**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,  2005.**                                                                                                                                                                                                                                                                                                                                                                                         |
| **or**                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF**                            |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **THE SECURITIES EXCHANGE ACT OF 1934**                                                        |
| **For the 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 registered underSection 12(b) of the Exchange Act: **NONE**

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

**COMMON STOCK, par value$0.05 per share**

(Title of Class)

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

Indicate by check mark whether the registrant (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such report, and (2) hasbeen subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark if disclosure of delinquentfilers in response to Item 405 of Regulation S-K is not contained in thisform, and no disclosure will be contained, to the best of registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

| Large accelerated filer o |   | Accelerated  filer  x |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------------|--------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o  No x

The aggregate market value of the voting stock held bynon-affiliates of the registrant as of the last business day of the registrant’smost recently completed second fiscal quarter was approximately$77.190 million. Shares of Common Stock owned by each executive officerand directors have not been included as such persons are deemed to beaffiliates.

The number of shares of common stock outstanding as of March 1,2006 is 6,268,262 shares.

Documentsincorporated by reference:Proxy Statement—Part III.

 

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**FIRST MARINER BANCORP**

**Annual Report on Form 10-KDecember 31, 2005**

**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                                  | ** ** | **Page** | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |                                                                                                                        |
| Item 1            |       | Business                                                                                                                    |       |     | 3          |   |   |
| Item 1A           |       | Risk  Factors                                                                                                               |       |     | 14         |   |   |
| Item 1B           |       | Unresolved Staff Comments                                                                                                   |       |     | 18         |   |   |
| Item 2            |       | Properties                                                                                                                  |       |     | 18         |   |   |
| Item  3           |       | Legal  Proceedings                                                                                                          |       |     | 22         |   |   |
| Item 4            |       | Submission of Matters to a Vote of Security Holders                                                                         |       |     | 22         |   |   |
| Item 4A           |       | Executive Officers of the Registrant                                                                                        |       |     | 22         |   |   |
| **PART II**  |       |                                                                                                                        |
| Item 5            |       | Market for the Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |     | 23         |   |   |
| Item  6           |       | Selected  Financial Data                                                                                                    |       |     | 25         |   |   |
| Item 7            |       | Management’s Discussion and Analysis of Financial  Condition and  Results of Operations                                |       |     | 26         |   |   |
| Item 7A           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                 |       |     | 52         |   |   |
| Item 8            |       | Financial Statements and Supplementary Data                                                                                 |       |     | 53         |   |   |
| Item 9            |       | Changes in and Disagreements with Accountants on  Accounting and  Financial Disclosures                                     |       |     | 86         |   |   |
| Item  9A          |       | Controls  and Procedures                                                                                                    |       |     | 86         |   |   |
| Item  9B          |       | Other  Information                                                                                                          |       |     | 89         |   |   |
| **PART III** |       |                                                                                                                        |
| Item 10           |       | Directors and Executive Officers of the Registrant                                                                          |       |     | 89         |   |   |
| Item  11          |       | Executive  Compensation                                                                                                     |       |     | 89         |   |   |
| Item 12           |       | Security Ownership of Certain Beneficial Owners and  Management and  Related Stockholder Matters                       |       |     | 89         |   |   |
| Item 13           |       | Certain Relationships and Related Transactions                                                                              |       |     | 90         |   |   |
| Item 14           |       | Principal Accountant’s Fees and Services                                                                               |       |     | 90         |   |   |
| **PART IV**  |       |                                                                                                                        |
| Item 15           |       | Exhibits and Financial Statement Schedules                                                                                  |       |     | 91         |   |   |

 

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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 (“Finance Maryland”),and FM Appraisals, LLC (“FM Appraisals”). We were formed in 1995 and have grownto become the fourth largest publicly traded bank holding company headquarteredin Maryland, with total assets in excess of $1.362 billion as of December 31,2005. Our executive offices are located in the Canton area of Baltimore City at3301 Boston Street, Baltimore, Maryland 21224. Our telephone number is(410) 342-2600. We maintain internet sites located atwww.1stmarinerbank.com, www.1stmarinerbancorp.com, www.1stmarinermortgage.com,www.vamortgage.com and www.financemaryland.com.

The Bank is our largest operating subsidiary withassets exceeding $1.278 billion as of December 31, 2005. 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, operateson a regional and even national basis. First Mariner Bank is an independentcommunity bank, 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,money 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 14 branchesand a central approval office in the state of Maryland and four branches in thestate of Delaware, which operate under the trade name “Finance Delaware.”Finance Maryland had total assets of $49.271 million as of December 31,2005.

FM Appraisals, which commenced operations in thefourth quarter of 2003, is a residential real estate appraisal preparation andmanagement company that is headquartered in Baltimore City. FM Appraisalsoffers appraisal services for residential real estate lenders, includingappraisal preparation, the compliance oversight of sub-contracted appraisers,appraisal ordering and administration, and appraisal review services. FMAppraisals has historically provided these services to First Mariner Mortgage,but expects to market appraisal management services to outside lenders in 2006.

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 ATMs in theBaltimore region, with total assets of $35.2 million, loans of$20.4 million, and deposits of $24.6 million. At December 31,2005, we had over 730 employees, 25 full service bank branches, 12 mortgageloan offices, 18 consumer finance offices, and approximately 195 ATMs (53 ownedby us and 142 available to our customers through 

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third party agreements)with total assets of $1.362 billion, loans of $851.586 million anddeposits of $876.010 million. We earned net income of $7.822 millionfor the year ending December 31, 2005.

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 Business Strategy**

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 of revenue;

·       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

·       Adhere to rigorous creditstandards to maintain the continued quality of our assets as we implement ourgrowth strategy.

**Financial Services We Provide**

*CommercialBanking.**  *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 ourcommercial customers.

*RetailBanking.**  *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 

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second mortgages, new andused auto loans, new and used boat loans, overdraft protection and unsecuredpersonal credit lines.

*Mortgage-Banking.**  *Our mortgage-banking business isstructured to provide a source of fee income largely from the process oforiginating residential mortgage loans for sale on the secondary market, aswell as the origination of loans to be held in our loan portfolio. Mortgage-bankingproducts include Federal Housing Administration (“FHA”) and the federalVeterans Administration (“VA”) loans, conventional and nonconforming first andsecond mortgages, reverse mortgages, and construction and permanent financing.We intend to improve our competitive position in our markets by streamliningthe mortgage underwriting process through the introduction of advancedtechnology, and development of new products to meet our customers’ needs.

*CommunityReinvestment 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 federally funded American Dream Downpayment Initiative, the MarylandMortgage Program (CDA), the Federal Home Loan Bank of Atlanta Closing CostAssistance Program, the Section 8 to Home-Ownership Program and theSettlement Expense Loan Program.

*Consumer Finance.**  *We offer a wide variety of consumerfinance products through Finance Maryland, which was formed in July 2002,and is currently focused on building market share by offering competitiveproducts and services, delivered by experienced personnel who provide responsiveservice. Loan sizes are generally smaller than those originated by the Bank(approximately $2,300), and Finance Maryland currently serves approximately19,000 customers in Maryland and Delaware.

