848 |   | 10,721 |   |
| Total investment  securities—available-for-sale |       | $                       | 322,965    |   | $ | 288,437 |   | $ | 127,810 |   |

 

Our investment portfolio at December 31, 2004, iscomprised of highly marketable securities, with over 75% secured by the U.S.Government or U.S. Government agencies. The maturity structure of ourinvestment portfolio is significantly influenced by the level of prepaymentactivity on mortgage-backed investments. At December 31, 2004, theaverage duration of our investment portfolio was 2.94 years, shorter thanthe average duration of 3.02 years at December 31, 2003. Thisreflects our decision to invest in shorter-term obligations to mitigatepotential market value and earnings declines in rising rate environments. Ourinvestments in trust preferred securities, corporate obligations and commonstocks totaled $37.935 million as of December 31, 2004 compared to$29.109 million as of December 31, 2003. We continually monitor thecredit risk associated with corporate investments, the risk is diversified, asthe maximum exposure to any one corporate issuer is less than 1% of totalinvestment securities.

See Note 4 of theConsolidated Financial Statements for information concerning the amortized costand weighted average yield of available-for-sale securities.

**Borrowings andRepurchase Agreements**

Our borrowings consist of short-term promissory notesissued to certain qualified investors and advances from the Federal Home LoanBank of Atlanta (“FHLB”). Our short-term promissory notes are in the form ofcommercial paper, which reprice daily and have maturities of 270 days orless. Our advances from FHLB may be in the form of short-term or long-termobligations. Short-term advances have maturities for one year or less and canbe paid without penalty. Long-term borrowings through the FHLB have originalmaturities up to ten years and generally contain prepayment penalties.

Our total borrowings and repurchase agreementsincreased by $97.777 million or 49.2%, reflecting increased borrowingrequired as growth in earning assets in excess of growth in deposits.Additional borrowings were primarily in the form of short-term FHLB advances.We also experienced growth in our short-term promissory notes.

Our repurchase agreementsmay be short-term or long-term, are priced at origination and cannot be prepaidwithout penalty. Total repurchase agreements remained unchanged. Seenote 8 of the consolidated financial statements for more informationconcerning our borrowings and repurchase agreements.

42

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**Off-BalanceSheet Arrangements**

We engage in financial instruments with off-balancesheet risk in the normal course of business in order to meet the financialneeds of customers. These financial instruments include commitments to extendcredit, and standby letters of credit. We apply the same credit policies inmaking commitments and conditional obligations for off-balance sheetinstruments as we do for on-balance sheet credits. These obligations arereviewed quarterly as part of the determination of the allowance to determinethe appropriate reserve for loss needed for off-balance sheetarrangements.

For a more detaileddiscussion of our off-balance sheet arrangements, refer to Management’sDiscussion and Analysis of Financial Condition and Results of Operations—“InterestRate Sensitivity and Liquidity” and Note 5 of the consolidated financialstatements.

**Impact of Inflationand Changing Prices**

Our consolidated financialstatements and notes thereto presented elsewhere herein have been prepared inaccordance with generally accepted accounting principles, which require themeasurement of financial position and operating results in terms of historicaldollars without considering the change in the relative purchasing power ofmoney over time and due to inflation. The impact of inflation is reflected inthe increased cost of our operations. Unlike most industrial companies, nearlyall of our assets are monetary in nature. As a result, interest rates have agreater impact on our performance than do the effects of general levels ofinflation. Interest rates do not necessarily move in the same direction or tothe same extent as the price of goods and services.

**Financial Review2003/2002**

For the year ended December 31, 2003, we recordednet income of $5.307 million or $0.88 per diluted share, an increase of35.9% from net income of $3.904 million income or $0.69 per diluted sharein 2002. Our gross revenue (net interest income and non interest income)increased $9.515 million while our non interest expenses, the provisionfor credit losses and income taxes increased by $8.112 million.

Our net interest income for 2003 increased$3.423 million or 11.0% from 2002, due to growth in average earning assetsof 16.2% over the prior year. Our net interest margin decreased 18 basis pointsto 3.99% in 2003 compared to 4.17% in 2002. The decrease in our net interestmargin resulted as our deposit and borrowing rates fell less than the declinein our yields on loans, investments and other earning assets.

Our provision for loan losses increased to$2.536 million in 2003 from $2.175 million in 2002. Our allowance forloan losses at December 31, 2003 represented 1.43% of loans outstanding, anincrease from December 31, 2002 of 1.35% of loans outstanding. Werecognized net chargeoffs of $1.032 million in 2003 compared to $511,000 in2002, due to the introduction of a new customer overdraft product and increasednet charge-offs from Finance Maryland.

Our total noninterest income increased 40.6% to$21.086 million, which included a significant increase in gains on salesof investment securities. Securities gains in 2003 totaled $1.371 millioncompared to $497,000 for 2002. Excluding gains on sales of securities, ournoninterest income increased $5.218 million or 36.0%. The increase was mostlydue to an increase in our gains on sales of mortgage loans that increased by$1.617 million or 44.6%, driven by higher levels of loans originated and sold intothe secondary market during 2003. Our service fees on deposits increased $2.354million or 54.4% as a result of increases in overdraft fee income from the newcustomer overdraft product, increased demand deposit account volume, and somepricing increases. ATM fees increased $411,000 due to higher volumes of ATMtransactions and pricing increases for non-customers. Income from bank ownedlife insurance increased by  $208,000,and sales of other insurance products from Finance Maryland increased  $702,000.

43

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We incurred noninterest expense growth of 20.8% to$45.883 million in 2003, which included non-recurring expenses of$1.385 million. Excluding nonrecurring items, noninterest expenses increased by$6.525 million or 17.2%. Our salaries and benefits increased 14.8% to $22.681million primarily due to staffing of Finance Maryland, staffing increases tosupport our loan and deposit growth, regular salary increases and higherbenefits costs. Our occupancy cost grew by 12.7% or $634,000. The increase wasdue to the addition of one branch, the additional Finance Maryland offices andretail mortgage space. Our advertising expense increased by $122,000 or 11.4%as we increased advertising and marketing during 2003. The increase in ourother expenses is primarily due to higher printing, postage and officesupplies, as well as increased loan origination and collection costs.

We recorded an income taxexpense of $1.771 million in 2003, compared to $1.930 millionrecorded in 2002. Our effective income tax rate for 2003 was 25.0% compared to33.1% for 2002. The decrease in our effective tax rate was primarily due toincreased levels of tax-exempt income, including investment interest incomeexempt from state income taxes, and increased income from bank-owned lifeinsurance that is tax exempt, and the utilization of $434,000 of Maryland stateand federal income tax credits.

**ITEM 7A**           QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Interest Rate Sensitivity and Liquidity” in Item7 of this Form 10-K.

44

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**ITEM 8**                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**Reportof Independent Registered Public Accounting Firm**

Board of Directors and StockholdersFirst Mariner BancorpBaltimore, Maryland

We have audited the accompanying consolidatedstatements of financial condition of First Mariner Bancorp and Subsidiaries(the “Company”) as of December 31, 2004 and 2003 and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2004.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the Company and itssubsidiaries as of December 31, 2004 and 2003, and the results of theiroperations and cash flows for each of the three years in the period ended December 31,2004, in conformity with accounting principles generally accepted in the UnitedStates of America.
|                     | /s/ Stegman &  Company |
|---------------------|---------------------------------|
| Baltimore, Maryland |
| February 20, 2005   |

 

45

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**FIRST MARINERBANCORP AND SUBSIDIARIESConsolidated Statements of Financial Condition**
| ** **                                                                                                                        | ** ** | **December 31,**                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
| **ASSETS**                                                                                                                        |       |                                 |       |   |   |
| Cash and due from  banks                                                                                                          |       | $                                    | 29,765     |   | $ | 26,574 |   |
| Interest-bearing  deposits                                                                                                        |       | 5,682                                |       | 20,105 |   |
| Available-for-sale  securities, at fair value                                                                                     |       | 322,965                              |       | 288,437 |   |
| Loans held for  sale                                                                                                              |       | 79,955                               |       | 59,055 |   |
| Loans receivable                                                                                                                  |       | 746,146                              |       | 609,847 |   |
| Allowance for  loan losses                                                                                                        |       | (9,580                               | )          | (8,692 | ) |
| Loans, net                                                                                                                        |       | 736,566                              |       | 601,155 |   |
| Other real estate  owned                                                                                                          |       | 65                                   |       | 296 |   |
| Restricted stock  investments                                                                                                     |       | 11,886                               |       | 7,265 |   |
| Premises and  equipment, net                                                                                                      |       | 17,445                               |       | 18,001 |   |
| Accrued interest  receivable                                                                                                      |       | 6,417                                |       | 4,955 |   |
| Deferred income  taxes                                                                                                            |       | 2,976                                |       | 2,619 |   |
| Bank-owned life  insurance                                                                                                        |       | 26,338                               |       | 15,266 |   |
| Prepaid expenses  and other assets                                                                                                |       | 10,471                               |       | 14,125 |   |
| Total assets                                                                                                                      |       | $                                    | 1,250,531  |   | $ | 1,057,853 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                                 |       |   |   |
| Liabilities:                                                                                                                      |       |                                 |       |   |   |
| Deposits:                                                                                                                         |       |                                 |       |   |   |
| Noninterest-bearing                                                                                                               |       | $                                    | 160,538    |   | $ | 132,979 |   |
| Interest-bearing                                                                                                                  |       | 664,879                              |       | 614,754 |   |
| Total deposits                                                                                                                    |       | 825,417                              |       | 747,733 |   |
| Borrowings                                                                                                                        |       | 271,661                              |       | 173,884 |   |
| Repurchase agreements                                                                                                             |       | 25,000                               |       | 25,000 |   |
| Junior subordinated deferrable interest debentures                                                                                |       | 58,249                               |       | 47,939 |   |
| Accrued expenses and other liabilities                                                                                            |       | 5,890                                |       | 4,863 |   |
| Total liabilities                                                                                                                 |       | 1,186,217                            |       | 999,419 |   |
| Stockholders’  equity:                                                                                                       |       |                                 |       |   |   |
| Common stock, $.05 par value; 20,000,000 shares  authorized; 5,826,011 and 5,693,637 shares issued and outstanding,  respectively |       | 291                                  |       | 285 |   |
| Additional paid-in capital                                                                                                        |       | 51,792                               |       | 50,717 |   |
| Retained earnings                                                                                                                 |       | 12,363                               |       | 6,262 |   |
| Accumulated other comprehensive (loss) income                                                                                     |       | (132                                 | )          | 1,170 |   |
| Total stockholders’ equity                                                                                                   |       | 64,314                               |       | 58,434 |   |
| Total liabilities  and stockholders’ equity                                                                                  |       | $                                    | 1,250,531  |   | $ | 1,057,853 |   |

 

See accompanying notes to consolidated financial statements.

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**FIRST MARINERBANCORP AND SUBSIDIARIESConsolidated Statements of Operations**
| ** **                                              | ** ** | **For the Years Ended December 31,**                   | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                                                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest income:                                        |       |                                                                            |       |   |   |   |   |
| Loans                                                   |       | $                                                                               | 51,549     |   | $ | 47,511 |   | $ | 42,735 |   |
| Investment securities and other earning assets          |       | 13,721                                                                          |       | 8,114 |   | 9,596 |   |
| Total interest  income                                  |       | 65,270                                                                          |       | 55,625 |   | 52,331 |   |
| Interest expense:                                       |       |                                                                            |       |   |   |   |   |
| Deposits                                                |       | 12,808                                                                          |       | 13,379 |   | 14,248 |   |
| Borrowed funds and other                                |       | 10,021                                                                          |       | 7,835 |   | 7,095 |   |
| Total interest  expense                                 |       | 22,829                                                                          |       | 21,214 |   | 21,343 |   |
| Net interest  income                                    |       | 42,441                                                                          |       | 34,411 |   | 30,988 |   |
| Provision for  loan losses                              |       | 2,243                                                                           |       | 2,536 |   | 2,175 |   |
| Net interest  income after provision for loan losses    |       | 40,198                                                                          |       | 31,875 |   | 28,813 |   |
| Noninterest  income:                                    |       |                                                                            |       |   |   |   |   |
| Gain on sale of loans                                   |       | 3,349                                                                           |       | 5,239 |   | 3,622 |   |
| Service fees on deposits                                |       | 6,899                                                                           |       | 6,681 |   | 4,327 |   |
| ATM Fees                                                |       | 2,836                                                                           |       | 2,520 |   | 2,109 |   |
| Gain on sale of investment securities, net              |       | 440                                                                             |       | 1,371 |   | 497 |   |
| Other mortgage banking fees                             |       | 1,567                                                                           |       | 1,708 |   | 1,832 |   |
| Income from bank-owned life insurance                   |       | 1,072                                                                           |       | 737 |   | 529 |   |
| Commissions on sales of nondeposit investment  products |       | 649                                                                             |       | 862 |   | 879 |   |
| Commissions on sales of other insurance products        |       | 1,519                                                                           |       | 1,049 |   | 347 |   |
| Other                                                   |       | 859                                                                             |       | 919 |   | 852 |   |
| Total noninterest  income                               |       | 19,190                                                                          |       | 21,086 |   | 14,994 |   |
| Noninterest  expenses:                                  |       |                                                                            |       |   |   |   |   |
| Salaries and employee benefits                          |       | 26,523                                                                          |       | 22,681 |   | 19,761 |   |
| Net occupancy                                           |       | 6,255                                                                           |       | 5,625 |   | 4,991 |   |
| Furniture, fixtures and equipment                       |       | 3,005                                                                           |       | 2,875 |   | 2,443 |   |
| Professional services                                   |       | 756                                                                             |       | 873 |   | 1,254 |   |
| Advertising                                             |       | 1,455                                                                           |       | 1,193 |   | 1,071 |   |
| Data processing                                         |       | 2,079                                                                           |       | 2,032 |   | 1,746 |   |
| Other                                                   |       | 10,853                                                                          |       | 10,604 |   | 6,707 |   |
| Total noninterest  expenses                             |       | 50,926                                                                          |       | 45,883 |   | 37,973 |   |
| Income before  income taxes                             |       | 8,462                                                                           |       | 7,078 |   | 5,834 |   |
| Income tax  expense                                     |       | 2,361                                                                           |       | 1,771 |   | 1,930 |   |
| Net income                                              |       | $                                                                               | 6,101      |   | $ | 5,307 |   | $ | 3,904 |   |
| Net income per  common share:                           |       |                                                                            |       |   |   |   |   |
| Basic                                                   |       | $                                                                               | 1.06       |   | $ | 0.97 |   | $ | 0.73 |   |
| Diluted                                                 |       | 0.96                                                                            |       | 0.88 |   | 0.69 |   |

 

See accompanying notes to consolidated financial statements.

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**FIRST MARINERBANCORPConsolidated Statements of Changes in Stockholders’Equity**
| ** **                                     | ** ** | **For the Years Ended December 31, 2004, 2003 and 2002  (Dollars in thousands, except number of shares.)** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Number of  Shares of  Common**                                                                                                              | ** ** | **Common** | ** ** | **Additional  Paid-in** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
| ** **                                     | ** ** | **Stock**                                                                                                                                               | ** ** | **Stock** | ** ** | **Capital** | ** ** | **(deficit)** | ** ** | **(Loss) Income** | ** ** | **Equity** | ** ** |
| Balance at  January 1, 2002               |       | 5,367,270                                                                                                                                               |       |   | $ | 268 |   |   | $ | 47,692 |   | $ | (2,949 | ) |   | $ | (1,003 | ) |   |   | $ | 44,008 |   |   |
| Common stock  issued, net of costs of issuance |       | 27,316                                                                                                                                                  |       |   | 2 |   |   | 247 |   | — |   |   | — |   |   |   | 249 |   |   |
| Net income                                     |       | —                                                                                                                                                  |       |   | — |   |   | — |   | 3,904 |   |   | — |   |   |   | 3,904 |   |   |
| Other  comprehensive income                    |       | —                                                                                                                                                  |       |   | — |   |   | — |   | — |   |   | 2,965 |   |   |   | 2,965 |   |   |
| Balance at  December 31, 2002             |       | 5,394,586                                                                                                                                               |       |   | 270 |   |   | 47,939 |   | 955 |   |   | 1,962 |   |   |   | 51,126 |   |   |
| Common stock  issued, net of costs of issuance |       | 299,051                                                                                                                                                 |       |   | 15 |   |   | 2,778 |   | — |   |   | — |   |   |   | 2,793 |   |   |
| Net income                                     |       | —                                                                                                                                                  |       |   | — |   |   | — |   | 5,307 |   |   | — |   |   |   | 5,307 |   |   |
| Other  comprehensive loss                      |       | —                                                                                                                                                  |       |   | — |   |   | — |   | — |   |   | (792 | ) |   |   | (792 | ) |   |
| Balance at  December 31, 2003             |       | 5,693,637                                                                                                                                               |       |   | 285 |   |   | 50,717 |   | 6,262 |   |   | 1,170 |   |   |   | 58,434 |   |   |
| Common stock  issued, net of costs of issuance |       | 170,049                                                                                                                                                 |       |   | 8 |   |   | 1,682 |   | — |   |   | — |   |   |   | 1,690 |   |   |
| Common stock  repurchased, net of costs        |       | (37,675                                                                                                                                                 | )          |   | (2 | ) |   | (607 | ) | — |   |   | — |   |   |   | (609 | ) |   |
| Net income                                     |       | —                                                                                                                                                  |       |   | — |   |   | — |   | 6,101 |   |   | — |   |   |   | 6,101 |   |   |
| Other  comprehensive loss                      |       | —                                                                                                                                                  |       |   | — |   |   | — |   | — |   |   | (1,302 | ) |   |   | (1,302 | ) |   |
| Balance at  December 31, 2004             |       | 5,826,011                                                                                                                                               |       |   | $ | 291 |   |   | $ | 51,792 |   | $ | 12,363 |   |   | $ | (132 | ) |   |   | $ | 64,314 |   |   |

 

See accompanying notes to consolidated financial statements.

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**FIRST MARINERBANCORP AND SUBSIDIARIESConsolidated Statements of Cash Flows**
| ** **                                                                                   | ** ** | **For The Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars in thousands)**                          | ** ** |
| Cash Flows From Operating Activities:                                                        |       |                                                          |       |   |   |   |   |
| Net income                                                                                   |       | $                                                             | 6,101      |   | $ | 5,307 |   | $ | 3,904 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                          |       |   |   |   |   |
| Depreciation and  amortization                                                               |       | 3,323                                                         |       | 3,099 |   | 3,023 |   |
| Capitalizated interest                                                                       |       | —                                                        |       | — |   | (15 | ) |
| Amortization of unearned  loan fees and costs, net                                           |       | (1,078                                                        | )          | (850 | ) | (2,005 | ) |
| Amortization of premiums  and discounts on loans                                             |       | (914                                                          | )          | (546 | ) | 5 |   |
| Amortization of premiums  and discounts on mortgage-backed securities, net                   |       | 563                                                           |       | 462 |   | 708 |   |
| Gain on sale of  investment securities                                                       |       | (440                                                          | )          | (1,371 | ) | (497 | ) |
| Gain on sale of loans                                                                        |       | (3,349                                                        | )          | (5,239 | ) | (3,622 | ) |
| Gain on other real estate  owned                                                             |       | (62                                                           | )          | (156 | ) | (310 | ) |
| Valuation allowance of  other real estate owned                                              |       | —                                                        |       | 162 |   | 100 |   |
| Deferred income taxes                                                                        |       | 390                                                           |       | (493 | ) | (794 | ) |
| Increase in accrued  interest receivable                                                     |       | (1,462                                                        | )          | (415 | ) | (403 | ) |
| Provision for loan losses                                                                    |       | 2,243                                                         |       | 2,536 |   | 2,175 |   |
| Origination of mortgage  loans held-for-sale                                                 |       | (674,984                                                      | )          | (873,863 | ) | (688,967 | ) |
| Proceeds from sales of  mortgage loans held-for-sale                                         |       | 654,084                                                       |       | 913,107 |   | 682,767 |   |
| Increase in accrued expenses  and other liabilities                                          |       | 1,027                                                         |       | 241 |   | 1,128 |   |
| Increase in cash  surrender value of bank-owned life insurance                               |       | (1,072                                                        | )          | (737 | ) | (529 | ) |
| Net decrease (increase)  in prepaids and other assets                                        |       | 3,654                                                         |       | (10,260 | ) | 433 |   |
| Net cash (used in)  provided by operating activities                                         |       | (11,976                                                       | )          | 30,984 |   | (2,899 | ) |
| Cash flows from investing activities:                                                        |       |                                                          |       |   |   |   |   |
| Loan disbursements, net  of principal repayments                                             |       | (132,424                                                      | )          | (75,877 | ) | (63,961 | ) |
| Purchases of property and  equipment                                                         |       | (2,767                                                        | )          | (3,529 | ) | (6,021 | ) |
| (Purchases) sales of  restricted stock investments                                           |       | (4,621                                                        | )          | (3,975 | ) | 710 |   |
| Activity in available for sale securities:                                                   |       |                                                          |       |   |   |   |   |
| Sales                                                                                        |       | 18,674                                                        |       | 8,909 |   | 11,845 |   |
| Maturities, prepayments  and calls                                                           |       | 153,175                                                       |       | 138,567 |   | 64,857 |   |
| Purchases                                                                                    |       | (208,549                                                      | )          | (308,492 | ) | (80,233 | ) |
| Purchase of bank-owned  life insurance                                                       |       | (10,000                                                       | )          | — |   | (5,000 | ) |
| Construction  disbursements-other real estate owned                                          |       | —                                                        |       | (227 | ) | (232 | ) |
| Sales of other real  estate owned                                                            |       | 404                                                           |       | 2,569 |   | 1,028 |   |
| Net cash used in  investing activities                                                       |       | (186,108                                                      | )          | (242,055 | ) | (77,007 | ) |
| Cash flows from financing activities:                                                        |       |                                                          |       |   |   |   |   |
| Net increase in deposits                                                                     |       | 77,684                                                        |       | 79,564 |   | 67,581 |   |
| Net increase (decrease)  in other borrowings                                                 |       | 24,777                                                        |       | (2 | ) | 6,200 |   |
| Proceeds from trust  preferred offering                                                      |       | 10,310                                                        |       | 37,639 |   | 10,300 |   |
| Repayment of trust  preferred offering                                                       |       | —                                                        |       | (22,050 | ) | — |   |
| Proceeds from advances  from Federal Home Loan Bank of Atlanta                               |       | 422,000                                                       |       | 205,000 |   | 102,000 |   |
| Repayment of advances  from Federal Home Loan Bank of Atlanta                                |       | (349,000                                                      | )          | (121,000 | ) | (102,000 | ) |
| Cost of repurchasing  stock                                                                  |       | (609                                                          | )          | — |   | — |   |
| Proceeds from stock  issuance, net                                                           |       | 1,690                                                         |       | 2,793 |   | 249 |   |
| Net cash provided by  financing activities                                                   |       | 186,852                                                       |       | 181,944 |   | 84,330 |   |
| (Decrease) increase in  cash and cash equivalents                                            |       | (11,232                                                       | )          | (29,127 | ) | 4,424 |   |
| Cash and cash equivalents  at beginning of period                                            |       | 46,679                                                        |       | 75,806 |   | 71,382 |   |
| Cash and cash equivalents  at end of period                                                  |       | $                                                             | 35,447     |   | $ | 46,679 |   | $ | 75,806 |   |
| Supplemental information:                                                                    |       |                                                          |       |   |   |   |   |
| Interest paid on deposits  and borrowed funds                                                |       | $                                                             | 22,494     |   | $ | 20,796 |   | $ | 21,410 |   |
| Real estate acquired in  satisfaction of loans                                               |       | 115                                                           |       | 400 |   | 150 |   |
| Income taxes paid                                                                            |       | 2,064                                                         |       | 2,970 |   | 2,828 |   |

 

See accompanying notes to consolidated financial statements.

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**FIRST MARINERBANCORP AND SUBSIDIARIESNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2004, 2003 and 2002**

**(1)   Summaryof Significant Accounting Policies**

***Organization, Basis of Presentation, and Use ofEstimates***

First Mariner Bancorp (“First Mariner”, on a parentonly basis and “we”, “our”, or “us” on a consolidated basis) is a financialholding company incorporated under the laws of the State of Maryland. FirstMariner is headquartered in Baltimore, Maryland, and was originally organizedas “MarylandsBank Corp.” in May 1994. MarylandsBank Corp’s name waschanged to “First Mariner Bancorp” in May 1995. First Mariner Bancorp owns100% of common stock of First Mariner Bank (the “Bank”) and 100% of theinterests in Finance Maryland, LLC (“Finance Maryland”), and FM Appraisal, LLC (“FMAppraisals”).

Most of our activities are with customers within theCentral Maryland region. A portion of activities related to consumer financeoperations and mortgage lending are more dispersed and cover parts of themid-Atlantic region outside of the State of Maryland. Note 4 describes thetypes of securities that we invest in, and Note 5 discusses our lendingactivities. We do not have any concentrations to any one industry or customer.

Our consolidated financial statements include theaccounts of First Mariner and its subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation. Certainreclassifications have been made to amounts previously reported to conform withclassifications made in 2004.

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses. In connection with these determinations,management evaluates historical trends and ratios and where appropriate obtainsindependent appraisals for significant properties and prepares fair valueanalyses. Actual results could differ significantly from those estimates.

***Cash and Cash Equivalents and Interest BearingDeposits***

We consider all highlyliquid investments with original maturities of three months or less to be cashequivalents. For reporting purposes assets grouped in the Statement ofCondition under the captions “Cash and Due from Banks” and “Interest-bearingdeposits” are considered cash or cash equivalents. For financial statementpurposes, these assets are carried at cost. Cash and due from banks andinterest bearing deposits have overnight maturities and are generally in excessof amounts that would be recoverable under FDIC insurance.

***Investment Securities***

We designate securities into one of the threecategories at the time of purchase. Debt securities that we have the positiveintent and ability to hold to maturity are classified as held to maturity andrecorded at amortized cost. Debt and equity securities are classified astrading securities if bought and held principally for the purpose of sellingthem in the near term. Trading securities are reported at estimated fair value,with unrealized gains and losses included in earnings. Debt securities notclassified as held to maturity and 

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debt and equity securitiesnot classified as trading securities are considered available for sale and arereported at estimated fair value, with unrealized gains and losses excludedfrom earnings and reported as a separate component of stockholders’ equity, netof tax effects, in accumulated other comprehensive income. As of December 31,2004 and 2003, all of our investment securities were classified as availablefor sale.

If a decline in value ofan individual security classified as held to maturity or available for sale isjudged to be other than temporary, the cost basis of that security is reducedto its fair value and the amount of the write-down is reflected in ourearnings. Estimated fair value is determined based on bid prices received fromthird party pricing services or bid quotations received from securitiesdealers. Gains or losses on the sales of investments are calculated using aspecific identification basis and are determined on a trade-date basis.Premiums and discounts on investment and mortgage-backed securities areamortized over the term of the security using methods that approximate theinterest method.

***Loans Held for Sale***

Loans originated for saleare carried at the lower of aggregate cost or market value. Market value isdetermined based on outstanding investor commitments or, in the absence of suchcommitments, based on current investor yield requirements. Gains and losses onloan sales are determined using the specific identification method.

***Loans Receivable***

Our loans receivable are stated at their principalbalance outstanding net of related deferred fees and costs. Interest income onour loans is accrued at the contractual rate based on the principaloutstanding. We place loans in nonaccrual status when they are contractuallypast due 90 days as to either principal or interest, unless the loan iswell secured and in the process of collection or earlier when, in the opinionof management, the collection of principal and interest is in doubt. A loanremains in nonaccrual status until the loan is current as to payment of bothprincipal and interest and the borrower demonstrates the ability to pay andremain current. Loans are charged-off when a loan or a portion thereof isconsidered uncollectible.

We identify impaired loans and measure impairment (i) atthe present value of expected cash flows discounted at the loan’s effectiveinterest rate; (ii) at the observable market price, or (iii) at thefair value of the collateral if the loan is collateral dependent. If ourmeasure of the impaired loan is less than the recorded investment in the loan,we recognize an impairment loss through a valuation allowance and correspondingcharge to provision for loan losses. We do not apply these provisions to largergroups of smaller-balance homogeneous loans such as consumer installmentand residential first and second mortgage loans. We evaluate these loanscollectively for impairment.

We determine a loan to be impaired when, based oncurrent information and events, it is probable that we will be unable tocollect all amounts due according to the contractual terms of the loanagreement. We do not consider a loan impaired during a period of delay inpayment if we expect to collect all amounts due, including interest past-due.Generally we consider a period of delay in payment to include delinquency up to90 days.

When the ultimatecollectibility of an impaired loan’s principal is in doubt, wholly orpartially, all cash receipts are applied to principal. Once the recordedprincipal balance has been reduced to zero, future cash receipts are applied tointerest income, to the extent any interest has been foregone, and then theyare recorded as recoveries of any amounts previously charged off. When thisdoubt no longer exists, cash receipts are applied under the contractual termsof the loan agreements. Origination and commitment fees and direct originationcosts on loans held for investment generallyare deferred and amortized to income over the contractuallives of the related loans using the interest method. Under certaincircumstances, 

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commitmentfees are recognized over the commitment period or upon expiration of thecommitment. Fees to extend loans three months or less are recognized in incomeupon receipt. Unamortized loan fees are recognized in income when the relatedloans are sold or prepaid.

***Rate Lock Commitments***

The Companyenters into commitments to originate residential mortgage loans whereby theinterest rate on the loan is determined prior to funding (i.e., ratelock commitments). Such rate lock commitments on mortgage loans to be sold inthe secondary market are consideredto be derivatives. The period of time between issuance of a loan commitment andclosing and sale of the loan generally range from 15 to 90 days. The Company protects itselffrom changes in interest rates through the use of best efforts forward deliverycommitments, whereby the Company commits to sell a loan at the time theborrower commits to an interest rate with the intent that the buyer has assumedinterest rate risk on the loan. As a result, the Company is not exposedto losses nor will itrealize gains related to its rate lock commitments due to changes in interestrates.

The market values of rate lock commitments and bestefforts contracts are not readily ascertainable with precision because ratelock commitments and best efforts contracts are not actively traded. Because ofthe high correlation between the rate lock commitments and best effortscontracts, no gain or loss occurs on the rate lock commitments.

***Allowance for Loan Losses***

Our allowance for loan losses represents an amount that, in management’s judgment,will be adequate to absorb probable losses on existing loans that may becomeuncollectible. The allowance for loan losses consists of an allocated componentand an unallocated component. The components of the allowance for loan lossesrepresent an estimation done pursuant to either Statement of FinancialAccounting Standards (“SFAS”) No. 5, *Accountingfor Contingencies,* or SFAS No. 114, *Accounting by Creditors for Impairment of a Loan.* The adequacyof the allowance for loan losses is determined through careful and continuousreview and evaluation of the loan portfolio and involves the balancing offactors as outlined below to establish a prudent level. Loans deemeduncollectible are charged against, while recoveries are credited to, theallowance. Management adjusts the level of the allowance through the provisionfor loan losses, which is recorded as a current period operating expense. Ourmethodology for assessing the appropriateness of the allowance consists ofseveral key elements, which include the formula allowance, specific allowanceand the unallocated allowance.

The formula allowance is calculated by applying lossfactors to corresponding categories of outstanding homogenous loans. Loss factorsare based on our historical loss experience, or for newer classes of loans,management’s estimate of probable losses. The use of these loss factors isintended to reduce the difference between estimated losses inherent in theportfolio and observed losses.

Specific allowances are established in cases wheremanagement has identified significant conditions or circumstances related to aloan that leads management to believe the probability that a loss may beincurred in an amount different from the amount determined by formula allowancecalculation. Management assigns a grade to each loan in this category based onan evaluation of each individual loan. Loss factors are set by management toreflect its assessment of the relative level of risk inherent in each grade.