**Our Lending Activities**

*LoanPortfolio Composition.**  *AtDecember 31, 2005, our loan portfolio totaled $851.586 million,representing approximately 62.5% of our total assets of $1.362 billion.Our loans are generally secured by residential and commercial real estate, andover 85% of our total loans as of December 31, 2005 were secured by realestate. The majority of our lending activity is in the Mid-Atlantic region. See“Item 7—Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” for the year ended December 31, 2005 for more detailedinformation concerning the composition of our loan portfolio.

*RealEstate Development and Construction 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 consideration private mortgage insurance. Our real estatedevelopment and construction loan funds are disbursed periodically atpre-specified stages of completion. We carefully monitor these loans withon-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.

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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 Item 7—“Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for the year ended December 31,2005 for more detailed information concerning our real estate development andconstruction lending.

*ResidentialReal Estate Mortgage Loans.**  *We originate adjustable and fixed-rateresidential mortgage loans. Our mortgage loans are generally originated underterms, conditions and documentation acceptable to the secondary mortgagemarket. We will place some of these loans into our portfolio, although the vastmajority are ultimately sold to investors.

*CommercialReal Estate Mortgage Loans.**  *We originate mortgage loans secured by commercialreal estate. These loans are primarily secured by office buildings, retailbuildings, warehouses and general-purpose business space. Although terms mayvary, our commercial mortgages generally have maturities of ten years or less.It is our general policy to obtain personal guarantees from the principals ofthe borrowers and assignments of all leases related to the collateral.

*CommercialLoans.**  *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.

*Consumer Loans.**  *The Bank and Finance Maryland offera variety of consumer loans. Consumer loans originated by the Bank aretypically secured by residential real estate or personal property, includingautomobiles and boats. Our home equity loans (closed-end and lines of credit)are typically made up to 80% of the appraised value, less the amount of anyexisting prior liens on the property and generally have maximum terms of10 years. We do offer home equity products with loan to values of up to100%, and mitigate our risk of loss on higher loan to value products withprivate mortgage insurance. The interest rates on our closed-end home equityloans are generally fixed, while interest rates on our home equity lines ofcredit are variable. Consumer finance products offered through Finance Marylandinclude loans for the purchase of consumer goods, direct cash lending, loansfor seasonal purposes, and loans originated though direct mail solicitation.Loans made by Finance Maryland are generally for terms less than five years,carry a fixed rate of interest, and are generally secured by consumer goods,including automobiles. Finance Maryland also originates a limited number ofclosed-end home equity loans.

**Our Credit Administration 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 

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policies. For significantproblem loans, we review and evaluate the financial strengths of our borrowerand the guarantor, the related collateral and the effects of economicconditions.

Our loan approval policies provide 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 approximates $15.8 million as of December 31, 2005. We haveestablished 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 established relationshipwith us and conducts its principal business operations within our market area.Consequently, we and our borrowers are affected by the economic conditionsprevailing in our market area. Approximately 81% of our real estate developmentand construction loan portfolio consisted of loans to Maryland customers; anadditional 18% consisted of loans to customers in the surrounding states andthe District of Columbia; and less than 1% consisted of loans to customers inother states in the country. Approximately 79% of our commercial loan portfolio(both commercial and commercial real estate) consisted of loans to Marylandcustomers with an additional 16% consisting of loans to customers in thesurrounding states and the District of Columbia. Commercial and commercial realestate loans to customers in other states in the country amounted toapproximately 5% of our portfolio.

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.

**Market**

We consider our coremarket area to be the communities within the Baltimore/Washington corridor, includingthe eastern shore of Maryland and particularly Baltimore City and the countiesof Baltimore, Anne Arundel, Harford, and Howard. Lending activities are broaderand include areas outside of our core market area such as other Marylandcounties, the District of Columbia and certain markets in contiguous states.

**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 financial 

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institutions operating inour market area offer certain services such as trust and international banking,which we do not offer, and have greater financial resources or havesubstantially 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 accommodate a customer’s needs, we will arrange forthose services to be provided by other financial institutions with which wehave a relationship.

Current banking lawsfacilitate interstate branching and merger activity among banks. This mayresult in an even greater degree of competition in the banking industry and wemay be brought into competition with institutions with which we do notcurrently compete. As a result, intense competition in our market area may beexpected to continue for the foreseeable future.

**Supervision and Regulation**

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.

*FederalFinancial Holding Company Regulation 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 (“Federal Reserve” or “FRB”).First Mariner is required to file annual and quarterly reports with the FederalReserve and to provide the Federal Reserve with such additional information asthe Federal Reserve may require. The Federal Reserve may conduct examinationsof First Mariner 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 

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of credit, lease or saleof property, 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 an extension of credit to the customer. TheFederal Reserve has ended the anti-tying rules for financial holdingcompanies and their non-banking subsidiaries. Such rules were retained forbanks.

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 the holdingcompany does not have the resources to provide it. In addition, depositoryinstitutions insured by the FDIC can be held liable for any losses incurred by,or reasonably anticipated to be incurred by, the FDIC in connection with thedefault of, or assistance provided to, a commonly controlled FDIC-insureddepository institution. Accordingly, in the event that any insured subsidiaryof First Mariner causes a loss to the FDIC, other insured subsidiaries could berequired to compensate the FDIC by reimbursing it for the estimated amount ofsuch loss. Such cross guaranty liabilities generally are superior in priorityto the obligations of the depository institution to its stockholders due solelyto their status as stockholders and obligations to other affiliates.

*StateBank Holding Company Regulation.**  *As a Maryland bank holding company,First Mariner is subject to various restrictions on its activities as set forthin Maryland law, in addition to those restrictions set forth in federal law.Under Maryland law, a bank holding company that desires to acquire a bank orbank holding 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.

*Federaland State Bank Regulation.**  *First Mariner’s banking subsidiary is a Marylandchartered trust company, with all the powers of a commercial bank regulated andexamined by the Maryland Commissioner and the FDIC. The FDIC has extensiveenforcement authority over the institutions it regulates to prohibit or correctactivities that violate law, regulation or written agreement with the FDIC.Enforcement powers also regulate activities that are deemed to constituteunsafe or unsound practices. Enforcement actions may include the appointment ofa conservator or receiver, the issuance of a cease and desist order, thetermination of deposit insurance, the imposition of civil money penalties onthe institution, its directors, officers, employees and institution-affiliatedparties, the issuance of directives to increase capital, the issuance of formaland informal agreements, the removal of or restrictions on directors, officers,employees and institution-affiliated parties, and the enforcement of anysuch mechanisms 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 and families,consistent with the safe and sound operation of those banks. These factors arealso considered by all regulatory agencies in evaluating 

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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.”

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 andinternal audit systems, loan documentation, credit underwriting, interest rateexposure, 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 new branch offices, the Bank mustmeet certain minimum capital stock and surplus requirements. With each newbranch located outside the municipal area of the Bank’s principal banking office,these minimal levels increase by $120,000 to $900,000, based on the populationsize of the municipal area in which the branch will be located. Prior toestablishment of the branch, the Bank must obtain Commissioner and FDICapproval. If establishment of the branch involves the purchase of a bankbuilding or furnishings, the total investment in bank buildings and furnishingscannot exceed, with certain exceptions, 50% of the Bank’s unimpaired capitaland surplus.

*FinancialServices Modernization.**  *Effective in pertinent part on March 11, 2000,the federal Gramm-Leach-Bliley Act (“GLBA”) revises the federalBank Holding Company Act of 1956 and repeals the affiliation provisions of thefederal Glass-Steagall Act of 1933, which, taken together, limited the securities,insurance, and other non-banking activities of any company that controls anFDIC insured financial institution. Under the GLBA, bank holding companies canelect, subject to certain qualifications, to become a “financial holdingcompany.” First Mariner made an election to become a financial holding companyin 2002 and, as such, First Mariner may engage in activities that are inaddition to the business of banking. The GLBA provides that a financial holdingcompany may engage in a full range of financial activities, including insuranceand securities sales and underwriting activities, real estate development, and,with certain exceptions, merchant banking activities, with new expedited noticeprocedures. The 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.

*DepositInsurance.**  *Asan FDIC member institution, deposits of the Bank are currently insured to amaximum of $100,000 per depositor through the Savings Association InsuranceFund (“SAIF”), administered by the FDIC. Insured financial institutions aremembers of either SAIF or the Bank Insurance Fund (“BIF”). SAIF membersgenerally are savings and loan associations or savings banks, including banksand trust companies that have converted from a savings and loan association orsavings bank to a commercial bank or trust company or bank and trust companiesthat have acquired SAIF deposits. The Bank is a converted federal savings bank;therefore, its deposits are insured through SAIF. Mergers or transfers ofassets between SAIF and BIF members generally are permitted with the assumingor resulting depository institution making payments of SAIF assessments on theportion of liabilities attributable to the SAIF-insured institution.

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The FDIC is required to establish the semi-annualassessments for BIF- and SAIF-insured depository institutions at a ratedetermined to be appropriate to maintain or increase the reserve ratio of therespective deposit insurance funds at or above 1.25% of estimated insureddeposits or at such higher percentage that the FDIC determines to be justifiedfor that year by circumstances raising significant risk of substantial futurelosses to the fund. Assessments are made on a risk-based premium system with ninerisk classifications based on certain capital and supervisory measures.Financial institutions with higher levels of capital and involving a low degreeof supervisory concern are assessed lower premiums than financial institutionswith lower levels of capital or involving a higher degree of supervisoryconcern.

On February 8, 2006, the Federal  Deposit Insurance Reform Act (“Reform Act”)of 2005 was signed into law. The Reform Act increases the general limit ondeposit insurance based on consumer price inflation, with the first increasetaking effect on January 1, 2011, and additional adjustments made everyfive years thereafter. In addition, the Reform Act gives the FDIC the authorityto manage its reserves more flexibly and over a longer time horizon by rescindingthe automatic trigger of 1.25% of estimated insured deposits.

*Limitson Dividends and Other Payments.**  *First Mariner’s current ability topay dividends is largely dependent upon the receipt of dividends from itsbanking subsidiary. Both federal and state laws impose restrictions on theability of the Bank to pay dividends. Federal law prohibits the payment of adividend by an insured depositoryinstitution like the Bank if the depository institution is considered “undercapitalized”or if the payment of the dividend would make the institution “undercapitalized.”See “Federal Deposit Insurance Corporation Improvement Act of 1991” below. Wedo not anticipate that such provisions will be applied to the Bank. The FederalReserve has issued a policy statement which provides that, as a general matter,insured banks and bank holding companies may pay dividends only out of prioroperating earnings. For a Maryland chartered bank or trust company, dividendsmay be paid out of undivided profits or, with the prior approval of theCommissioner, from surplus in excess of 100% of required capital stock. Ifhowever, the surplus of a Maryland bank is less than 100% of its requiredcapital stock, cash dividends may not be paid in excess of 90% of net earnings.In addition to these specific restrictions, bank regulatory agencies also havethe ability to prohibit proposed dividends by a financial institution whichwould otherwise be permitted under applicable regulations if the regulatorybody determines that such distribution would constitute an unsafe or unsoundpractice.

*CapitalRequirements.**  *TheFederal Reserve and FDIC have adopted certain risk-based capital guidelines toassist in the assessment of the capital adequacy of a banking organization’soperations for both transactions reported on the balance sheet as assets andtransactions, such as letters of credit and recourse arrangements, which arerecorded as off balance sheet items. Under these guidelines, nominal dollaramounts of assets and credit equivalent amounts of off balance sheet items aremultiplied by one of several risk adjustment percentages, which range from 0% forassets with low credit risk, such as certain U.S. Treasury securities to 100%for assets with relatively high credit risk, such as business loans.

A bankingorganization’s risk-based capital ratio is obtained by dividing its qualifyingcapital by its total risk adjusted assets. The regulators measure risk-adjustedassets, which include off balance sheet items, against both total qualifyingcapital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) andTier 1 capital. “Tier 1,” or core capital includes common equity, perpetualpreferred stock (excluding auction rate issues), trust preferred securities(limited to one-third of other Tier 1 components), and minority interest inequity accounts of consolidated subsidiaries (less goodwill and otherintangibles), subject to certain exceptions. “Tier 2,” or supplementarycapital, includes, among other things, limited-life preferred stock, hybridcapital instruments, mandatory convertible securities and trust preferredsecurities (above amounts not qualifying as Tier 1 capital), qualifying andsubordinated debt, and the allowance for loan and lease losses, subject tocertain limitations and less required deductions. The inclusion of elements ofTier 2 capital is subject to certain other requirements and limitations of thefederal banking agencies. Banks and bank holding companies, subject to therisk-based capital guidelines are required to maintain a 

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ratio of Tier 1 capital torisk-weighted assets of at least 4% and a ratio of total capital to risk-weightedassets of at least 8%. The appropriate regulatory authority may set highercapital requirements when particular circumstances warrant. In addition torisk-based capital, banks and bank holding companies are required to maintain aminimum amount of Tier 1 capital to quarterly average assets, referred to asthe leverage capital ratio, of at least 4%. First Mariner and the Bankmaintained capital ratios that exceeded these minimum standards. See “Item 7—Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” forthe year ended December 31, 2005 for more detailed information concerningcapital 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 utilizes 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 applicable capital guidelines couldsubject a banking organization to a variety of enforcement actions, includinglimitations on its ability to pay dividends, the issuance by the applicableregulatory authority of a capital directive to increase capital and, in thecase of depository institutions, the termination of deposit insurance by theFDIC, as well as the measures described under “Federal Deposit InsuranceCorporation Improvement Act of 1991” below, as applicable to undercapitalizedinstitutions. In addition, future changes in regulations or practices couldfurther reduce the amount of capital recognized for purposes of capitaladequacy. Such a change could affect the ability of the Bank to grow and couldrestrict the amount of profits, if any, available for the payment of dividendsto First Mariner.