The unallocated allowance is based upon management’sevaluation of various conditions that are not directly measured in thedetermination of the formula and specific allowances. Such conditions includegeneral economic and business conditions affecting key lending areas, creditquality trends (including trends in delinquencies and nonperforming loansexpected to result from existing conditions), loan volumes and concentrations,specific industry conditions within portfolio categories, recent lossexperience 

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in particular loancategories, duration of the current business cycle, bank regulatory examinationresults, findings of internal loan examiners, and management’s judgment withrespect to various other conditions including loan administration andmanagement and the quality of risk identification systems. Executive managementand the Board of Directors review these conditions quarterly.

Management believes thatthe allowance for loan losses is adequate. However, the determination of theallowance requires significant judgment, and estimates of probable lossesinherent in the loan portfolio can vary significantly from the amounts actuallyobserved. While management uses available information to recognize probablelosses, future additions to the allowance may be necessary based on changes inthe loans comprising the loan portfolio and changes in the financial conditionof borrowers which may result from changes in economic conditions. In addition,various regulatory agencies, as an integral part of their examination process,periodically review the Bank’s and Finance Maryland’s loan portfolio andallowance for loan losses. Such review may result in recognition of additionsto the allowance based on their judgments of information available to them at thetime of their examination.

***Foreclosed assets***

We record foreclosed realestate assets at the lower of cost or estimated fair value on their acquisitiondates and at the lower of such initial amount or estimated fair value lessselling costs thereafter. Subsequent write-downs are included in ournoninterest expenses, along with operating income net of related expenses ofsuch properties and gains or losses realized upon disposition.

***Restricted Stock Investments***

The Bank, as a member of the Federal Home Loan BankSystem, is required to maintain an investment in capital stock of the FederalHome Loan Bank of Atlanta (“FHLB”) in varying amounts based on balances ofoutstanding home loans and on amounts borrowed from the FHLB. Because no readymarket exists for this stock and it has no quoted market value, the Bank’sinvestment in this stock is carried at cost.

The Bank, maintains aninvestment in capital stock of several bankers banks. Because no ready marketexists for this stock and it has no quoted market value, the Bank’s investmentin these stocks are carried at cost.

***Premises and Equipment***

Our premises and equipmentare stated at cost less accumulated depreciation and amortization. Depreciationand amortization are accumulated using straight-line and accelerated methodsover the estimated useful lives of the assets. Additions and betterments arecapitalized and charges for repairs and maintenance are expensed when incurred.The cost and accumulated depreciation or amortization is eliminated from theaccounts when an asset is sold or retired and the resultant gain or loss iscredited or charged to income. Premises and equipment have estimated usefullives ranging from 3 to 39 years. We capitalize the cost of imputedinterest we incur for significant real estate construction and development andcharge the amount of capitalized interest to depreciation expense on astraight-line basis over the useful life of the asset. Capitalized interest iscomputed and capitalized based on the average invested amount in the developmentproject over the construction period at the rate of the company’s incrementalborrowing cost for the construction period.

***Bank Owned Life Insurance***

Bank owned life insuranceis carried at the aggregate cash surrender value of life insurance policiesowned where the Company or its subsidiaries are named beneficiaries. Increasesin cash surrender value derived from crediting rates for underlying insurancepolicies is credited to noninterest income.

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***Other Intangible Assets***

Other intangible assets areincluded in other assets and represent organization costs related to theformation of our subsidiaries. Organization expenses are amortized over aperiod of five years.

***Transfers of Financial Assets***

Transfers of financialassets are accounted for as sales, when control over the assets has beensurrendered. Control over transferred assets is deemed to be surrendered when (1) theassets have been isolated from the Company, (2) the transferee obtains theright (free of conditions that constrain it from taking advantage of thatright) to pledge or exchange the transferred assets, and (3) the Companydoes not maintain effective control over the transferred assets through anagreement to repurchase them before their maturity.

***Comprehensive Income***

Comprehensive incomeincludes all changes in stockholders’ equity during a period, except thoserelating to investments by and distributions to stockholders. Our comprehensiveincome consists of net earnings and unrealized gains and losses on securitiesavailable-for-sale and is presented in Note 17. Accumulated othercomprehensive income is displayed as a separate component of stockholders’equity.

***Income Taxes***

Deferred income taxes arerecognized for the tax consequences of temporary differences between financialstatement carrying amounts and the tax bases of assets and liabilities.Deferred income taxes are provided on income and expense items when they arereported for financial statement purposes in periods different from the periodsin which these items are recognized in the income tax returns. Deferred taxassets are recognized only to the extent that it is more likely than not thatsuch amounts will be realized based upon consideration of available evidence,including tax planning strategies and other factors.

***Statements of Cash Flows***

We consider all highlyliquid investments with original maturities of three months or less to be cashequivalents. For reporting purposes assets grouped in the Statement ofCondition under the captions “Cash and Due from Banks” and “Interest-bearingdeposits” are considered cash or cash equivalents.

***Net Income Per Share***

Our basic income per shareis computed by dividing net income available to common shareholders by theweighted-average number of common shares outstanding during the year.Diluted income per share is computed after adjusting the denominator of thebasic income per share computation for the effect of all dilutive potentialcommon shares outstanding during the period. The dilutive effects of options,warrants and their equivalents are computed under the “treasury stock” method,and are provided in Note 13.

***Stock-Based Compensation***

We apply the intrinsic value method to account forstock-based employee compensation plans. Under this method, compensationcost is recognized for awards of shares of common stock to employees only ifthe quoted market price of the stock at the grant date (or other measurementdate, if later) is greater than the amount the employee must pay to acquire thestock.

Theoption price is equal to the market price of the common stock at the date ofgrant for all of our options granted in 2004, 2003 and 2002 and, accordingly,we do not record compensation expense related to options granted. If we hadapplied the fair value-based method to recognize compensation cost forthe 

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options granted, our net income and net income pershare would have been changed to the following pro forma amounts for the yearsended December 31:
| ** **                                                                                                                                   | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                   | ** ** | **(dollars in thousands)** | ** ** |
| Net income-as  reported                                                                                                                      |       | $                                    | 6,101      |     | $          | 5,307    |       | $ | 3,904 |   |
| Deduct: Total  stock-based employee compensation determined under fair value based  method for all awards, net of related income tax effects |       | (567                                 | )          | (526     | )          | (335     | )          |
| Proforma net  income                                                                                                                         |       | $                                    | 5,534      |     | $          | 4,781    |       | $ | 3,569 |   |
| Earnings per share:                                                                                                                          |       |                                 |       |     |       |     |       |
| Basic—as reported                                                                                                                       |       | $                                    | 1.06       |     | $          | 0.97     |       | $ | 0.73 |   |
| Basic—proforma                                                                                                                          |       | 0.96                                 |       | 0.88     |       | 0.66     |       |
| Diluted—as  reported                                                                                                                    |       | 0.96                                 |       | 0.88     |       | 0.69     |       |
| Diluted—proforma                                                                                                                        |       | 0.87                                 |       | 0.80     |       | 0.63     |       |

 

Theweighted average fair values of our option grants during 2004, 2003 and 2002were $6.90, $5.50 and $7.03, respectively, on the dates of grants. The fairvalues of our options granted were calculated using the Black-Scholesoption-pricing model with the following weighted average assumptions:
| ** **               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield           |       | 0.00     | %          | 0.00     | %          | 0.00     | %          |
| Expected  volatility     |       | 14.15    | %          | 26.21    | %          | 48.22    | %          |
| Risk-free  interest rate |       | 4.19     | %          | 4.09     | %          | 4.98     | %          |
| Expected lives           |       | 10 Years |       | 10 Years |       | 10 Years |       |

 

***Loan Servicing***

We amortize the cost of excess servicing receivablesin proportion to, and over the period of, estimated net servicing revenue. Weassess possible impairment of mortgage servicing receivables based on the fairvalue of those rights. Fair values are estimated using discounted cash flowsbased on a current market interest rate. The amount of the impairmentrecognized is the amount by which the capitalized excess servicing receivablesexceed their fair value.

When participating interests in loans sold have anaverage contractual interest rate, adjusted for normal servicing fees, thatdiffers from the agreed yield to the purchaser, gains or losses are recognizedequal to the present value of such differential over the estimated remaininglife of such loans. The resulting “excess servicing receivable” or “deferredservicing revenue” is amortized over the estimated life using a methodapproximating the interest method.

Quoted market prices arenot available for the excess servicing receivables. Thus, the excess servicingreceivables and the amortization thereon are periodically evaluated in relationto estimated future servicing revenue, taking into consideration changes ininterest rates, current repayment rates, and expected future cash flows. Weevaluate the carrying value of the excess servicing receivables by estimatingthe future servicing income of the excess servicing receivables based onmanagement’s best estimate of remaining loan lives and discounted at theoriginal discount rate.

***Advertising***

We expense our advertisingcosts as incurred, except payments for major sponsorships which are amortizedover an estimated life not to exceed one year. Advertising expenses were$1.455 million, $1.193 million and $1.071 million for the yearsended December 31, 2004, 2003 and 2002, respectively.

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**Recent AccountingPronouncements**

In January 2005, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment(Revised 2004)”, which establishes standards for accounting for transactions inwhich an entity (i) exchanges its equity instruments for goods and services,or (ii) incurs liabilities in exchange for goods and services that arebased on an entity’s equity instruments or that may be settled by the issuanceof equity instruments. SFAS 123R eliminates the ability to account for stockbased compensation using Accounting Principles Board (“APB”) No. 25 andrequires that such transactions be recognized as compensation cost in theincome statement based on their fair values on the date of the grant. SFAS 123Ris effective on July 1, 2005. The Company will transition to fairvalue-based compensation using a modified version of the prospectiveapplication, which means the fair value-based method prescribed under SFAS 123Rwill apply to new awards, modification of previous awards, repurchases andcancellations after July 1, 2005. Additionally, compensation cost forawards for which requisite service has not been rendered (non-vested optionsand stock grants) that are outstanding as of July 1, 2005 must berecognized as the remaining requisite service is rendered during the period ofand/or the periods after the adoption of SFAS 123R. The determination ofcompensation cost for awards granted prior to July 1, 2005 will be basedon the same methods and on the same fair values previously determined for thepro forma disclosures required for companies that did not previously adopt thefair value accounting method for stock-based compensation. Based on thestock-based compensation awards outstanding as of February 28, 2005, forwhich requisite service is not expected to be fully rendered by July, 1,2005, the Company expects to record an additional pre-tax quarterlycompensation expense of approximately $149,000 beginning in the third quarterof 2005 as a result of adopting SFAS 123R. Future levels of compensation expenserelated to stock-based compensation may be impacted by new awards, ormodifications, repurchases, or cancellations of existing awards both before andafter the adoption of this standard.

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets”, an amendment of APB No. 29, “Accountingfor Nonmonetery Transactions”. This statement amends the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged and more broadly provides for exceptions regardingexchanges occurring in fiscal periods beginning after June 15, 2005. Theadoption of this standard is not expected to have a material impact on ourfinancial condition, results of operations, or liquidity.

In March of 2004, the FASB Emerging Issues TaskForce (EITF) released Issue 03-01, “Meaning of Other Than TemporaryImpairment”, which addressed other-than-tempory impairment for certain debt andequity investments. The recognition and measurement requirements of Issue 03-01,and other disclosure requirements not already implemented, were effective forperiods after June 15, 2004. In September 2004, the FASB staff issuedFASB Staff Position (“FSP”) EITF 03-1-1, which delayed theeffective date for certain measurement and recognition guidance during theperiod of delay until a final concensus is reached. We do not anticipate theissuance of the final rules will have a material impact on our financialcondition, results of operations, or liquidity.

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFASNo. 149”). The changes in SFAS No. 149 improve financial reporting byrequiring that contracts with comparable characteristics be accounted forsimilarly. In particular, SFAS No. 149 clarifies the definitions ofderivatives, clarifies when a derivative contains a financing component, andamends certain other accounting pronouncements. SFAS No. 149 is generallyeffective for contracts entered into or modified after June 30, 2003, andfor hedging relationships designated after June 30, 2003. The adoption ofSFAS No. 149 did not have a material impact on our financial condition orresults of operations.

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In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity” (“SFAS No. 150”). This statement requires that an issuer classifyfinancial instruments that are within its scope as a liability. Many of thoseinstruments were previously classified as equity. Most of the guidance includedin SFAS No.150 is effective for financial instruments entered into after May 31,2003, and otherwise effective beginning the first interim periods beginningafter June 15, 2003. The adoption of SFAS No. 150 did not have amaterial impact on our financial condition or operating results.

In December 2003, theFASB released Interpretation No. 46R, “Consolidation of Variable InterestEntities” (“FIN 46R”), which revised a previous interpretation in January 2003(“FIN 46”). FIN 46R requires companies that have issued trust preferredsecurities through statutory trusts, to deconsolidate their investment in thosetrusts. FIN 46 requires deconsolidation and re-characterization of theunderlying consolidated debt obligation from the trust preferred securitiesobligation to the junior subordinated debenture obligation that exists betweena company and its statutory trusts. The adoption of FIN 46 and 46R did not havea material impact on our statement of financial condition or operating results.

**(3)   Restrictionson Cash and Due From Banks**

The Bank is required bythe Federal Reserve System to maintain certain cash reserve balances basedprincipally on deposit liabilities. At December 31, 2004 and 2003, therequired reserve balances were $1.000 million and $250,000 respectively.

**(4)   Available-for-salesecurities**

Thecomposition of our available-for-sale securities is as follows at December 31:
| ** **                                       | ** ** | **2004**            | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                       | ** ** | **(in  thousands)** | ** ** |
| Available-for-sale securities:                   |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities                      |       | $                   | 201,610    |   |   | $ | 1,026 |   |   |   | $ | 1,928 |   |   | $ | 200,708 |   |
| Trust preferred  securities                      |       | 30,783              |       |   | 1,109 |   |   |   | 385 |   |   | 31,507 |   |
| Equity securities                                |       | 1,136               |       |   | 399 |   |   |   | 4 |   |   | 1,531 |   |
| U.S. Treasury Securities                         |       | 1,000               |       |   | — |   |   |   | — |   |   | 1,000 |   |
| Obligations of state and  municipal subdivisions |       | 2,942               |       |   | 31 |   |   |   | — |   |   | 2,973 |   |
| U.S. Government Agency  Notes                    |       | 79,413              |       |   | — |   |   |   | 464 |   |   | 78,949 |   |
| Foreign Government Bonds                         |       | 1,400               |       |   | — |   |   |   | — |   |   | 1,400 |   |
| Other bonds and  annuities                       |       | 4,897               |       |   | — |   |   |   | — |   |   | 4,897 |   |
|                                             |       | $323,181            |       |   | $ | 2,565 |   |   |   | $ | 2,781 |   |   | $ | 322,965 |   |
|                                                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **2003**                | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **Amortized  Cost**     | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Available-for-sale securities: |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities    |       | $                       | 149,128    |   |   | $ | 1,627 |   |   |   | $ | 992 |   |   | $ | 149,763 |   |
| Trust preferred  securities    |       | 22,228                  |       |   | 1,190 |   |   |   | 431 |   |   | 22,987 |   |
| Equity securities              |       | 967                     |       |   | 318 |   |   |   | 11 |   |   | 1,274 |   |
| U.S. Treasury Securities       |       | 1,000                   |       |   | 1 |   |   |   | — |   |   | 1,001 |   |
| U.S. Government Agency  Notes  |       | 107,182                 |       |   | 200 |   |   |   | 68 |   |   | 107,314 |   |
| Foreign Government Bonds       |       | 1,250                   |       |   | — |   |   |   | — |   |   | 1,250 |   |
| Other bonds and  annuities     |       | 4,848                   |       |   | — |   |   |   | — |   |   | 4,848 |   |
|                           |       | $                       | 286,603    |   |   | $ | 3,336 |   |   |   | $ | 1,502 |   |   | $ | 288,437 |   |

 

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Thefollowing table presents the amortized cost and weighted-average yield ofsecurities at December 31, 2004 by maturity:
| ** **                                      | ** ** | **Within  1 Year**              | ** ** | **1 to 5 Years** | ** ** | **5 to 10 Years** | ** ** | **After 10  Years** | ** ** | **Total** | ** ** | **Weighted  Average  Yield** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|--------------------------|------------|-----------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Available-for-sale securities:                  |       |                                 |       |                            |       |                             |       |                     |       |      |       |                         |       |   |   |   |   |   |   |
| Mortgage-backed securities                      |       | $                                    | —     |                            |       | $                                | 4,752      |                     |       |      | $          | 58,836                       |       |   | $ | 138,022 |   | $ | 201,610 |   |   | 4.48 | % |   |
| Trust preferred securities                      |       | —                               |       |                            | —     |                             |       |                     | —     |      |       | 30,783                       |       | 30,783 |   |   | 7.13 | % |   |
| Equity securities                               |       | —                               |       |                            | —     |                             |       |                     | —     |      |       | 1,136                        |       | 1,136 |   |   | 1.13 | % |   |
| U.S. Treasury Securities                        |       | 1,000                                |       |                            | —     |                             |       |                     | —     |      |       | —                       |       | 1,000 |   |   | 1.19 | % |   |
| Obligations of state and municipal subdivisions |       | —                               |       |                            | —     |                             |       |                     | —     |      |       | 2,942                        |       | 2,942 |   |   | 6.82 | % |   |
| U.S. Government Agency Notes                    |       | 10,000                               |       |                            | 69,413     |                             |       |                     | —     |      |       | —                       |       | 79,413 |   |   | 2.44 | % |   |
| Foreign Government Bonds                        |       | 250                                  |       |                            | 1,150      |                             |       |                     | —     |      |       | —                       |       | 1,400 |   |   | 5.10 | % |   |
| Other bonds and annuities                       |       | —                               |       |                            | 4,897      |                             |       |                     | —     |      |       | —                       |       | 4,897 |   |   | 3.81 | % |   |
| Amortized Cost                                  |       | $                                    | 11,250     |                            |       | $                                | 80,212     |                     |       |      | $          | 58,836                       |       |   | $ | 172,883 |   | $ | 323,181 |   |   | 4.22 | % |   |
| Weighted  average yield                    |       | 1.44                                 | %          |                            | 2.76       | %                                |       |                     | 4.06       | %         |       | 5.14                         | %          | 4.22 | % |   |   |   |   |

 

Weighted yields are based on amortized cost. Yields ontax-exempt securities are calculated on a tax equivalent basis using themarginal Federal income tax rate of 34%. Mortgage-backed securities areassigned to maturity categories based on their final maturity. Equitysecurities are included in other securities in the after 10 years category.Stated maturities on our securities holdings may differ from contractualmaturities as issuers have the right to call or prepay certain obligationswithout penalty.

Thefollowing table shows the level of our gross unrealized losses and associatedfair value by type and maturity:
| ** **                     | ** ** | **December 31, 2004**        | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                     | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                     | ** ** | **(dollars  in thousands)**            | ** ** |
| Available-for-sale securities: |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities    |       | $                                      | 124,095    |   |   | $ | 1,275 |   |   | $ | 22,078 |   |   | $ | 653 |   |   | $ | 146,173 |   |   | $ | 1,928 |   |   |
| Trust preferred  securities    |       | 6,003                                  |       |   | 159 |   |   | 3,968 |   |   | 226 |   |   | 9,971 |   |   | 385 |   |   |
| Equity securities              |       | 84                                     |       |   | 4 |   |   | — |   |   | — |   |   | 84 |   |   | 4 |   |   |
| U.S. Government  Agency Notes  |       | 68,950                                 |       |   | 464 |   |   | — |   |   | — |   |   | 68,950 |   |   | 464 |   |   |
| Total                          |       | $                                      | 199,132    |   |   | $ | 1,902 |   |   | $ | 26,046 |   |   | $ | 879 |   |   | $ | 225,178 |   |   | $ | 2,781 |   |   |

 

Gross unrealized losses totaled $2.781 million as of December 31,2004 and equaled 1.22% of the amortized cost of securities with unrealizedlosses as of this date. A total of eighteen securities were in an unrealizedloss position as of December 31, 2004, with the largest single unrealizedloss in any one security totaling $202,000. Eight securities were in anunrealized loss position for twelve months or more.

All of our temporarily impaired securities with theexception of trust preferred securities are defined as impaired due to declinesin fair values resulting from increases in interest rates compared to the timethey were purchased. None of these securities have exhibited a decline in valuedue to changes in credit risk. Furthermore, we have the ability to hold thesesecurities to maturity and do not expect to realize losses on any of theseholdings. As such, management does not consider the impairments to be otherthan temporary.

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Trust preferred securities considered temporarilyimpaired are issues of other banks and bank holding companies we currently holdin our portfolio. There are eight issues that are considered impaired, two ofwhich have been impaired for the last twelve months or more. We believe thefactors that have contributed to the decline in values for these securities arechanges in the market that have limited the demand for these securities andreduced their liquidity. New trust preferred offerings have been created whichpool issuers, diversify risk, and offer other flexible terms for investors. Thepopularity for these new issues has resulted in diminished demand for older,single issuer instruments with institutional investors. While some of theseissuers have reported weaker financial performance since their acquisition, themajority ofthese issuers continue to possess more than acceptable credit risk inmanagement’s opinion. Management closely monitors these securities for changesin credit risk, and we have the ability to hold these securities to theirmaturity. Management does not consider the impairment of these securities to beother than temporary.

At December 31, 2004, there were no securities ofa single issuer, other than U.S. Government securities or U.S. sponsoredagencies securities, which exceeded 10% of stockholders’ equity.

During 2004, 2003 and 2002, we recognized gross gainson sale of securities of $440,000, $1,371,000 and $497,000, respectively. Therewere no losses for any of the years shown.

At December 31, 2004,we held available for sale securities with an aggregate carrying value (fairvalue) of approximately $266.153 million that we have pledged ascollateral for borrowings under repurchase agreements.

**(5)   LoansReceivable and Allowance for Loan Losses**

Approximately 80% of our loans receivable are tocustomers located in the State of Maryland. Loans are extended only afterevaluation by management of customers’ creditworthiness and other relevantfactors on a case-by-case basis. We generally do not lend more than 90% of theappraised value of a property and require private mortgage insurance onresidential mortgages with loan-to-value ratios in excess of 80%. In addition,we generally obtain personal guarantees of repayment from our borrowers and/orothers for construction, commercial and multi-family residential loansand disburse the proceeds of construction and similar loans only as workprogresses on the related projects.

We generally consider our residential lending toinvolve less risk than other forms of lending, although our payment experienceon these loans is dependent to some extent on economic and market conditions inour primary lending area. Commercial and construction loan repayments are generallydependent on the operations of the related properties or the financialcondition of its borrower or guarantor. Accordingly, repayment of such loanscan be more susceptible to adverse conditions in the real estate market and theregional economy.

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Loansreceivable are summarized as follows at December 31:
| ** **                                        | ** ** | **2004**                | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| Loans secured by first  mortgages on real estate: |       |                    |       |     |       |
| Residential                                       |       | $                       | 41,558     |     | $          | 40,231 |   |
| Commercial                                        |       | 316,363                 |       | 245,380  |       |
| Consumer residential construction                 |       | 135,820                 |       | 119,834  |       |
| Construction, net of undisbursed principal        |       | 64,542                  |       | 51,748   |       |
|                                              |       | 558,283                 |       | 457,193  |       |
| Commercial                                        |       | 60,854                  |       | 66,097   |       |
| Loans secured by  second mortgages on real estate |       | 79,771                  |       | 50,906   |       |
| Consumer loans                                    |       | 47,389                  |       | 35,818   |       |
| Loans secured by  deposits and other              |       | 1,068                   |       | 1,160    |       |
| Total loans                                       |       | 747,365                 |       | 611,174  |       |
| Unamortized loan  (discounts) premiums            |       | (273                    | )          | (306     | )          |
| Unearned loan  fees, net                          |       | (946                    | )          | (1,021   | )          |
|                                              |       | $746,146                |       | $        | 609,847    |   |
|                                                   |            |                         |            |          |            |  |  |

 

During 2004, the Companyidentified certain loans previously identified as commercialloans and reclassified them as either constructionloans or commercial real estateloans to more closely categorize these loans with the loan purpose. Amountspresented for the 2003loan portfolio reflect $12.966 million reclassified out of commercialloans mostly into the commercial real rstate group.

Included in consumer loan totals in the above tableare overdrawn commercial and retail checking accounts totaling $753,000 and$741,000 as of December 31, 2004 and 2003, respectively. Included inunearned loan fees and costs in the above table is unearned income oninstallment loans of $612,000 and $189,000 as of December 31, 2004 and2003, respectively.

Our loans on nonaccrual status totaled $4.628 million,$4.774 million and $1.278 million at December 31, 2004, 2003 and2002, respectively. The interest income which would have been recorded in 2004,2003 and 2002 under the original terms of loans in nonaccrual status wasapproximately $440,000, $360,000 and $113,000,respectively. The actual interest income recorded on these loans in 2004, 2003and 2002 was approximately $272,000, $217,000 and $3,000,respectively. Loans past due 90 days or more and still accruing totaled $1.658million, $2.258 million, and $9.346 million as of December 31, 2004, 2003,and 2002, respectively.

Loans we consider impaired at December 31, 2004totaled $3.474 million compared to $3.027 million at December 31,2003. The valuation allowance for impaired loans was approximately $1.434million at December 31, 2004 and $454,000 at December 31, 2003. Theaverage recorded investment in our impaired loans was approximately $1.601 million,$644,000 and $163,000 for the years ended December 31, 2004, 2003 and2002, respectively, and no income has been accrued or collected on these loanswhile they have been classified as impaired.

Changesin the allowance for losses on loans are summarized as follows:
| ** **                    | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Balance at  beginning of year |       | $                       | 8,692      |     | $          | 7,188    |       | $ | 5,524 |   |
| Provisions for  loan losses   |       | 2,243                   |       | 2,536    |       | 2,175    |       |
| Charge-offs                   |       | (1,573                  | )          | (1,266   | )          | (553     | )          |
| Recoveries                    |       | 218                     |       | 234      |       | 42       |       |
| Balance at end of year        |       | $                       | 9,580      |     | $          | 8,692    |       | $ | 7,188 |   |

 

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Commitments to extend credit are agreements to lend tocustomers, provided that terms and conditions established in the relatedcontracts are met. At December 31, 2004 and 2003, we had commitments tooriginate first mortgage loans on real estate of approximately $85.8 millionand $57.6 million, respectively, most of which were committed for sale in thesecondary market.

At December 31, 2004 and 2003, we also hadcommitments to loan funds under unused home equity lines of credit aggregatingapproximately $57.541 million and $41.299 million, respectively, andunused commercial lines of credit, retailchecking line of credit, as well as unfunded constructioncommitments aggregating approximately $166.958 million and $130.463 million,respectively. Such commitments generally carry a fixed rate of interest, whilehome equity lines of credit are generally variable.

Commitments for first mortgage loans generally expirewithin 60 days and are normally funded with loan principal repayments,excess liquidity and deposits. Since certain commitments may expire withoutbeing drawn upon, the total commitment amounts do not necessarily represent ourfuture cash requirements.

Substantially all outstanding commitments at December 31,2004 and 2003 are for loans to be secured by real estate with appraised valuesin excess of the commitment amounts. Our exposure to credit loss under thesecontracts in the event of non-performance by the other parties is representedby the commitment amounts, assuming the collateral has no value.

During the ordinary course of business, we make loansto our directors and their affiliates and several of our policy making officerson substantially the same terms, including interest rates and collateral, asthose prevailing for comparable transactions with other customers. Loansoutstanding and included in our statement of financial condition to ourdirectors, their affiliates, and our policy making officers totaled$1.882 million and$2.352 million at December 31, 2004, and 2003, respectively. During2004, new loans and advances of existing loans totaled $80,000 and repaymentstotaled $550,000; in 2003, $323,000 of new loans and advances of existing loanswere made and repayments totaled $1.015 million. Unused loan commitments todirectors and policy making officers totaled $776,000 as of December 31,2004 and $245,000 as of December 31, 2003. Letters of credit issued onbehalf of directors and policy making officers totaled $763,000 for December 31,2004 compared to $400,000 at December 31, 2003.

From time to time, weretain servicing on certain loans we sell into the secondary market. At December 31,2004, 2003, and 2002 our servicing portfolio totaled $2.997 million,$3.533 million, and $10.491 million, respectively. Servicing loansfor others generally consists of collecting mortgage payments, disbursingpayments to investors and foreclosure processing. Loan servicing income isrecorded upon receipt and includes servicing fees from investors and certaincharges collected from borrowers, such as late payment fees. Our mortgageservicing rights had a carrying value of $0, $1,000 and $107,000, as of December 31,2004, 2003, and 2002, respectively. Estimated fair values of these servicingrights approximate carrying value. Amortization expense and impairment ofservicing rights was $1,000, $106,000, and $152,000 for the years ended December 31,2004, 2003, and 2002 respectively.

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**(6)   Propertyand Equipment**

We own property andequipment as follows at December 31:
| ** **                                      | ** ** | **2004**                | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Land                                            |       | $                       | 2,300      |     | $          | 1,823 |   |
| Buildings and  improvements                     |       | 6,952                   |       | 6,936    |       |
| Leasehold improvements                          |       | 5,176                   |       | 4,778    |       |
| Furniture, fixtures and  equipment              |       | 17,817                  |       | 15,966   |       |
| Total at cost                                   |       | 32,245                  |       | 29,503   |       |
| Less accumulated  depreciation and amortization |       | 14,800                  |       | 11,502   |       |
| Total premises and equipment                    |       | $17,445                 |       | $        | 18,001     |   |
|                                                 |            |                         |            |          |            |  |  |

 

Our rent expense for the years ended December 31,2004, 2003 and 2002 was approximately $3.576 million, $3.284 millionand $2.615 million, respectively. Our rent expense for 2002 included$100,000 for termination of existing leases.

Depreciation expense for the years ended December 31,2004, 2003 and 2002 was $3.323 million, $3.099 million and$3.023 million, respectively.

We occupy space leased from various companies, ofwhich the Chairman and CEO of First Mariner is the owner. In 2004, thesecompanies were paid approximately $1.6 million for office, branch, and storagespace. The terms of the leases vary with the majority expiring in 2013.Management believes that such terms are at least as favorable as those thatcould be obtained from a third party.

Ourminimum lease payments due for each of the next five years are as follows:
| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2005       |       |                    | $          | 3,497 |   |   |
| 2006       |       |                    | 3,086      |   |   |
| 2007       |       |                    | 2,861      |   |   |
| 2008       |       |                    | 2,621      |   |   |
| 2009       |       |                    | 2,379      |   |   |
| Thereafter |       |                    | 7,498      |   |   |
|       |       |                    | $          | 21,942 |   |   |

 

In October 2004, we entered into anagreement to purchase our headquarters building located at 3301 Boston Streetin Baltimore, Maryland from a limited liability company wholly owned by ourChairman and CEO. The purchase is expected to close on or about March 31,2005. Upon successful completion of the closing, the rental commitmentsdisclosed in the above table will be reduced by approximately $825,000 in 2005,and $1.111 million per year through October of 2013.