*FederalDeposit Insurance Corporation Improvement Act of 1991.*   InDecember 1991, Congress enacted FDICIA, which substantially revised thebank regulatory and funding provisions of the Federal Deposit Insurance Act andmade significant revisions to several other federal banking statutes. FDICIAprovides for, among other things, (i) publicly available annual financialcondition and management reports for financial institutions, including auditsby independent accountants, (ii) the establishment of uniform accountingstandards by federal banking agencies, (iii) the establishment of a “promptcorrective action” system of regulatory supervision and intervention, based oncapitalization levels with more scrutiny and restrictions placed on depositoryinstitutions with lower levels of capital, (iv) additional grounds for theappointment of a conservator or receiver, and (v) restrictions orprohibitions 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 

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institution wouldthereafter be undercapitalized. Undercapitalized depository institutions aresubject to growth limitations and are required to submit capital restorationplans. If a depository institution fails to submit an acceptable plan, it istreated 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 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 the federal banking agencies withsignificantly expanded powers to take enforcement action against institutionsthat fail to comply with capital or other standards. Such action may includethe termination of deposit insurance by the FDIC or the appointment of areceiver or conservator for the institution. FDICIA also limits thecircumstances under which the FDIC is permitted to provide financial assistanceto an insured institution before appointment of a conservator or receiver.

*InterstateBanking Legislation.*   The Riegle-Neal InterstateBanking and Branching Efficiency Act of 1994 (“Riegle-Neal”) was enacted intolaw on September 29, 1994. Riegle-Neal authorized federal banking agenciesto approve interstate bank merger transactions even if such transactions areprohibited by the laws of a state. An exception to such authorization arises ifthe home state of one of the banks that is a party to the merger transactionopted out of the merger provisions of Riegle-Neal by adopting a law after thedate of the enactment of the Riegle-Neal and prior to June 1, 1997. Theselaws must apply equally to all out-of-state banks and expressly prohibit mergertransactions involving out-of-state banks. Riegle-Neal also permits interstatebranch acquisitions if the laws of the state where the branch is locatedpermits interstate branch acquisitions. The interstate merger and branchacquisitions permitted by Riegle-Neal are subject to nationwide and statewideinsured deposit limitations as described in Riegle-Neal.

Riegle-Neal also authorizes the federal bankingagencies to approve *de novo*interstate branching by national and state banks in states which specificallyallow for such branching. To our knowledge, only two states, Texas and Montana,have opted out of the Riegle-Neal provisions relating to interstate mergers,acquisitions of branches and establishment of de novo branches. We anticipatethat Riegle-Neal may increase competition within our market area, although wecannot predict the timing or the extent of such increased competition.

*PrivacyLegislation.**  *CurrentFederal banking rules limit the ability of banks and other financialinstitutions to disclose non-public financial information about customers tonon-affiliated third parties. Under these rules, financial institutions mustprovide initial notices to customers about their privacy policies that providea description of the conditions under which they may disclose non-publicpersonal information to non-affiliated third parties and affiliates.Institutions must also provide annual notices to current customers that providea reasonable method for customers to “opt out” of disclosures to non-affiliatedparties. These policies affect how customer information is transmitted throughdiversified financial companies and conveyed to third parties. We have implementedour privacy policies in accordance with the law.

*USAPatriot Act.**  *TheUSA Patriot Act of 2001 significantly increased the anti-money laundering andfinancial transparency 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 parties that may be involved in terrorism or money laundering. Thelaw requires reporting of financial businesses to report cash transactions inexcess of $10,000 to the U.S. Treasury Department, and also requires reportingof suspicious customer activities.

*Sarbanes-Oxley Act of 2002.*   The Sarbanes-Oxley Act of 2002comprehensively revised the laws affecting corporate governance, accountingobligations and corporate reporting for companies, such as the 

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Company, withequity or debt securities registered under the Securities Exchange Act of 1934.In particular, the Sarbanes-Oxley Act established: 1) new requirements foraudit committees, including independence, expertise, and responsibilities; 2)additional responsibilities regarding financial statements for the ChiefExecutive Officer and Chief Financial Officer of the reporting company; 3) newstandards for auditors and regulation of audits; 4) increased disclosure andreporting obligations for the reporting company and its directors and executiveofficers; and 5) new and increased civil and criminal penalties for violationof the securities laws.

**EconomicMonetary Policies and Economic Controls**

We are affected bymonetary policies of regulatory agencies, including the Federal Reserve Board,which regulates the national money supply in order to mitigate recessionary andinflationary pressures. Among the techniques available to the Federal ReserveBoard are: engaging in open market transactions in U.S. Government securities,changing the discount rate on bank borrowings, changing reserve requirementsagainst bank deposits, prohibiting the payment of interest on demand deposits,and imposing conditions on time and savings deposits. These techniques are usedin varying combinations to influence the overall growth of bank loans,investments and deposits. Their use may also affect interest rates charged onloans or paid on deposits. The effect of governmental policies on our earningscannot be predicted. However, our earnings will be impacted by movement ininterest rates, as discussed in Part II Item 7A—“Quantitative andQualitative Disclosures About Market Risk.”

**ITEM 1A**           RISKFACTORS

***Our Future Depends on the Successful Growth of theBank and Finance Maryland***

Our primary businessactivity for the foreseeable future will be to act as a financial holdingcompany. Our future profitability will therefore depend on the success andgrowth of First Mariner Bank (the “Bank”) and Finance Maryland, LLC (“FinanceMaryland”). Our growth will depend, in large part, on our ability to leverageour existing infrastructure. The inability of the Bank to expand its businesswithout substantially increasing the number of branches, the inability of ourmortgage division to grow its residential mortgage business withoutsubstantially increasing its number of offices, or the inability of FinanceMaryland to grow its consumer portfolio without substantially increasing itsnumber of offices may prevent us from realizing our growth objectives.

***A SignificantAmount of Our Business is Concentrated in Real Estate Lending, and Most of thisLending Involves Maryland Real Estate***

Approximately 28% of our loan portfolio is comprisedof commercial and consumer real estate development and construction loans,which are secured by the real estate being developed in each case. In additionto the risk that the market values of the real estate securing these loans maydeteriorate, these loans are also subject to the development risks that theprojects will not be completed in a timely manner, or according to originalspecifications. Real estate development and construction projects that are notcompleted in a timely manner, or according to original specifications, aregenerally less marketable than projects that are fully developed. The loansunderlying such projects may be subject to greater losses in the event that thereal estate collateral becomes the source of repayment.

In addition to the financial strength and cash flowcharacteristics of the borrower in each case, the Bank often secures its loanswith real estate collateral. At December 31, 2005, approximately 85% ofthe Bank’s loans have real estate as a primary, secondary or tertiary componentof collateral. The real estate collateral in each case provides an alternatesource of repayment in the event of default by the borrower, and maydeteriorate in value during the time the credit is extended. If we are requiredto liquidate the 

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collateral securing a loanduring a period of reduced real estate values to satisfy the debt, our earningsand capital could be adversely affected.

Additionally, because mostof our loans are concentrated in Maryland, a decline in local economicconditions could adversely affect the values of real estate in Maryland.Consequently, a decline in local economic conditions may have a greater effecton our earnings and capital than on the earnings and capital of largerfinancial institutions whose real estate loan portfolios are geographicallydiverse.