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**(7)   Deposits**

Depositsare summarized as follows (dollars in thousands) at December 31:
| ** **                       | ** ** | **2004**   | ** ** | **2003**                               | ** ** |
|----------------------------------|------------|------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **Amount** | ** ** | **Weighted  Average  Effective  Rate** | ** ** | **Amount** | ** ** | **Weighted  Average  Effective  Rate** | ** ** |
| Noncertificate:                  |       |       |       |                                   |       |   |   |   |   |   |   |   |   |
| Passbook and other savings       |       | $          | 68,642     |                                   |       | 0.35 | % |   | $ | 61,110 |   |   | 0.60 | % |   |
| Interest bearing demand deposits |       | 30,176     |       |                                   | 0.34       | % |   | 59,815 |   |   | 0.53 | % |   |
| Money market accounts            |       | 192,394    |       |                                   | 0.84       | % |   | 152,529 |   |   | 1.01 | % |   |
| Non-interest bearing demand      |       | 160,538    |       |                                   |       |   |   | 132,979 |   |   |   |   |   |
| Total  noncertificate deposits   |       | 451,750    |       |                                   |       |   |   | 406,433 |   |   |   |   |   |
| Certificates:                    |       |       |       |                                   |       |   |   |   |   |   |   |   |   |
| Original  maturities:            |       |       |       |                                   |       |   |   |   |   |   |   |   |   |
| Under 12 months                  |       | 3,015      |       |                                   | 1.48       | % |   | 4,055 |   |   | 1.47 | % |   |
| 12 to 60 months                  |       | 337,216    |       |                                   | 2.97       | % |   | 308,828 |   |   | 3.42 | % |   |
| IRA and KEOGH                    |       | 33,436     |       |                                   | 3.48       | % |   | 28,417 |   |   | 3.81 | % |   |
| Total  certificates of deposit   |       | 373,667    |       |                                   |       |   |   | 341,300 |   |   |   |   |   |
| Total deposits                   |       | $          | 825,417    |                                   |       |   |   |   | $ | 747,733 |   |   |   |   |   |

 
| ** **                         | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
|------------------------------------|------------|------------|------------|----------------------|------------|------------|------------|----------------------|------------|
| Scheduled certificate  maturities: |       |       |       |                 |       |       |       |                 |       |   |   |   |   |
| Under 6 months                     |       | $          | 36,549     |                 |       | 9.78       | %          |                 | $          | 42,379 |   |   | 12.42 | % |   |
| 6 months to 12 months              |       | 34,480     |       |                 | 9.23       | %          |       | 42,225               |       |   | 12.37 | % |   |
| 12 months to 24 months             |       | 110,773    |       |                 | 29.64      | %          |       | 80,254               |       |   | 23.51 | % |   |
| 24 months to 36 months             |       | 60,077     |       |                 | 16.08      | %          |       | 42,394               |       |   | 12.42 | % |   |
| 36 months to 48 months             |       | 101,550    |       |                 | 27.18      | %          |       | 39,894               |       |   | 11.69 | % |   |
| Over 48 months                     |       | 30,238     |       |                 | 8.09       | %          |       | 94,154               |       |   | 27.59 | % |   |
|                               |       | $373,667   |       |                 | 100.00     | %          |       | $                    | 341,300    |   |   | 100.00 | % |   |
|                                    |            |            |            |                      |            |            |            |                      |            |  |  |  |  |  |  |

 

The Bank offers certain certificate products thatprovide customers a “one-time” withdrawal option that the customer may exerciseat any time without penalty. As of December 31, 2004, certificates thatpermitted early withdrawal totaled $138.994 million.

Certificates of deposit of$100,000 or more totaled approximately $145.079 million and$161.154 million at December 31, 2004 and 2003, respectively.

**(8)   Borrowingsand Repurchase Agreements**

Our borrowings consist of short-term and long-termadvances from the Federal Home Loan Bank at Atlanta (FHLB), short-termpromissory notes, long-term repurchase agreements with callable options, and along-term line of credit. The FHLB advances are available under a specificcollateral pledge and security agreement, which currently allows us to borrowup to 25% of our the bank’s total assets and requires that we maintaincollateral for all of our borrowings in the form of specific first mortgageloans or commercial mortgages with outstanding principal equal to 133% of theadvances, overnight investments equal to 100% of advances or securities equalto 103% of advances. Long-term FHLB advances totaled $85.000 million at year-endand are fixed-rate instruments with various call provisions. Short-termadvances totaled $132.000 million at December 31, 2004 and are in the formof overnight borrowings with rates changing daily. Long-term repurchaseagreements totaled $25.000 million at December 31, 2004, are fixed-rateobligations and 

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require the company topledge Government National Mortgage Association (“GNMA”) securities or cash. The long-termline of credit is maintained with a commercial bank, and permits FinanceMaryland to borrow up to $25.000 million at a variable rate of interest. Theline of credit is secured by eligible receivables of Finance Maryland and isalso guaranteed by First Mariner Bancorp. Other covenants relating to the lineof credit require Finance Maryland to maintain predetermined levels ofoperating performance, credit quality and equity levels, as well as other usualand customary requirements.

Certaininformation regarding our borrowings and repurchase agreements are as follows:
| ** **                                       | ** ** | **December 31,**                | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Amount outstanding at  year-end:                 |       |                                 |       |   |   |   |   |
| FHLB short-term advances                         |       | $                                    | 132,000    |   | $ | 59,000 |   | $ | — |   |
| Short-term promissory notes                      |       | 30,292                               |       | 29,884 |   | 29,824 |   |
| Short-term repurchase agreements                 |       | —                               |       | — |   | — |   |
| FHLB long-term advances                          |       | 85,000                               |       | 85,000 |   | 60,000 |   |
| Long-term repurchase agreements                  |       | 25,000                               |       | 25,000 |   | 25,000 |   |
| Long-term line of credit                         |       | 24,369                               |       | — |   | — |   |
| Weighted average  interest rate at year-end:     |       |                                 |       |   |   |   |   |
| FHLB short-term advances                         |       | 2.44                                 | %          | 1.12 | % | — |   |
| Short-term promissory notes                      |       | 0.61                                 | %          | 0.75 | % | 1.00 | % |
| Short-term repurchase agreements                 |       | —                               |       | — |   | — |   |
| FHLB long-term advances                          |       | 4.84                                 | %          | 4.84 | % | 5.99 | % |
| Long-term repurchase agreements                  |       | 5.06                                 | %          | 5.06 | % | 5.06 | % |
| Long-term line of credit                         |       | 5.62                                 | %          | — |   | — |   |
| Maximum  outstanding at any month-end:           |       |                                 |       |   |   |   |   |
| FHLB short-term advances                         |       | $                                    | 132,000    |   | $ | 59,000 |   | $ | — |   |
| Short-term promissory notes                      |       | 41,058                               |       | 43,981 |   | 41,790 |   |
| Short-term repurchase agreements                 |       | —                               |       | — |   | 4,257 |   |
| FHLB long-term advances                          |       | 85,000                               |       | 85,000 |   | 60,000 |   |
| Long-term repurchase agreements                  |       | 25,000                               |       | 25,000 |   | 25,000 |   |
| Long-term line of credit                         |       | 24,369                               |       | — |   | — |   |
| Average  outstanding:                            |       |                                 |       |   |   |   |   |
| FHLB short-term advances                         |       | $                                    | 62,060     |   | $ | 8,452 |   | $ | 2,409 |   |
| Short-term promissory notes                      |       | 30,821                               |       | 25,647 |   | 21,543 |   |
| Short-term repurchase agreements                 |       | —                               |       | — |   | 723 |   |
| FHLB long-term advances                          |       | 85,000                               |       | 61,507 |   | 60,000 |   |
| Long-term repurchase agreements                  |       | 25,000                               |       | 25,000 |   | 25,000 |   |
| Long-term line of credit                         |       | 16,360                               |       | — |   | — |   |
| Weighted average  interest rate during the year: |       |                                 |       |   |   |   |   |
| FHLB short-term advances                         |       | 1.78                                 | %          | 1.22 | % | 1.82 | % |
| Short-term promissory notes                      |       | 0.51                                 | %          | 0.63 | % | 0.99 | % |
| Short-term repurchase agreements                 |       | —                               |       | — |   | 3.30 | % |
| FHLB long-term advances                          |       | 4.93                                 | %          | 5.99 | % | 5.99 | % |
| Long-term repurchase agreements                  |       | 5.17                                 | %          | 5.13 | % | 5.06 | % |
| Long-term line of  credit                        |       | 5.24                                 | %          | — |   | — |   |

 

Repayments on long-term FHLB advances and long-termrepurchase agreements are as follows: 2005—$10.000 million; 2006—$15.000 million;2007—$24.369 million, 2008—$25.000 million; thereafter—$60.000 million.Long term borrowings totaling $85.000 million are subject to call provisions.

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We have pledged securitieswith a carrying value (fair value) of $266.153 million and loans with acarrying value of $120.699 million as collateral for short-term andlong-term FHLB advances as well as the long-term line of credit.

**(9)   JuniorSubordinated Deferrable InterestDebentures**

Thefollowing table shows the subordinated debt issued by First Mariner Bancorp and therelated Trust Preferred Securities issued at December 31, 2004.
| **Trust** | ** ** | ** ** | ** ** | **Subordinated  Debt issued  To Trust** | ** ** | **Security Title** | ** **                                | **Trust  Preferred  Securities  Issued by  Trust** | ** ** | **Date of  Original Issue** | ** ** | **Optional  Redemption Date** | ** ** | **Stated  Maturity**    | ** ** |
|-----------|------------|------------|------------|---------------------------------------------------|------------|--------------------|-------------------------------------------|---------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| MCT II    |       |       | $          | 10,300,000                                        |       |               | Floating  rate Trust Preferred Securities |                                                    | $          | 10,000,000                            |       | December 11,  2002            |       | December 11,  2007 |       | December 11,  2032 |   |
| MCT III   |       |       | $          | 14,949,000                                        |       |               | 5-year  Fixed Trust Preferred Securities  |                                                    | $          | 14,500,000                            |       | June 18,  2003                |       | July 7,  2008      |       | July 7,  2033 |   |
| MCT IV    |       |       | $          | 12,380,000                                        |       |               | Floating  rate Trust Preferred Securities |                                                    | $          | 12,000,000                            |       | August 19,  2003              |       | August 18,  2008   |       | August 18,  2033 |   |
| MCT V     |       |       | $          | 10,310,000                                        |       |               | Floating  rate Trust Preferred Securities |                                                    | $          | 10,000,000                            |       | September 25,  2003           |       | October 8,  2008   |       | October 8,  2033 |   |
| MCT VI    |       |       | $          | 10,310,000                                        |       |               | Floating  rate Trust Preferred Securities |                                                    | $          | 10,000,000                            |       | October 21,  2004             |       | January 7,  2010   |       | January 7,  2035 |   |
| Total     |       |       | $          | 58,249,000                                        |       |               |                                      |                                                    | $          | 56,500,000                            |       |                               |       |                    |       |   |   |

 

We have issued subordinated debt to Mariner CapitalTrusts (“MCT”), including MCT II, MCT III, MCT IV,MCT V and MCT VI (the “Trusts”). The Trusts are Delaware business trusts forwhich all the common securities are owned by First Mariner and which wereformed for the purpose of issuing Trust Preferred Securities. In accordancewith the provisions of FIN46, we have deconsolidated the Trusts, and theirfinancial position and results of operations are not included in ourconsolidated financial position and results of operations. The terms of thesubordinated debt issued to the Trusts and the Trust Preferred Securitiesissued by the Trusts areidentical.

The Trust Preferred Securities are mandatorilyredeemable, in whole or in part, upon repayment of their underlyingsubordinated debt at their respective maturities or their earlier redemption.The subordinated debt is redeemable prior to maturity at our option on or afterits optional redemption dates.

The Floating Rate Trust Securities, issued by MCT IIaccrue interest at a variable rate of interest equal to the 3-month LIBOR rateplus 335 basis points. The Trust Securities, issued by MCT III accrue interestat a fixed rate of interest, initially at 5.66% on the outstanding securities.The interest rate will reset July 7, 2008 to a floating rate equal to3-month LIBOR rate plus 325 basis points. The Floating Rate Trust Securities,issued by MCT IV accrue interest at a variable rate of interest equal to the3-month LIBOR rate plus 305 basis points. The Floating Rate Trust Securities,issued by MCT V accrue interest at a variable rate of interest equal to the3-month LIBOR rate plus 315 basis points. The Floating Rate Trust Securities,issued by MCT VI accrue interest at a variable rate of interest equal to the3-month LIBOR rate plus 205 basis points.

The interest expense (including amortization of thecost of issuance) on Trust Preferred Securities was $2.426 million in 2004 and$2.549 million in 2003.

The junior subordinated deferrable interest debenturesare the sole assets of the Trusts. First Mariner has fully and unconditionallyguaranteed all of the obligations of the Trusts.

Underapplicable regulatory guidelines, a portion of the Trust Preferred Securitieswill qualify as Tier I capital, and the remaining portion will qualify as TierII capital. Under applicable regulatory guidelines, $21.482 million of theoutstanding Trust Preferred Securities qualify as Tier I capital and $35.018 millionof the Trust Preferred Securities qualify as Tier II capital at December 31,2004.

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**(10)   EmployeeBenefit Plans**

***(a)   Profit Sharing Plan***

Weestablished a defined contribution plan in 1997, covering our employees meetingcertain age and service eligibility requirements. The Plan provides for cashdeferrals qualifying under Section 401(k). We make matching contributionsto the plan which totaled $392,000, $378,000 and $304,000 in 2004, 2003, and2002, respectively.

***(b)   Stock Options***

We have stock option award arrangements, which providefor the granting of options to acquire common stock to our directors and keyemployees. Option prices are equal to or greater than the estimated fair marketvalue of the common stock at the date of the grant. Options issued prior to1996 are exercisable immediately after the date of grant. Beginning in 1996, optionsgranted have a three-year vesting schedule with the first year vested uponissuance. All of our options expire ten years after the date of grant.

Informationwith respect to stock options is as follows for the years ended December 31,2004, 2003 and 2002:
| ** **                             | ** ** | **2004**                         | ** ** | **2003**                               | ** ** | **2002**                         | ** ** |
|----------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **Number of   Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of   Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of   Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of year |       |                             | 701,888    |                                   |       |                             | $          | 9.48 |   |   |   | 514,538 |   |   |   | $ | 8.58 |   |   |   | 373,170 |   |   |   | $ | 7.74 |   |   |
| Granted                                |       |                             | 51,350     |                                   |       |                             | 18.32      |   |   |   | 193,850 |   |   |   | 11.85 |   |   |   | 146,200 |   |   |   | 10.65 |   |   |
| Exercised                              |       |                             | (12,165    | )                                      |       |                             | 10.66      |   |   |   | (6,500 | ) |   |   | 9.01 |   |   |   | (3,498 | ) |   |   | 5.58 |   |   |
| Forfeited/Cancelled                    |       |                             | (2,834     | )                                      |       |                             | 16.41      |   |   |   | — |   |   |   | — |   |   |   | (1,334 | ) |   |   | 7.89 |   |   |
| Outstanding at end of  year            |       |                             | 738,239    |                                   |       |                             | $          | 10.05 |   |   |   | 701,888 |   |   |   | $ | 9.48 |   |   |   | 514,538 |   |   |   | $ | 8.58 |   |   |

 

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Options outstanding aresummarized as follows at December 31, 2004:
| **Options Outstanding**          | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| **Exercise Price ($)** | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Options  Exercisable  Shares** | ** ** |
| $  4.00                |       | 1,400      |       |   | 6.0 |   |   |   | 1,400 |   |   |
|     5.50     |       | 95,818     |       |   | 6.2 |   |   |   | 95,818 |   |   |
|     5.63     |       | 41,750     |       |   | 5.2 |   |   |   | 41,750 |   |   |
|     6.25     |       | 3,000      |       |   | 5.4 |   |   |   | 3,000 |   |   |
|     6.45     |       | 700        |       |   | 6.5 |   |   |   | 700 |   |   |
|     7.10     |       | 5,500      |       |   | 6.4 |   |   |   | 5,500 |   |   |
|     7.40     |       | 550        |       |   | 6.8 |   |   |   | 550 |   |   |
|     8.69     |       | 10,000     |       |   | 4.9 |   |   |   | 10,000 |   |   |
|     9.09     |       | 183,920    |       |   | 1.9 |   |   |   | 183,920 |   |   |
|     9.16     |       | 1,150      |       |   | 7.0 |   |   |   | 1,150 |   |   |
|     9.86     |       | 1,850      |       |   | 7.8 |   |   |   | 1,850 |   |   |
|   10.45                |       | 120,500    |       |   | 7.2 |   |   |   | 120,500 |   |   |
|   10.50                |       | 3,000      |       |   | 4.6 |   |   |   | 3,000 |   |   |
|   10.70                |       | 850        |       |   | 7.3 |   |   |   | 850 |   |   |
|   11.68                |       | 176,001    |       |   | 8.2 |   |   |   | 117,334 |   |   |
|   11.75                |       | 14,750     |       |   | 4.2 |   |   |   | 14,750 |   |   |
|   11.95                |       | 1,100      |       |   | 8.2 |   |   |   | 733 |   |   |
|   12.03                |       | 6,000      |       |   | 7.4 |   |   |   | 6,000 |   |   |
|   12.10                |       | 9,500      |       |   | 7.4 |   |   |   | 9,500 |   |   |
|   13.00                |       | 1,100      |       |   | 8.2 |   |   |   | 733 |   |   |
|   13.52                |       | 7,500      |       |   | 8.4 |   |   |   | 5,000 |   |   |
|   16.86                |       | 1,000      |       |   | 9.5 |   |   |   | 333 |   |   |
|   16.95                |       | 2,950      |       |   | 8.8 |   |   |   | 1,967 |   |   |
|   18.20                |       | 10,050     |       |   | 9.4 |   |   |   | 3,350 |   |   |
|   18.38                |       | 38,300     |       |   | 9.1 |   |   |   | 12,767 |   |   |
|                             |       | 738,239    |       |   |   |   |   |   | 642,455 |   |   |

 

***(c)   Warrants***

We had outstandingwarrants of 482,682 and 619,699 to acquire shares of our common stock at $9.09 pershare exercisable at December 31, 2004, and 2003, respectively. Allremaining warrants expire in May and August of 2005.

***(d)   Stock Purchase***

We initiated stockpurchase plans for employees in 2000 and 2003 whereby the employees canpurchase our stock through payroll deductions. We generally provide a discountof up to 10% of the purchase price.

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**(11)   IncomeTaxes**

Ourincome tax expense consists of the following for the years ended December 31:
| ** **         | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
| Current            |       | $                                    | 2,751      |     | $          | 1,278    |       | $ | 1,136 |   |
| Deferred           |       | (390                                 | )          | 493      |       | 794      |       |
| Income tax expense |       | $                                    | 2,361      |     | $          | 1,771    |       | $ | 1,930 |   |

 

Incometax expense (benefit) are reconciled to the amount computed by applying thefederal corporate tax rate of 34% to income before taxes as follows for theyears ended December 31:
| ** **                                    | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(dollars in thousands)** | ** ** |
| Income tax  expense at federal corporate rate |       | $                                    | 2,877      |     | $          | 2,406    |       | $ | 1,984 |   |
| Change in  valuation allowance                |       | (10                                  | )          | 34       |       | 103      |       |
| Bank-owned  life insurance                    |       | (365                                 | )          | (250     | )          | (180     | )          |
| State income  taxes                           |       | 21                                   |       | (350     | )          | —   |       |
| Federal income  tax credits                   |       | (166                                 | )          | (84      | )          | —   |       |
| Other                                         |       | 4                                    |       | 15       |       | 23       |       |
|                                          |       | $                                    | 2,361      |     | $          | 1,771    |       | $ | 1,930 |   |

 

Thetax effects of temporary differences between the financial reporting basis andincome tax basis of assets and liabilities relate to the following at December 31:
| ** **                                                                   | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(dollars in thousands)** | ** ** |
| Deferred tax  assets:                                                        |       |                                 |       |     |       |   |   |   |   |
| Allowance for losses on loans                                                |       |                                 | $          | 3,700    |       |   |   | $ | 3,395 |   |   |
| Amortization of intangible assets                                            |       |                                 | 138        |     |       |   | 116 |   |   |
| State net operating loss carryforward                                        |       |                                 | 346        |     |       |   | 356 |   |   |
| Other                                                                        |       |                                 | 95         |     |       |   | 89 |   |   |
| Total gross  deferred tax assets                                             |       |                                 | 4,279      |     |       |   | 3,956 |   |   |
| Less valuation  allowance                                                    |       |                                 | (346       | )        |       |   | (356 | ) |   |
| Net deferred tax  assets                                                     |       |                                 | 3,933      |     |       |   | 3,600 |   |   |
| Deferred tax  liabilities:                                                   |       |                                 |       |     |       |   |   |   |   |
| Depreciation                                                                 |       |                                 | 1,041      |     |       |   | 306 |   |   |
| Gain on sales of loans                                                       |       |                                 | —     |     |       |   | 12 |   |   |
| Total gross  deferred tax liabilities                                        |       |                                 | 1,041      |     |       |   | 318 |   |   |
| Attributable to  operations                                                  |       |                                 | 2,892      |     |       |   | 3,282 |   |   |
| Unrealized gain  (loss) on investments charged to other comprehensive income |       |                                 | 84         |     |       |   | (663 | ) |   |
| Deferred income taxes                                                        |       |                                 | $          | 2,976    |       |   |   | $ | 2,619 |   |   |

 

First Mariner has net operating loss carryforwards forstate income tax purposes of approximately $7.491 million that areavailable to offset future state taxable income of First Mariner Bancorp only.The loss carryforwards will begin to expire in 2019. Management anticipatesthat it is more likely than not that the future operations of First MarinerBancorp will not generate sufficient taxable income to realize the deferred taxasset in the amount of $346,000 relating to this state net operating loss.

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The Bank has earned significant state tax incentivesthrough its participation in the One Maryland Economic Development and JobCreation Tax Credit programs. The tax incentives total $5.5 million basedupon a confirmation received from the Maryland Department of Business andEconomic Development. We will realize the benefits of the incentives in ourreported earnings as the credits can be utilized, in accordance with accountingstandards that govern the recognition of investment tax credits. The amount ofthe credit that we can utilize will be determined by the level of Marylandtaxable income for the Bank only, and will be recognized as a reduction in ourincome tax expense. Any unused One Maryland credits can be carried forward andwill expire in 2016. The Job Creation Tax Credit can be carried forward forfive years. The total tax credits not utilized as of December 31, 2004 is$5.0 million. We expect the Bank to fully realize the full value of the creditsbefore their expiration.

TheBank has invested in a partnership that owns and manages seven affordablehousing projects in the mid-Atlantic area. Through its interest in thepartnership, the Bank receives tax incentives in the form of Federal taxcredits that can be used to offset current Federal income taxes. Tax creditsassociated with the limited partnership (assuming the 5% limited partnershipinterest currently owned by the Bank) is projected to total $1.599 millionand will be available to the limited partners from January 2003 through December 2012.The annual tax credits anticipated to be available approximate $168,000. TheBank invested $1.5 million to obtain its 5% interest in the partnership inJuly of 2003, and recognized $166,000 in tax credits in 2004 and $84,000in 2003.

**(12)   OtherExpenses**

Thefollowing summarizes our other noninterest expenses for the years ended December 31:
| ** **                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Service and  maintenance                          |       | $                                    | 1,485      |     | $          | 1,308    |       | $ | 1,043 |   |
| Office supplies                                   |       | 697                                  |       | 691      |       | 550      |       |
| ATM servicing  expenses                           |       | 1,112                                |       | 922      |       | 831      |       |
| Printing                                          |       | 712                                  |       | 795      |       | 459      |       |
| Corporate  insurance                              |       | 378                                  |       | 297      |       | 234      |       |
| OREO expense                                      |       | (73                                  | )          | 18       |       | (131     | )          |
| FDIC Premiums                                     |       | 115                                  |       | 109      |       | 186      |       |
| Consulting fees                                   |       | 385                                  |       | 506      |       | 232      |       |
| Marketing/promotion                               |       | 722                                  |       | 825      |       | 625      |       |
| Postage                                           |       | 982                                  |       | 756      |       | 393      |       |
| Overnight  delivery/courier                       |       | 736                                  |       | 770      |       | 553      |       |
| Security                                          |       | 310                                  |       | 294      |       | 222      |       |
| Dues and  memberships                             |       | 341                                  |       | 248      |       | 187      |       |
| Writeoff of  Unamortized Trust Preferred expenses |       | —                               |       | 945      |       | —   |       |
| Loan collection  expenses                         |       | 332                                  |       | 239      |       | 153      |       |
| Other                                             |       | 2,619                                |       | 1,881    |       | 1,170    |       |
|                                              |       | $                                    | 10,853     |     | $          | 10,604   |       | $ | 6,707 |   |

 

**(13)   Dividendsand Earnings Per Share**

As a depository institution whose deposits are insuredby the Federal Deposit Insurance Corporation (FDIC), the Bank may not paydividends or distribute any of its capital assets while it remains in defaulton any assessment due the FDIC. The Bank currently is not in default under anyof its obligations to the FDIC. As a commercial bank under the MarylandFinancial Institution Law, the Bank may declare cash dividends from undividedprofits or, with the prior approval of the Commissioner of FinancialRegulation, 

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out of surplus in excessof 100% of its required capital stock, after providing for due or accruedexpenses, losses, interest and taxes.

First Mariner and the Bank, in declaring and payingdividends, are also limited insofar as minimum capital requirements mandated byregulatory authorities. First Mariner and the Bank comply with such capitalrequirements.

Our current ability to pay dividends to stockholdersis largely dependent upon the receipt of dividends from our banking subsidiary.Both federal and state laws impose restrictions on the ability of the Bank topay dividends. The FRB has issued a policy, which provides that, as a generalmatter, insured banks and bank holding companies may pay dividends only out ofprior operating earnings. For a Maryland state-chartered bank or trustcompany, dividends may be paid out of undivided profits or, with the priorapproval of the Commissioner, from surplus in excess of 100% of requiredcapital stock. Cash dividends may not be paid in excess of 90% of net earnings.

Informationrelating to the calculations of our earnings per common share is summarized asfollows for the years ended December 31:
| ** **                                                  | ** ** | **2004**                             | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                                  | ** ** | **(dollars in thousands)** | ** ** |
| Net income—basic  and diluted                          |       | $                                    | 6,101      |      | $          | 5,307     |       | $ | 3,904 |   |
| Weighted-average  shares outstanding—basic             |       | 5,759,310                            |       | 5,450,704 |       | 5,377,998 |       |
| Dilutive  securities-options and warrants                   |       | 591,962                              |       | 554,842   |       | 250,275   |       |
| Adjusted weighted-average  shares outstanding—dilutive |       | 6,351,272                            |       | 6,005,546 |       | 5,628,273 |       |
|                                                             |            |                                      |            |           |            |           |            |  |  |  |

 

**(14)   RegulatoryMatters**

Various regulatory capital requirements administeredby the federal banking agencies apply to us as well as our banking subsidiary.Failure to meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on our financial statements. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the Bank must meet specific capital guidelines that involve quantitativemeasures of assets, liabilities, and certain off-balance sheet items ascalculated under regulatory accounting practices. The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulators aboutcomponents, risk weightings, and other factors.

Quantitative measures established by regulation toensure capital adequacy require the Bank to maintain minimum amounts and ratiosof total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital toaverage assets. Management believes, as of December 31, 2004, that theBank meets all capital adequacy requirements to which it is subject. As of December 31,2004, the Bank was “well capitalized” under the regulatory framework for promptcorrective action. There are no conditions or events that management believeswould change the Bank’s category.

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Ourregulatory capital amounts (dollars in thousands) and ratios as of December 31,2004 and 2003, were as follows:
| ** **                                          | ** ** | **Actual** | ** ** | ** ** | ** ** | **Minimum  Requirements  For Capital  Adequacy  Purposes** | ** ** | **To Be Well  Capitalized  Under Prompt  Corrective  Action Provision** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount**                                                      | ** ** | **Ratio**                                                                                   | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of  December 31, 2004**                   |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets):           |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Consolidated                                        |       | $          | 130,526    |       | 14.1       | %                                                               | 74,098     |                                                                                        |       | 8.0 | % |   | 92,623 |   | 10.0 | % |
| The Bank                                            |       | 88,713     |       | 10.2       | %          | 69,801                                                          |       |                                                                                        | 8.0        | % |   | 87,252 |   | 10.0 | % |
| Tier 1 capital  (to risk weighted assets):          |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Consolidated                                        |       | 85,928     |       | 9.3        | %          | 37,049                                                          |       |                                                                                        | 4.0        | % |   | 55,574 |   | 6.0 | % |
| The Bank                                            |       | 75,812     |       | 8.7        | %          | 34,901                                                          |       |                                                                                        | 4.0        | % |   | 52,351 |   | 6.0 | % |
| Tier 1 capital (to  average fourth quarter assets): |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Consolidated                                        |       | 85,928     |       | 7.1        | %          | 48,123                                                          |       |                                                                                        | 4.0        | % |   | 60,153 |   | 5.0 | % |
| The Bank                                            |       | 75,812     |       | 6.5        | %          | 46,411                                                          |       |                                                                                        | 4.0        | % |   | 58,014 |   | 5.0 | % |
| **As of  December 31, 2003**                   |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets):           |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Consolidated                                        |       | $          | 112,456    |       | 15.0       | %                                                               | 59,858     |                                                                                        |       | 8.0 | % |   | 74,823 |   | 10.0 | % |
| The Bank                                            |       | 77,174     |       | 10.7       | %          | 57,682                                                          |       |                                                                                        | 8.0        | % |   | 72,103 |   | 10.0 | % |
| Tier 1 capital  (to risk weighted assets):          |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Consolidated                                        |       | 76,352     |       | 10.2       | %          | 29,929                                                          |       |                                                                                        | 4.0        | % |   | 44,894 |   | 6.0 | % |
| The Bank                                            |       | 69,586     |       | 9.7        | %          | 28,841                                                          |       |                                                                                        | 4.0        | % |   | 43,262 |   | 6.0 | % |
| Tier 1 capital (to  average fourth quarter assets): |       |       |       |       |       |                                                            |       |                                                                                        |       |   |   |   |   |   |   |
| Consolidated                                        |       | 76,352     |       | 7.7        | %          | 39,806                                                          |       |                                                                                        | 4.0        | % |   | 49,758 |   | 5.0 | % |
| The Bank                                            |       | 69,586     |       | 7.2        | %          | 38,886                                                          |       |                                                                                        | 4.0        | % |   | 48,608 |   | 5.0 | % |

 

TheFDIC, through the Savings Association Insurance Fund (SAIF), insures depositsof accountholders up to $100,000. The Bank pays an annual premium to providefor this insurance. The Bank is a member of the Federal Home Loan Bank Systemand is required to maintain an investment in the stock of the FHLB equal to atleast 1% of the unpaid principal balances of residential mortgage loans, 0.3%of total assets or 5% of outstanding advances from the Bank, whichever isgreater. Purchases and sales of stock are made directly with the Bank at parvalue.

**(15)   FairValue of Financial Instruments**

Fair value estimates, methods, and assumptions are setforth below for our financial instruments as of December 31, 2004 and2003.

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Thecarrying value and estimated fair value of financial instruments is summarizedas follows:
| ** **                                          | ** ** | **2004**                             | ** ** | **2003**                       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **Carrying  Value**                  | ** ** | **Estimated  Fair Value** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                                          | ** ** | **(dollars in thousands)** | ** ** |
| Assets:                                             |       |                                 |       |                           |       |   |   |   |   |
| Cash and interest-bearing deposits                  |       | $                                    | 35,447     |                           | $          | 35,447 |   | $ | 46,679 |   | $ | 46,679 |   |
| Investment securities                               |       | 322,965                              |       | 322,965                        |       | 288,437 |   | 288,437 |   |
| Loans receivable                                    |       | 746,146                              |       | 753,843                        |       | 609,847 |   | 630,221 |   |
| Loans held for sale                                 |       | 79,955                               |       | 79,955                         |       | 59,055 |   | 59,055 |   |
| Restricted stock investments                        |       | 11,886                               |       | 11,886                         |       | 7,265 |   | 7,265 |   |
| Liabilities:                                        |       |                                 |       |                           |       |   |   |   |   |
| Deposits                                            |       | 825,417                              |       | 826,823                        |       | 747,733 |   | 764,551 |   |
| Borrowings                                          |       | 271,661                              |       | 288,177                        |       | 173,884 |   | 193,007 |   |
| Repurchase agreements                               |       | 25,000                               |       | 25,197                         |       | 25,000 |   | 27,862 |   |
| Junior  subordinated deferrable interest debentures |       | 58,249                               |       | 58,578                         |       | 47,939 |   | 48,501 |   |
|                                                     |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

***Cash and Interest-Bearing Deposits***

The carrying amount forcash and interest-bearing deposits approximates fair value due to theshort maturity of these instruments.