***Mortgage-Banking Activities Generate a SignificantPortion of Our Noninterest Income***

A significant portion of ourbusiness involves making residential mortgage loans through our mortgagedivision, which accounted for over 31% and 25% of our noninterest income forthe years ended December 31, 2005 and 2004, respectively. Real estate loanorigination activity, including refinancings, is generally greater duringperiods of low or declining interest rates and favorable economic conditions,and has been favorably affected by relatively lower market interest ratesduring the past three years. There is no assurance that such favorableconditions will continue; any adverse change in market conditions could have anadverse impact on our earnings. Moreover, most of our residential mortgageloans are secured by Maryland real estate; therefore, a decline in localeconomic conditions could also adversely impact our earnings.

***We May Experience Loan Losses in Excess of theAllowance***

The risk of credit losses on loans varies with, amongother things, general economic conditions, the type of loan being made, thecreditworthiness of the borrower over the term of the loan and, in the case ofa collateralized loan, the value and marketability of the collateral for theloan. Management maintains an allowance for loan losses based upon, among otherthings, historical loss experience in the loan portfolios, the levels andtrends in past-due and nonaccrual loans, the status of nonaccrual loans andother loans identified as having the potential for further deterioration,credit risk and industry concentrations, trends in loan volume, the effects ofany changes in lending policies and procedures or underwriting standards, and acontinuing evaluation of the economic environment.

Based upon such factors, management makes variousassumptions and judgments about the ultimate collectibility of the loanportfolio and provides an allowance for loan losses based upon a percentage ofthe outstanding balances and for specific loans when their ultimatecollectibility is considered questionable. If management’s assumptions andjudgments prove to be incorrect and the allowance for loan losses is inadequateto absorb future losses, or if regulatory authorities require the Bank orFinance Maryland to increase the allowance for loan losses as a part of theirexamination process, our earnings and capital could be significantly andadversely affected.

As of December 31,2005, the allowance for loan losses was $11.743 million, which represented1.38% of outstanding loans, net of unearned income. At such date, we hadnonaccruing loans totaling $3.019 million. Management actively administersits nonaccruing loans in an effort to minimize credit losses. Althoughmanagement believes that its allowance for loan losses is adequate, there canbe no assurance that the allowance will prove sufficient to cover future loanlosses. Further, although management uses the best information available tomake determinations with respect to the allowance for loan losses, futureadjustments may be necessary if economic conditions differ substantially fromthe assumptions used or adverse developments arise with respect to non performingor performing loans. Material additions to the allowance for loan losses wouldresult in a decrease in net income and capital, and could have a materialadverse effect on us.

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***We currently hold a significant level of Bank OwnedLife Insurance***

We currently hold asignificant level of Bank Owned Life Insurance on key employees and executivesthat have cash surrender values of $27.375 million as of December 31, 2005.The eventual repayment of the cash surrender value is subject to the ability ofvarious insurance companies to pay benefits in the event of the death of aninsured employee, or return the cash surrender value to us in the event of ourneed for liquidity. We continuously monitor the financial strength of thevarious insurance companies with whom we carry policies. However, there is noassurance that one or more of these companies will not experience a decline infinancial strength which could impair its ability to pay benefits or return ourcash surrender value. Additionally, should we need to liquidate these policiesfor liquidity needs, we would be subject to taxation on the increase in cashsurrender value as well as penalties for early termination of the insurancecontracts. These events would have a negative impact on our earnings.

***Economic Conditions and Monetary Policy***

Our operating results will depend to a great extentupon the rate differentials between the yields earned on our loans, securitiesand other earning assets and the rates paid on our deposits and otherinterest-bearing liabilities. These rate differentials are highly sensitive tomany factors beyond our control, including general economic conditions and thepolicies of various governmental and regulatory authorities, in particular theFederal Reserve Board. The makeup of our loan and deposit portfolios, inparticular, determines our sensitivity to these factors. At December 31,2005, we had a one year cumulative interest sensitivity gap of $167.664 million.See Item 7A—“Quantitative and Qualitative Disclosures About Market Risk.”

Like other depositoryinstitutions, the Company is affected by the monetary policies implemented bythe Federal Reserve Board and other federal entities. A primary instrument ofmonetary policy employed by the Federal Reserve Board is the restriction orexpansion of the money supply through open market operations, including thepurchase and sale of government securities and the adjustment of reserverequirements. These actions may at times result in significant fluctuations ininterest rates, which could have adverse effects on our operations. Inparticular, our ability to make loans, attract deposits and realize gains onthe sale of residential mortgage loans, as well as public demand for loans,could be adversely affected. See Item 1—“ Business—Economic Monetary Policiesand Economic Controls.”

***Our Ability to Pay Cash Dividends is Limited***

Holders of shares of our common stock are entitled todividends if declared by our board of directors out of funds legally availablefor that purpose. Although the board of directors has declared cash dividendsin the past, it has discontinued such payments to conserve cash and capitalresources, and does not intend to declare cash dividends until current earningsare sufficient to generate adequate internal capital to support growth. Ourcurrent ability to pay dividends is largely dependent upon the receipt ofdividends from the Bank. Federal and state laws impose restrictions on theability of the Bank to pay dividends. Additional restrictions are placed uponus by the policies of federal regulators, including the FRB’s November 14,1985 policy statement, which provides that bank holding companies should paydividends only out of the past year’s net income, and then only if theirprospective rate of earnings retention appears consistent with their capitalneeds, asset quality, and overall financial condition.

Our ability to pay dividends is further subject to ourability to make payments of interest under junior subordinated debentures duethrough 2035 held by our statutory trusts Mariner Capital Trust II, III,IV, V, VI, VII, and VIII (“the trusts”). These payments are necessary to fundthe distributions that the trusts each must pay to holders of its trustpreferred securities (collectively, the “Mariner Trust Preferred Securities”).If we are unable to make such payments, if we determine to defer such payments,or if we default under our other obligations in connection with the MarinerTrust Preferred Securities, we will not be permitted 

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to pay dividends toholders of our common stock until such time as we recommence making payments orare not otherwise in default.

In general, futuredividend policy is subject to the discretion of the board of directors and willdepend upon a number of factors, including the future earnings, capitalrequirements, regulatory constraints, and our financial condition as well asthat of the Bank and Finance Maryland.

***Our Management Controls a Significant Percentage ofOur Stock***

At December 31, 2005,our directors and executive officers beneficially owned approximately 30%shares of our common stock (either directly or with options or warrants), or 22%of our outstanding shares of common stock. Edwin F. Hale, Sr., who is ourChairman, Chief Executive Officer, and largest stockholder, beneficially owns1,412,941 shares of common stock (with options), or 20% of our outstandingshares of common stock as of December 31, 2005. Because of the largepercentage of stock held by our directors and executive officers, these personscould influence the outcome of any matter submitted to a vote of ourstockholders.