***Investment Securities***

The fair value ofinvestment securities is based on bid prices received from an external pricingservice or bid quotations received from securities dealers.

***Loans Receivable***

Loans were segmented into portfolios with similarfinancial characteristics. Loans were also segmented by type such asresidential, multifamily and nonresidential, construction and land, secondmortgage loans, commercial, and consumer. Each loan category was furthersegmented by fixed and adjustable rate interest terms and performing andnonperforming categories. The fair value of each loan category was calculatedby discounting anticipated cash flows based on weighted-averagecontractual maturity, weighted-average coupon, and discount rate.

The fair value fornonperforming loans was determined by reducing the carrying value ofnonperforming loans by our historical loss percentage for each specific loancategory.

***Loans Held for Sale***

The fair value of loansheld for sale is based on commitments to sell loans classified as held for salein the secondary market.

***Restricted Stock Investments***

The carrying value ofrestricted stock investments is a reasonable estimate of fair value as theseinvestments do not have a readily available market and can only be sold back tothe issuer at its par value of $100 per share.

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***Deposits***

The fair value of depositswith no stated maturity, such as noninterest bearing deposits, interest bearingNow accounts, money market and statement savings accounts, is deemed to beequal to the carrying amounts. The fair value of certificates of deposit isbased on the discounted value of contractual cash flows. The discount rate forcertificates of deposit was estimated using the rate currently offered fordeposits of similar remaining maturities.

***Borrowings, Repurchase Agreements and JuniorSubordinated Notes***

Borrowings, repurchaseagreements and junior subordinated notes were segmented into categories withsimilar financial characteristics. Carrying values were discounted using a cashflow approach based on market rates as of December 31, 2004.

***Off-Balance Sheet Financial Instruments***

Our adjustable rate commitments to extend credit movewith market rates and are not subject to interest rate risk. The rates andterms of our fixed rate commitments to extend credit are competitive withothers in the various markets in which we operate. It is impractical to assignfair values to these instruments.

The disclosure of fairvalue amounts does not include the fair values of any intangibles, includingcore deposit intangibles. Core deposit intangibles represent the valueattributable to total deposits based on an expected duration of customerrelationships.

***Limitations***

Fairvalue estimates are made at a specific point in time, based on relevant marketinformation and information about financial instruments. These estimates do notreflect any premium or discount that could result from offering for sale at onetime our total holdings of a particular financial instrument. Because no marketexists for a significant portion of our financial instruments, fair valueestimates are based on judgments regarding future expected loss experience,current economic conditions, risk characteristics of various financialinstruments and other factors. These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment and therefore cannotbe determined with precision. Changes in assumptions could significantly affectestimates.

**(16)   SegmentInformation**

We operate in three business segments—commercial andconsumer banking, mortgage banking and consumer finance. Commercial andconsumer banking is conducted through the Bank and involves delivering a broadrange of financial products and services, including lending and deposit takingto individuals and commercial enterprises. Consumer and commercial banking alsoinclude our treasury function and an allocation for corporate overhead andadministration. Mortgage banking is conducted through First Mariner Mortgage, adivision of the Bank, and involves originating residential single-familymortgages for sale in the secondary market and to the Bank. Consumer finance isconducted through Finance Maryland, and involves making small direct consumerloans and the purchase of retail installment sales contracts.

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The following tablepresents certain information regarding our business segments:

**For the year ended December 31, 2004**
| ** **                                                           | ** ** | **Commercial and  Consumer Banking** | ** ** | **Consumer  Finance** | ** ** | **Mortgage  Banking** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------|------------|
| ** **                                                           | ** ** | **(dollars in thousands)**           | ** ** |
| Interest income                                                      |       |                                           | $          | 55,089                |       |                  | $          | 7,718     |       | $ | 2,463 |   | $ | 65,270 |   |
| Interest expense                                                     |       |                                           | 20,663     |                  |       | 1,076                 |       | 1,090     |       | 22,829 |   |
| Net interest income                                                  |       |                                           | 34,426     |                  |       | 6,642                 |       | 1,373     |       | 42,441 |   |
| Provision for  loan losses                                           |       |                                           | 725        |                  |       | 1,518                 |       | —    |       | 2,243 |   |
| Net interest income after provision  for loan losses  |       |                                           | 33,701     |                  |       | 5,124                 |       | 1,373     |       | 40,198 |   |
| Noninterest  income                                                  |       |                                           | 12,883     |                  |       | 1,668                 |       | 4,639     |       | 19,190 |   |
| Noninterest  expense                                                 |       |                                           | 36,294     |                  |       | 5,770                 |       | 8,862     |       | 50,926 |   |
| Net intersegment  income                                             |       |                                           | (582       | )                     |       | —                |       | 582       |       | — |   |
| Income before  income taxes                                          |       |                                           | $          | 9,708                 |       |                  | $          | 1,022     |       | $ | (2,268 | ) | $ | 8,462 |   |
| Total assets                                                         |       |                                           | $          | 1,136,054             |       |                  | $          | 34,522    |       | $ | 79,955 |   | $ | 1,250,531 |   |

 

**Forthe year ended December 31, 200**3
| ** **                                                           | ** ** | **Commercial and  Consumer Banking** | ** ** | **Consumer  Finance** | ** ** | **Mortgage  Banking** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------|------------|
| ** **                                                           | ** ** | **(dollars in thousands)**           | ** ** |
| Interest income                                                      |       |                                           | $          | 46,186                |       |                  | $          | 4,582     |       | $ | 4,857 |   | $ | 55,625 |   |
| Interest expense                                                     |       |                                           | 17,866     |                  |       | 696                   |       | 2,652     |       | 21,214 |   |
| Net interest income                                                  |       |                                           | 28,320     |                  |       | 3,886                 |       | 2,205     |       | 34,411 |   |
| Provision for  loan losses                                           |       |                                           | 1,400      |                  |       | 1,136                 |       | —    |       | 2,536 |   |
| Net interest income after provision  for loan losses  |       |                                           | 26,920     |                  |       | 2,750                 |       | 2,205     |       | 31,875 |   |
| Noninterest  income                                                  |       |                                           | 13,024     |                  |       | 1,145                 |       | 6,917     |       | 21,086 |   |
| Noninterest  expense                                                 |       |                                           | 35,066     |                  |       | 3,731                 |       | 7,086     |       | 45,883 |   |
| Net intersegment  income                                             |       |                                           | 6          |                  |       | —                |       | (6        | )          | — |   |
| Income before  income taxes                                          |       |                                           | $          | 4,884                 |       |                  | $          | 164       |       | $ | 2,030 |   | $ | 7,078 |   |
| Total assets                                                         |       |                                           | $          | 975,615               |       |                  | $          | 23,183    |       | $ | 59,055 |   | $ | 1,057,853 |   |

 

**For the year ended December 31, 2002**
| ** **                                                          | ** ** | **Commercial and  Consumer Banking** | ** ** | **Consumer  Finance** | ** ** | **Mortgage  Banking** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------|------------|
| ** **                                                          | ** ** | **(dollars in thousands)**           | ** ** |
| Interest income                                                     |       |                                           | $          | 48,459                |       |                  | $          | 742       |       | $ | 3,130 |   | $ | 52,331 |   |
| Interest expense                                                    |       |                                           | 20,051     |                  |       | 137                   |       | 1,155     |       | 21,343 |   |
| Net interest income                                                 |       |                                           | 28,408     |                  |       | 605                   |       | 1,975     |       | 30,988 |   |
| Provision for  loan losses                                          |       |                                           | 1,495      |                  |       | 680                   |       | —    |       | 2,175 |   |
| Net interest income after provision for loan losses  |       |                                           | 26,913     |                  |       | (75                   | )          | 1,975     |       | 28,813 |   |
| Noninterest  income                                                 |       |                                           | 8,901      |                  |       | 494                   |       | 5,599     |       | 14,994 |   |
| Noninterest  expense                                                |       |                                           | 31,014     |                  |       | 1,309                 |       | 5,650     |       | 37,973 |   |
| Net intersegment  income                                            |       |                                           | 13         |                  |       | —                |       | (13       | )          | — |   |
| Income before  income taxes                                         |       |                                           | $          | 4,813                 |       |                  | $          | (890      | )          | $ | 1,911 |   | $ | 5,834 |   |
| Total assets                                                        |       |                                           | $          | 767,603               |       |                  | $          | 10,451    |       | $ | 93,098 |   | $ | 871,152 |   |

 

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**(17)   ComprehensiveIncome**

Componentsof our comprehensive income are as follows for the years ended December 31:
| ** **                                                                                                                            | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                            | ** ** | **(dollars in thousands)** | ** ** |
| Net income                                                                                                                            |       | $                                    | 6,101      |     | $          | 5,307    |       | $ | 3,904 |   |
| Other comprehensive  income items:                                                                                                    |       |                                 |       |     |       |     |       |
| Unrealized holding (losses) gains arising during the  period (net of tax (benefit) expense of $(582), $19, and $1,673,  respectively) |       | (1,027                               | )          | 49       |       | 3,270    |       |
| Less: reclassification adjustment for gains (net of  taxes of $165, $529, and $192, respectively) included in net income              |       | 275                                  |       | 841      |       | 305      |       |
| Total other  comprehensive (loss) income                                                                                              |       | (1,302                               | )          | (792     | )          | 2,965    |       |
| Total comprehensive  income                                                                                                           |       | $                                    | 4,799      |     | $          | 4,515    |       | $ | 6,869 |   |

 

**(18)   QuarterlyResults of Operations**

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended December 31, 2004 and 2003:
| ** **                             | ** ** | **Three months ended**                                                | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **December 31,  2004**                                                     | ** ** | **September 30,  2004** | ** ** | **June 30,  2004** | ** ** | **March 31,  2004** | ** ** |
| ** **                             | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest income                        |       |                                                                            | $          | 17,566 |   |   |   | $ | 16,865 |   |   | $ | 15,698 |   |   | $ | 15,141 |   |   |
| Interest expense                       |       |                                                                            | 6,337      |   |   |   | 5,801 |   |   | 5,471 |   |   | 5,220 |   |   |
| Net interest  income                   |       |                                                                            | 11,229     |   |   |   | 11,064 |   |   | 10,227 |   |   | 9,921 |   |   |
| Provision for  loan losses             |       |                                                                            | 762        |   |   |   | 692 |   |   | 489 |   |   | 300 |   |   |
| Other operating  income                |       |                                                                            | 5,073      |   |   |   | 4,623 |   |   | 4,673 |   |   | 4,381 |   |   |
| Gain on sale of  securities            |       |                                                                            | —     |   |   |   | 100 |   |   | — |   |   | 340 |   |   |
| Operating  expenses                    |       |                                                                            | 13,004     |   |   |   | 12,874 |   |   | 12,519 |   |   | 12,529 |   |   |
| Income before  taxes                   |       |                                                                            | 2,536      |   |   |   | 2,221 |   |   | 1,892 |   |   | 1,813 |   |   |
| Income tax  expense                    |       |                                                                            | 690        |   |   |   | 646 |   |   | 519 |   |   | 506 |   |   |
| Net income                             |       |                                                                            | $          | 1,846 |   |   |   | $ | 1,575 |   |   | $ | 1,373 |   |   | $ | 1,307 |   |   |
| Net income per  common share (Basic)   |       |                                                                            | $          | 0.32 |   |   |   | $ | 0.27 |   |   | $ | 0.24 |   |   | $ | 0.23 |   |   |
| Net income per  common share (Diluted) |       |                                                                            | 0.28       |   |   |   | 0.25 |   |   | 0.22 |   |   | 0.21 |   |   |

 
| ** **                             | ** ** | **Three months ended**                                                | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **December 31,  2003**                                                     | ** ** | **September 30,  2003** | ** ** | **June 30,  2003** | ** ** | **March 31,  2003** | ** ** |
| ** **                             | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest income                        |       |                                                                            | $          | 14,520 |   |   |   | $ | 14,160 |   |   | $ | 13,768 |   |   | $ | 13,177 |   |   |
| Interest expense                       |       |                                                                            | 5,192      |   |   |   | 5,661 |   |   | 5,324 |   |   | 5,037 |   |   |
| Net interest  income                   |       |                                                                            | 9,328      |   |   |   | 8,499 |   |   | 8,444 |   |   | 8,140 |   |   |
| Provision for  loan losses             |       |                                                                            | 429        |   |   |   | 655 |   |   | 902 |   |   | 550 |   |   |
| Other operating  income                |       |                                                                            | 4,186      |   |   |   | 5,773 |   |   | 5,081 |   |   | 4,675 |   |   |
| Gain on sale of  securities            |       |                                                                            | 441        |   |   |   | 741 |   |   | 143 |   |   | 46 |   |   |
| Operating  expenses                    |       |                                                                            | 11,577     |   |   |   | 12,869 |   |   | 10,813 |   |   | 10,624 |   |   |
| Income before  taxes                   |       |                                                                            | 1,949      |   |   |   | 1,489 |   |   | 1,953 |   |   | 1,687 |   |   |
| Income tax  expense                    |       |                                                                            | 527        |   |   |   | 87 |   |   | 625 |   |   | 532 |   |   |
| Net income                             |       |                                                                            | $          | 1,422 |   |   |   | $ | 1,402 |   |   | $ | 1,328 |   |   | $ | 1,155 |   |   |
| Net income per  common share (Basic)   |       |                                                                            | $          | 0.25 |   |   |   | $ | 0.26 |   |   | $ | 0.25 |   |   | $ | 0.21 |   |   |
| Net income per common  share (Diluted) |       |                                                                            | 0.22       |   |   |   | 0.23 |   |   | 0.23 |   |   | 0.20 |   |   |

 

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**(19)   FinancialInformation of Parent Company**

The following is financialinformation of First Mariner Bancorp (parent company only):

**Statements of Financial Condition as of December 31,**
| ** **                                       | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                       | ** ** | **(dollars in thousands)** | ** ** |
| Assets:                                          |       |                                 |       |     |       |
| Cash and interest  bearing deposits              |       | $                                    | 16,525     |     | $          | 6,577 |   |
| Subordinated  notes                              |       | 5,000                                |       | —   |       |
| Loans receivable                                 |       | 11,331                               |       | 21,618   |       |
| Available-for-sale  securities                   |       | 1,531                                |       | 1,273    |       |
| Investment in subsidiaries                       |       | 84,485                               |       | 77,077   |       |
| Bank-owned life  insurance                       |       | 2,578                                |       | —   |       |
| Other assets                                     |       | 1,464                                |       | 1,246    |       |
| Total assets                                     |       | $                                    | 122,914    |     | $          | 107,791 |   |
| Liabilities and  Stockholders’ Equity:      |       |                                 |       |     |       |
| Other liabilities                                |       | $                                    | 351        |     | $          | 1,418 |   |
| Junior  subordinated debentures                  |       | 58,249                               |       | 47,939   |       |
| Stockholders’  equity                       |       | 64,314                               |       | 58,434   |       |
| Total liabilities  and stockholders’ equity |       | $                                    | 122,914    |     | $          | 107,791 |   |

 

**Statements of income for the years ended December 31,**
| ** **                                                          | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                          | ** ** | **(dollars in thousands)** | ** ** |
| Income:                                                             |       |                                 |       |     |       |     |       |
| Interest income on investments and interest bearing  deposits       |       | $                                    | 150        |     | $          | 189      |       | $ | 193 |   |
| Interest on subordinated note                                       |       | 274                                  |       | —   |       | —   |       |
| Interest income on loans                                            |       | 470                                  |       | 736      |       | 148      |       |
| Gain on sale of securities                                          |       | —                               |       | 1,124    |       | 103      |       |
| Other income                                                        |       | 741                                  |       | 642      |       | 525      |       |
| Total income                                                        |       | 1,635                                |       | 2,691    |       | 969      |       |
| Expenses:                                                           |       |                                 |       |     |       |     |       |
| Interest expense                                                    |       | 2,426                                |       | 2,631    |       | 1,884    |       |
| Professional expenses                                               |       | 248                                  |       | 204      |       | 188      |       |
| Other expenses                                                      |       | 304                                  |       | 1,279    |       | 233      |       |
| Total expenses                                                      |       | 2,978                                |       | 4,114    |       | 2,305    |       |
| Loss before income tax benefit                                      |       | (1,343                               | )          | (1,423   | )          | (1,336   | )          |
| Income tax  benefit                                                 |       | (489                                 | )          | (507     | )          | (473     | )          |
| Loss before equity in undistributed net income of  the subsidiaries |       | (854                                 | )          | (916     | )          | (863     | )          |
| Equity in  undistributed net income in subsidiaries                 |       | 6,955                                |       | 6,223    |       | 4,767    |       |
| Net income                                                          |       | $                                    | 6,101      |     | $          | 5,307    |       | $ | 3,904 |   |