***Our Stock is Not Heavily Traded***

The average daily tradingvolume of our shares on The Nasdaq National Market for the previous threemonths was approximately 6,700 shares. Thus, our common stock is not heavilytraded and can be more volatile than stock trading in an active public market.Factors such as our financial results, the introduction of new products andservices by us or our competitors, and various factors affecting the bankingindustry generally may have a significant impact on the market price of ourcommon stock. We cannot predict the extent to which an active public market forour common stock will develop or be sustained. In recent years, the stockmarket has experienced a high level of price and volume volatility, and marketprices for the stock of many companies have experienced wide price fluctuationsthat have not necessarily been related to their operating performance.Therefore, our stockholders may not be able to trade large blocks of shares atthe volumes, prices, or times that they desire.

***Our Stock is Not Insured***

Investments in the sharesof our common stock are not deposits and are not insured against loss by thegovernment.

***We Operate in a Competitive Market***

We operate in acompetitive environment, competing for deposits, loans and customers withcommercial banks, thrifts, finance companies, and other financial entities.Competition for deposits comes primarily from other commercial banks, savingsassociations, credit unions, money market, and mutual funds, and otherinvestment alternatives. Competition for loans comes primarily from othercommercial banks, savings associations, mortgage banking firms, consumerfinance companies, credit unions, and other financial intermediaries. Many ofthe financial intermediaries operating in our market area offer certainservices, such as trust, investment, and international banking services, whichwe do not offer. In addition, companies with a larger capitalization andfinancial intermediaries not subject to regulatory restrictions, have largerlending limits, and are thereby able to serve the needs of larger customers.Finally, our continued growth and profitability will depend upon our ability toattract and retain skilled managerial, marketing, and technical personnel.Competition for qualified personnel in the banking industry is intense, andthere can be no assurance that we will be successful in attracting andretaining such personnel.

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***Contracts With Our Officers May Discourage aTakeover or Adversely Affect Our Takeover Value***

We have entered intochange in control agreements with six of our officers. These agreements providefor a payment to each officer of a multiple (ranging from 1 to 2.99) of his orher salary and bonus upon the occurrence of either a change in control thatresults in the loss of employment or a significant change in his or heremployment. Thus, we may be required to make significant payments in the eventthat the rights under these agreements are triggered by a change in control. Asa result, these contracts may discourage a takeover, or adversely affect theconsideration payable to stockholders in the event of a takeover.

***Our Articles of Incorporation and Bylaws May Discouragea Corporate Takeover***

Our Amended and RestatedArticles of Incorporation (“Articles”), and Amended and Restated Bylaws (“Bylaws”),contain certain provisions designed to enhance the ability of the board ofdirectors to deal with attempts to acquire control of the Company. Theseprovisions provide for the classification of our board of directors into threeclasses; directors of each class serve for staggered three year periods. TheArticles also provide for supermajority voting provisions for the approval ofcertain business combinations. Although these provisions do not preclude atakeover, they may have the effect of discouraging a future takeover attemptwhich would not be approved by our board of directors, but pursuant to whichstockholders might receive a substantial premium for their shares overthen-current market prices. As a result, stockholders who might desire toparticipate in such a transaction might not have the opportunity to do so. Suchprovisions will also render the removal of our board of directors and ofmanagement more difficult and, therefore, may serve to perpetuate currentmanagement. Further, such provisions could potentially adversely affect themarket price of the common stock.

**ITEM 1B**              UNRESOLVED STAFF COMMENTS

There were no unresolvedcomments from the staff of the Securities and Exchange Commission at December 31,2005.

**ITEM 2**                   PROPERTIES

We own our executive offices located at 3301 BostonStreet, Baltimore, Maryland. This location also houses a Bank branch anddrive-up banking and customer parking facilities.

We lease an operations facility at 1516 Baylis Street,Baltimore, Maryland. We occupy approximately 34,500 square feet of officespace. Annual rent is approximately $389,000 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(3)**                         | ** ** | **Ocean City(2)**            |
| 12 A Bel Air South Parkway             |       | 12505 Coastal Highway        |
| Bel Air, MD 21015-3964                 |       | Ocean City, MD 21842-4781    |
| **Canton/Headquarters(1)**             | ** ** | **Odenton(1)**               |
| 3301 Boston Street                     |       | 1600 Annapolis Road          |
| Baltimore, MD 21224-4974               |       | Odenton, MD 21113-1002       |
| **Carroll Island(2)**                  | ** ** | **Owings Mills(2)**          |
| 176 Carroll Island Road                |       | 60 Painters Mill Road        |
| Baltimore, MD 21220-2208               |       | Owings Mills, MD 21117-3604  |
| **Cockeysville(3)**                    | ** ** | **Perry Hall (1)**           |
| 9840 York Road                         |       | 8843 Bel Air Road            |
| Cockeysville, MD 21030-4914            |       | Perry Hall, MD 21236-2403    |
| **Columbia(2)**                        | ** ** | **Pikesville(1)**            |
| 8835 Centre Park Drive, Suite 100 |       | 1013 Reisterstown Road       |
| Columbia, MD 21045-2114                |       | Baltimore, MD 21208-4207     |
| **Crofton(3)**                         | ** ** | **Pikesville Drive-Thru(2)** |
| 1049 MD Route 3                        |       | 1100 Reisterstown Road       |
| Gambrills, MD 21054-1722               |       | Baltimore, MD 21208-4207     |
| **Downtown Baltimore(2)**              | ** ** | **Randallstown(1)**          |
| 16 South Calvert Street                |       | 9833 Liberty Road            |
| Baltimore, MD 21202-1305               |       | Randallstown, MD 21133-2034  |
| **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(3)**                   | ** ** | **White Marsh(1)**           |
| 10065 Baltimore National Pike          |       | 10101 Philadelphia Road      |
| Ellicott City, MD 21042-3611           |       | Baltimore, MD 21237-3411     |
| **Glen Burnie(2)**                     | ** ** | **Woodlawn(3)**              |
| 305 South Crain Highway                |       | 7007 Security Boulevard      |
| Glen Burnie, MD 21061-3110             |       | Baltimore, MD 21244-2514     |

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*                    Forour branch hours and remote ATM locations, please refer to our website at www.1stmarinerbank.com.

(1)          Companyowns branch

(2)          Companyleases branch

(3)          Company owns branch, butleases related land

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For more information on our lease commitments andcosts see Note 7 of the notes to the consolidated financial statements.

Weoperate mortgage offices at the following locations:

| **Annandale, VA(2)**                       | ** ** | **Loch Raven(1)**                    |
|--------------------------------------------|------------|--------------------------------------|
| 7010 Little River Turnpike, Suite 140 |       | 1641 East Joppa Road, 2nd Floor |
| Annandale, VA 22003                        |       | Baltimore, MD 21286                  |
| **Annapolis(2)**                           | ** ** | **Prince Georges(2)**                |
| 2086 Generals Highway, 2nd Floor           |       | 7905 Malcolm Road, Suite 101    |
| Annapolis, MD 21401                        |       | Clinton, MD 20735                    |
| **Canton/Headquarters(1)**                 | ** ** | **Salisbury(2)**                     |
| 3301 Boston Street                         |       | 309 E. Main Street, Suite 100   |
| Baltimore, MD 21224                        |       | Salisbury, MD 21801                  |
| **Crofton(3)**                             | ** ** | **Waldorf(2)**                       |
| 1049 MD Route 3, 2nd floor            |       | 3200 Crain Highway, Suite 102   |
| Gambrills, MD 21054                        |       | Waldorf, MD 20603                    |
| **Ellicott City(3)**                       | ** ** | **White Marsh(1)**                   |
| 10065 Baltimore National Pike              |       | 10101 Philadelphia Road              |
| Ellicott City, MD 21042                    |       | White Marsh, MD 21237                |
| **Fairfax Wholesale(2)**                   | ** ** | **Wilmington(2)**                    |
| 3975 Fair Ridge Dr., Ste 300               |       | 3301 Lancaster Pike, Suite 5B   |
| North Tower                                | ** ** | Wilmington, DE 19805                 |
| Fairfax, VA 22033                          | ** ** | ** **                           |

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(1)          Companyowns office

(2)          Companyleases office

(3)          Company owns office, butleases related land

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We operate consumerfinance offices at the following locations which are leased by FinanceMaryland:

| **Bel Air**                         | ** ** | **Overlea**                              |
|-------------------------------------|------------|------------------------------------------|
| 225 Briarhill Place, Suite I-1 |       | 7682 Belair Road                         |
| Bel Air, MD 21015                   |       | Baltimore, MD 21236                      |
| **Bowie**                           | ** ** | **Randallstown**                         |
| 3440 Crain Highway                  |       | 3537 Brenbrook Drive                     |
| Bowie, MD 20716                     |       | 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                      |
| **Essex**                           |       | **Canton/Headquarters/Central Approval** |
| 511A Eastern Blvd.                  |       | 3301 Boston Street                       |
| Essex, MD 21221                     |       | Baltimore, MD 21224                      |
| **Frederick**                       | ** ** | **Bear, Delaware**                       |
| 454 Prospect Blvd                   |       | 1831 Pulaski Highway                     |
| Frederick, MD 21702                 |       | Bear, DE 19701                           |
| **Glen Burnie**                     | ** ** | **Dover, Delaware**                      |
| 7400 Ritchie Highway, Suite E  |       | 222 S. Dupont Hwy, Ste 101               |
| Glen Burnie, MD 21061               |       | Dover, DE 19901                          |
| **Hagerstown**                      | ** ** | **Milford, Delaware**                    |
| 1423 Dual Hwy                       |       | 975A Dupont Blvd                         |
| Hagerstown, MD 21740                |       | Milford, DE 19963                        |
| **Laurel**                          | ** ** | **Seaford, Delaware**                    |
| 3421 Fort Meade Rd                  |       | 1026 West Stein Highway                  |
| Laurel, MD 20707                    |       | Seaford, DE 19973                        |
| **North East**                      | ** ** | ** **                               |
| 113 North East Plaza                |       |                                     |
| North East, MD 21901                |       |                                     |

 

Ourbank branches range in total size from 2,000 to 4,000 square feet, mortgageoffices generally range from 1,200 to 2,000 square feet and our FinanceMaryland offices from 800 to 1,600 square feet. All of our locations aresuitable and adequate to conduct business and support growth in customer andtransaction volume.

In May of 2005, we signed a lease forapproximately 56,500 square feet of office space currently under constructionby a company owned by our CEO, Edwin F. Hale, Sr. On November 15,2005, we signed an amendment to the lease that increased the square footage wewill occupy to 74,061. This new building is adjacent to the currentheadquarters building and is anticipated to be completed in the second quarterof 2006. At that time, the operations facility at 1516 Baylis Street will bevacated.

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**ITEM 3**                   LEGALPROCEEDINGS

We are party to legal actions that are routine andincidental to our business. In management’s opinion, the outcome of thesematters, individually or in the aggregate, will not have a material effect on ourresults of operations or financial position.

**ITEM 4**                   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

There was no submission of matters to a vote ofsecurities holders during the fourth quarter of the year ended December 31,2005.

**ITEM 4A**           EXECUTIVEOFFICERS OF THE REGISTRANT

EdwinF. Hale, Sr.(age 59) has been Chairman and Chief Executive Officer ofFirst Mariner and of the Bank since 1995. Joseph A. Cicero (age 61) hasbeen the President of First Mariner and Chief Operating Officer of the Banksince 1996. George H. Mantakos (age 63) has been Executive Vice Presidentof First Mariner, and the President of the Bank since 1995. Mark A. Keidel (age44) has been Senior Vice President and Chief Financial Officer of FirstMariner and the Bank since June 2000.

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**PART II**

**ITEM 5**                   MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market for Common Stock**

Ourcommon stock trades on The NasdaqNational Market under the symbol “FMAR.” The table below sets forth for theperiods indicated the low and high market prices of our common stock asreported on The Nasdaq National Market. These over-the-counter marketquotations reflect inter-dealer prices and do not include retail mark-up,mark-down or commissions, and they may not necessarily represent actualtransactions. We currently have approximately 2,800 stockholders, and we didnot pay a cash dividend in 2004 or 2005.

| ** **          | ** ** | **Low** | ** ** | **High** | ** ** |
|---------------------|------------|---------|------------|----------|------------|
| 2005 Quarter ended: |       |    |       |     |       |
| Fourth quarter      |       | $       | 16.50      |     | $          | 18.45 |   |
| Third quarter       |       | 16.05   |       | 18.86    |       |
| Second quarter      |       | 15.18   |       | 17.82    |       |
| First quarter       |       | 17.30   |       | 18.30    |       |
| 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    |       |

 

**EquityCompensation Plan Information**

Thefollowing table sets forth the securities authorized for issuance under theCompany’s equity compensation plans as of December 31, 2005:

| ** **                                                  | ** ** | **(A)**    | ** ** | **(B)**                                                                                                                                              | ** ** | **(C)**                                                                                                         | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                      | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **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     |       |       | 981,934    |                                                                                                                                                 |       |                                                                                                            | $          | 12.16 |   |   |   | 269,465 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                 |       |                                                                                                            | —     |   |   |   | — |   |   |
| Total                                                       |       |       | 981,934    |                                                                                                                                                 |       |                                                                                                            | $          | 12.16 |   |   |   | 269,465 |   |   |
|                                                             |            |            |            |                                                                                                                                                      |            |                                                                                                                 |            |  |  |  |  |  |  |  |  |  |

** **

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**Issuer Purchases ofEquity Securities**(1)

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 2005  |       |                                         | —     |                                         |       |                                                                             | —     |                                                           |       |   | 132,425 |   |   |   | 167,575 |   |   |
| November 2005 |       |                                         | —     |                                         |       |                                                                             | —     |                                                           |       |   | 132,425 |   |   |   | 167,575 |   |   |
| December 2005 |       |                                         | —     |                                         |       |                                                                             | —     |                                                           |       |   | 132,425 |   |   |   | 167,575 |   |   |

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(1)          On July 20, 2004,the Company announced that its Board of Directors approved a share repurchaseprogram of up to 300,000 shares (approximately 5%) of the Company’s outstandingcommon stock, which provides for open market or private purchases of stock overthe next 24 months. The Company did not repurchase any shares of our commonstock during the quarter ended December 31, 2005.  During the year ended December 31, 2005,the Company repurchased a total of 94,750 shares of our common stock at anapproximate cost of $1.578 million.