 

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**Statements of Cash Flows for the years ended December 31,**
| ** **                                                                    | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                    | ** ** | **(in thousands)** | ** ** |
| Cash flows from  operating activities:                                        |       |                    |       |     |       |     |       |
| Loss before undistributed net income of subsidiaries                          |       | $                       | (854       | )        | $          | (916     | )          | $ | (863 | ) |
| (Gain) on sale of securities                                                  |       | —                  |       | (1,124   | )          | (103     | )          |
| (Increase) decrease in other assets                                           |       | (251                    | )          | (559     | )          | (306     | )          |
| Income from bank owned life insurance                                         |       | (78                     | )          | —   |       | —   |       |
| Increase (decrease) in other liabilities                                      |       | (1,067                  | )          | 523      |       | 308      |       |
| Net cash used in operating activities                                         |       | (2,250                  | )          | (2,076   | )          | (964     | )          |
| Cash flows from  investing activities:                                        |       |                    |       |     |       |     |       |
| Investment in subsidiaries                                                    |       | (1,810                  | )          | (4,430   | )          | (4,320   | )          |
| Loans (disbursements) repayments, net                                         |       | 10,287                  |       | (11,968  | )          | (7,000   | )          |
| Purchase of subordinated notes                                                |       | (5,000                  | )          | —   |       | —   |       |
| Purchase of available for sale securities                                     |       | (170                    | )          | (256     | )          | (460     | )          |
| Sale of available for sale securities                                         |       | —                  |       | 2,711    |       | 407      |       |
| Purchase of Bank-owned life insurance                                         |       | (2,500                  | )          | —   |       | —   |       |
| Net cash provided by (used in) investing activities                           |       | 807                     |       | (13,943  | )          | (11,373  | )          |
| Cash flows from  financing activities:                                        |       |                    |       |     |       |     |       |
| Proceeds from stock issuance, net                                             |       | 1,690                   |       | 2,793    |       | 249      |       |
| Repurchase of bank stock                                                      |       | (609                    | )          | —   |       | —   |       |
| Repayment of junior subordinated deferrable interest  debentures              |       | —                  |       | (22,050  | )          | —   |       |
| Proceeds from issuance of junior subordinated  deferrable interest debentures |       | 10,310                  |       | 37,639   |       | 10,300   |       |
| Net cash provided by financing activities                                     |       | 11,391                  |       | 18,382   |       | 10,549   |       |
| Net increase (decrease) in cash and interest bearing  deposits                |       | 9,948                   |       | 2,363    |       | (1,788   | )          |
| Cash and short-term  investments at beginning of year                         |       | 6,577                   |       | 4,214    |       | 6,002    |       |
| Cash and short-term  investments at end of year                               |       | $                       | 16,525     |     | $          | 6,577    |       | $ | 4,214 |   |

 

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**ITEM 9**                   CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

**ITEM 9A**           CONTROLS AND PROCEDURES

Senior management maintains disclosure controls andprocedures that are designed to ensure that information required to be disclosedin our exchange act reports is recorded, processed, summarized and reportedwithin the time periods provided in the SEC’s rules and forms, and thatsuch information is accumulated and communicated to our management, includingthe Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, senior management hasrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and therefore has been required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

In accordance with Rule 13a-15(b) ofthe Exchange Act, as of the end of the fiscal year ended December 31, 2004,we carried out an evaluation under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in rule 13a-15(e) and 15d-15(e) underthe Exchange Act. Based on that evaluation, our Chief Executive Officer andChief Financial Officer have concluded that our disclosure controls andprocedures are effective.

Management has elected not to file at this time“Management’s annual report on internal control over financial reporting”required by Item 308(a) of Regulation S-K (“Management’s Report”), and therelated “Attestation report of the registered public accounting firm”, requiredby Item 308(b) of Regulation S-K (“Attestation Report”) as permitted byparagraph (b) of the conditions of the Order Under Section 36 of the SecuritiesExchange Act of 1934 granting an exemption from specified provisions of ExchangeAct Rules 13a-1 and 15d-1 (Release No. 34-50754, November 30, 2004) (the “Order”).The Company intends to file the Management’s Report and the Attestation Reportwithin the 45-day period permitted by the Order.

During the quarter ended December 31,2004, there have been no changes in our internal controls over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, these controls.

**ITEM 9B   OTHERINFORMATION**

None.

**PART III**

**ITEM 10**            DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

Certain information relating to our directors andexecutive officers and our Section 16(a) beneficial ownershipreporting compliance is incorporated by reference herein from our proxystatement in connection with our Annual Meeting of Stockholders to be held on May 3,2005, which proxy statement will be filed with the Securities and ExchangeCommission no later than 120 days after the close of our fiscal year.

The information called forby Item 10 with respect to executive officers is set forth above in Part I,Item 4A under the caption “Executive Officers of the Registrant.”

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**Code of Ethics**

We have a Code of Conductand Ethics that applies to our employees, officers and directors, including ourprincipal executive officer, principal financial officer and principalaccounting officer. A copy of this Code of Conduct and Ethics is available onour website at www.1stmarinerbancorp.com (investor relations section), ora written copy can be obtained by request. We intend to disclose any changes inor waivers from our code by posting such information on our website. We alsohave adopted an Executive Code of Conduct and Ethics Policy that addresses (i) tradingprohibitions during “blackout period”; (ii) prohibitions against insidertrading; (iii) corporate opportunities; and (iv) loans to insiderspolicy.

**ITEM 11**            EXECUTIVE COMPENSATION

Certain informationrelating to our directors’ and executive officers’ compensation, ourCompensation Committee’s report on executive compensation, and our stockperformance is incorporated by reference herein from our definitive proxystatement in connection with our Annual Meeting of Stockholders to be held on May 3,2005, which proxy statement will be filed with the Securities and ExchangeCommission no later than 120 days after the close of our fiscal year.

**ITEM 12**            SECURITIES OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Certain information required by this item is set forthin the following sections of our Definitive Proxy Statement in connection withour 2005 Annual Meeting of Stockholders to be held on May 3, 2005, whichproxy statement will be filed with the Securities and Exchange Commission nolater than 120 days after the close of our fiscal year: “CertainBeneficial Ownership” and “Nominees for Director and Directors Continuing inOffice”.

For information regarding theCompany’s equity compensation plans, please refer to the table captioned“Equity Compensation Plans” in Item 5 of this Form 10-K.

**ITEM 13**            CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

Certain informationrelating to certain relationships and related transactions is incorporated byreference herein from our definitive proxy statement in connection with ourAnnual Meeting of Stockholders to be held on May 3, 2005, which proxystatement will be filed with the Securities and Exchange Commission no laterthan 120 days after the close of our fiscal year.

**ITEM 14**            PRINCIPAL ACCOUNTANTSFEES AND SERVICES

Information regarding fees paidto our independent accountants, Stegman & Company, is incorporated byreference herein from our definitive proxy statement in connection with ourAnnual Meeting of Stockholders to be held on May 3, 2005, which proxystatement will be filed with the Securities and Exchange Commission no laterthan 120 days after the close of our fiscal year.

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**PART IV**

**ITEM 15**            EXHIBITS AND FINANCIALSTATEMENT SCHEDULES
| a.     | (1), (2) Financial Statements                                                                                          |   |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   | Report of Independent  Registered Public Accounting Firm                                                                    |   | 45     |
|   | Consolidated  Statements of Financial Condition as of  December 31, 2004 and 2003                                      |   | 46     |
|   | Consolidated  Statements of Operations for the years ended  December 31, 2004, 2003 and 2002                           |   | 47     |
|   | Consolidated Statements  of Changes in Stockholders’ Equity for the years ended December 31,  2004, 2003 and 2002 |   | 48     |
|   | Consolidated Statements of Cash  Flows for the years ended  December 31, 2004, 2003 and 2002                           |   | 49     |
|   | Notes to Consolidated Financial  Statements for the years ended  December 31, 2004, 2003 and 2002                      |   | 50     |
|   | (a)(3) Exhibits Required to be filed by Item  601 of Regulation S-K.                                              |
|   | See Exhibit Index following Signatures                                                                                 |
| b.     | Exhibits required by Item 601 of Regulation S-K                                                                        |
|   | See the Exhibit Index following the Signatures                                                                         |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                            | FIRST MARINER BANCORP |
|----------------------------|-----------------------|
| Date: March 16,  2005 | By:                   | /s/  EDWIN F. HALE SR. |
|                       |                  | Edwin F. Hale Sr. |
|                       |                  | *Chairman  and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following person on behalf of the registrant in theircapacities as indicated on the 16th day of March 2005.
| /s/ EDWIN F. HALE SR.                           |   | /s/ MARK A. KEIDEL                            |
|-------------------------------------------------|--------|-----------------------------------------------|
| Edwin F. Hale  Sr., Chief Executive Officer and |   | Mark A. Keidel,  Chief Financial Officer      |
| Director                                        |   |                                          |
| /s/ JOSEPH A. CICERO                            |   | /s/ GEORGE H. MANTAKOS                        |
| Joseph A. Cicero,  President and Director       |   | George H.  Mantakos, Executive Vice President |
|                                            |   | and Director                                  |
| /s/ BARRY B. BONDROFF                           |   | /s/ BRUCE H. HOFFMAN                          |
| Barry B.  Bondroff, Director                    |   | Bruce H. Hoffman,  Director                   |
| /s/ JOHN BROWN III                              |   | /s/ JOHN J. OLIVER                            |
| John Brown III,  Director                       |   | John J. Oliver,  Director                     |
| /s/ THOMAS L. BROMWELL                          |   | /s/ PATRICIA SCHMOKE                          |
| Thomas L.  Bromwell, Director                   |   | Patricia Schmoke,  Director                   |
| /s/ EDITH B. BROWN                              |   | /s/ HANAN Y. SIBEL                            |
| Edith B. Brown,  Director                       |   | Hanan Y. Sibel,  Director                     |
| /s/ STEPHEN A. BURCH                            |   | /s/ LEONARD STOLER                            |
| Stephen A. Burch,  Director                     |   | Leonard Stoler,  Director                     |
| /s/ ROSE M. CERNAK                              |   | /s/ HECTOR TORRES                             |
| Rose M. Cernak,  Director                       |   | Hector Torres,  Director                      |
| /s/ HOWARD FRIEDMAN                             |   | /s/ MICHAEL R. WATSON                         |
| Howard Friedman,  Director                      |   | Michael R.  Watson, Director                  |

 

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**EXHIBITINDEX**
|        3.1 |   | Amended and Restated Articles of Incorporation of  First Mariner Bancorp (Incorporated by reference to Exhibit 3.1 of the  Registrant’s Registration Statement on Form SB-2, as amended, file  no. 333-16011 (the “1996 Registration Statement”)) |
|------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        3.2 |   | Amended and Restated Bylaws of First Mariner Bancorp  (Incorporated by reference to Exhibit 3.2 of First Mariner’s  Form 10-Q for the quarter ended September 30, 2002)                                                                                |
|     10.1                  |   | 1996 Stock Option Plan of First Mariner Bancorp  (Incorporated by reference to Exhibit 10.1 of the Registration  Statement)                                                                                                                                           |
|     10.2                  |   | Employment Agreement dated May 1, 1995 between  First Mariner Bancorp and First Mariner Bank and George H. Mantakos  (Incorporated by reference to Exhibit 10.2 of the 1996 Registration  Statement)                                                             |
|     10.3                  |   | Lease Agreement dated March 1, 1996 between  First Mariner Bank and Mars Super Markets, Inc. (Incorporated by  reference to Exhibit 10.3 of the 1996 Registration Statement)                                                                                |
|     10.4                  |   | Lease Agreement dated November 1, 1997 between  Edwin F. Hale, Sr. and First Mariner Bank (Incorporated by reference to  Exhibit 10.4 of Pre-Effective Amendment Number 1 to Form S-1,  file no. 333-53789-01)                                    |
|     10.5                  |   | 1998 Stock Option Plan of First Mariner Bancorp  (Incorporated by reference to Exhibit 10.5 of Pre-Effective  Amendment Number 1 to Form S-1, file no. 333- 53789-01)                                                                                       |
|     10.6                  |   | Employee Stock Purchase Plan of First Mariner  Bancorp (Incorporated by reference to Exhibit 10.6 of Pre-Effective  Amendment Number 1 to Form S-1, file no. 333-53789-01)                                                                                  |
|     10.7                  |   | Lease Agreement dated as of June 1, 1998  between Building #2, L.L.C. and First Mariner Bank (Incorporated by reference  to Exhibit 10.7 of Pre-Effective Amendment Number 1 to Form S-1,  file no. 333-53789-01)                                      |
|     10.8                  |   | Lease Agreement dated June 18, 2002 between  Hale Properties, LLC and First Mariner Bank (Incorporated by reference to  Exhibit 10.8 to First Mariner’s Form 10-Q for the quarter  ended June 30, 2002.)                                          |
|     10.9                  |   | First Mariner Bancorp 2002 Stock Option Plan  (Incorporated by reference to Attachment A to First Mariner’s Definitive  Proxy Statement filed on April 5, 2002)                                                                                                       |
|     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.)                        |

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|     10.17 |   | Change of Control Agreement dated April 2, 2003  between First Mariner Bancorp and Brett J. Carter (Incorporated by reference  to Exhibit 10.17 to the Company’s Form 10-Q for the quarter  ended March 31, 2003.)   |
|--------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     10.18 |   | Lease Agreement dated June 2, 2003 between  Canton Crossing LLC and First Mariner Bank (Incorporated by reference to  Exhibit 10.17 to the Company’s Form 10-Q for the quarter  ended September 30, 2003)            |
|     10.19 |   | First Mariner Bancorp 2004 Long-Term Incentive Plan  (incorporated by reference to Appendix B to First Mariner’s Definitive Proxy  Statement filed on April 1, 2004)                                                                     |
|     10.20 |   | First Mariner Bancorp 2003 Employee Stock Purchase  Plan (incorporated by reference to Appendix C to First Mariner’s Definitive  Proxy Statement filed on April 1, 2004)                                                                 |
|     10.21 |   | Purchase and Sale Agreement dated October 20, 2004  among First Mariner Bancorp, Canton Crossing LLC and Hale Canton, LLC  (incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form  8-K filed on October 22, 2004) |
|     10.22 |   | Form of Non-Qualified Stock Option Agreement under  the 2004 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1  to the Registrant’s Report on Form 8-K filed on January 31, 2005)                                      |
|     10.23 |   | Form of Incentive Stock Option Award Agreement under  the 2004 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2  to the Registrant’s Report on Form 8-K filed on January 31, 2005)                                    |
|     21    |   | Subsidiaries of Registrant filed herewith                                                                                                                                                                                                     |
|     23.1  |   | Consent of Stegman & Company filed herewith                                                                                                                                                                                          |
|     31.1  |   | Certifications of Chief Executive Officer pursuant  to Rule 13a-14(a) and Rule 15d-14(a), promulgated  under the Securities Exchange Act of 1934, as amended, filed herewith                                                   |
|     31.2  |   | Certifications of Chief Financial Officer pursuant  to Rule 13a-14(a) and Rule 15d-14(a), promulgated  under the Securities Exchange Act of 1934, as amended, filed herewith                                                   |
|     32.1  |   | Certifications of Chief Executive Officer pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002, furnished herewith.                                                                 |
|     32.2  |   | Certifications of Chief Financial Officer pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002, furnished herewith.                                                                 |
|     99.1  |   | Risk Factors filed herewith                                                                                                                                                                                                                   |

 

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