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**ITEM6**                   SELECTEDFINANCIAL DATA

| ** **                                                      | ** ** | **2005**                                                                          | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ***(dollars in thousands, except per share data)*** | ** ** |
| **Consolidated Income Statement  Data:**                        | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income                                            |       | $                                                                                 | 47,723     |       | $          | 42,441     |       | $          | 34,411     |       | $          | 30,988 |   | $ | 25,874 |   |
| Provision for loan  losses                                      |       | 3,287                                                                             |       | 2,243      |       | 2,536      |       | 2,175      |       | 1,625      |       |
| Noninterest income                                              |       | 23,015                                                                            |       | 19,190     |       | 21,086     |       | 14,994     |       | 10,741     |       |
| Noninterest  expense                                            |       | 56,340                                                                            |       | 50,926     |       | 45,883     |       | 37,973     |       | 31,296     |       |
| Income tax expense                                              |       | 3,289                                                                             |       | 2,361      |       | 1,771      |       | 1,930      |       | 1,390      |       |
| Net income                                                      |       | 7,822                                                                             |       | 6,101      |       | 5,307      |       | 3,904      |       | 2,304      |       |
| **Consolidated  Balance Sheet Data:**                           |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Total assets                                                    |       | $                                                                                 | 1,362,478  |       | $          | 1,250,531  |       | $          | 1,057,853  |       | $          | 871,152 |   | $ | 778,525 |   |
| Loans receivable,  net                                          |       | 839,843                                                                           |       | 736,566    |       | 601,155    |       | 526,777    |       | 463,141    |       |
| Deposits                                                        |       | 876,010                                                                           |       | 825,417    |       | 747,733    |       | 668,169    |       | 600,588    |       |
| Long-term  borrowings and repurchase agreements                 |       | 131,000                                                                           |       | 134,369    |       | 110,000    |       | 85,000     |       | 85,000     |       |
| Stockholders’  equity                                      |       | 72,375                                                                            |       | 64,314     |       | 58,434     |       | 51,126     |       | 44,008     |       |
| **Per  Share Data:**                                            |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Number of shares  of common stock outstanding at year end       |       | 6,262,442                                                                         |       | 5,826,011  |       | 5,693,637  |       | 5,394,586  |       | 5,367,270  |       |
| Net income:                                                     |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Basic                                                           |       | $                                                                                 | 1.28       |       | $          | 1.06       |       | $          | 0.97       |       | $          | 0.73 |   | $ | 0.58 |   |
| Diluted                                                         |       | 1.20                                                                              |       | 0.96       |       | 0.88       |       | 0.69       |       | 0.57       |       |
| Cash dividends  declared                                        |       | —                                                                            |       | —     |       | —     |       | —     |       | —     |       |
| **Performance  and Capital Ratios:**                            |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Return on average  assets                                       |       | 0.59                                                                              | %          | 0.54       | %          | 0.57       | %          | 0.49       | %          | 0.32       | %          |
| Return on average  equity                                       |       | 11.44                                                                             | %          | 10.11      | %          | 9.76       | %          | 8.20       | %          | 6.98       | %          |
| Dividend payout  ratio                                          |       | —                                                                            |       | —     |       | —     |       | —     |       | —     |       |
| Net interest  margin                                            |       | 3.88                                                                              | %          | 4.06       | %          | 3.99       | %          | 4.17       | %          | 3.86       | %          |
| Average equity to  average assets                               |       | 5.13                                                                              | %          | 5.36       | %          | 5.83       | %          | 5.99       | %          | 4.65       | %          |
| Year-end Tier 1  leverage ratio                                 |       | 7                                                                                 | %          | 7          | %          | 8          | %          | 8          | %          | 8          | %          |
| Tier 1 capital to  risk-weighted assets                         |       | 10                                                                                | %          | 9          | %          | 10         | %          | 10         | %          | 11         | %          |
| Total capital to  risk-weighted assets                          |       | 15                                                                                | %          | 14         | %          | 15         | %          | 13         | %          | 13         | %          |
| **Asset  Quality Ratios:**                                      |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Nonperforming  assets to total assets                      |       | 0.29                                                                              | %          | 0.38       | %          | 0.48       | %          | 0.40       | %          | 0.56       | %          |
| Allowance for loan losses  at year-end to:                      |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Total loans, net of unearned income                             |       | 1.38                                                                              | %          | 1.28       | %          | 1.43       | %          | 1.35       | %          | 1.18       | %          |
| Nonperforming and past-due loans                                |       | 244.14                                                                            | %          | 150.84     | %          | 118.61     | %          | 55.85      | %          | 57.59      | %          |
| Net charge-offs to  average total loans, net of unearned income |       | 0.14                                                                              | %          | 0.21       | %          | 0.19       | %          | 0.10       | %          | 0.10       | %          |

 

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

**Forward-Looking Statements**

This annual report on Form 10-Kmay contain forward-looking language within the meaning of The PrivateSecurities Litigation Reform Act of 1995. Statements may include expressionsabout our confidence, policies, and strategies, provisions and allowance forloan losses, adequacy of capital levels, and liquidity. All statements includedor incorporated by reference in this Annual Report on Form 10-K,other than statements that are purely historical, are forward-lookingstatements. Statements that include the use of terminology such as “anticipates,”“expects,” “intends,” “plans,” “believes,” “estimates,” and similar expressionsalso identify forward-looking statements. The forward-looking statements arebased on our current intent, belief, and expectations. Forward-lookingstatements in this Annual Report on Form 10-K include, but are notlimited to, statements of our plans, strategies, objectives, intentions,including, among other statements, statements involving our projected loan anddeposit growth, loan collateral values, collectibility of loans, anticipatedchanges in other operating income, payroll and branching expenses, branch,office and product expansion of the Company and its subsidiaries, and liquidityand capital levels. Such forward looking statements involve certain risks anduncertainties, including general economic conditions, competition in thegeographic and business areas in which we operate, inflation, fluctuations ininterest rates, legislation, and government regulation. These statements arenot guarantees of future performance and are subject to certain risks anduncertainties that are difficult to predict. For a more complete discussion ofrisks and uncertainties that could cause actual results to differ materiallyfrom those contained in the forward looking statements, see “Risk Factors” inItem 1A of this Form 10-K. Except as required by applicable laws, wedo not intend to publish updates or revisions of any forward-looking statementswe make to reflect new information, future events or otherwise.

**The Company**

The Company is a financial holding companyincorporated under the laws of Maryland and registered under the federal BankHolding Company Act of 1956, as amended. The Company began conducting businessas First Mariner Bancorp in May 1995. Since 1995, the Company’s strategyhas involved building a network of banking branches, ATMs, and otherfinancial services outlets to capture market share and build a communityfranchise for stockholders, customers, and employees. The Company is currentlyfocused on growing assets and earnings by capitalizing on the broad network ofbank branches, mortgage offices, consumer finance offices, andATMs established during its infrastructure expansion phase.

The Company’s business is conducted primarily throughits wholly owned subsidiaries, First Mariner Bank (the “Bank”), FinanceMaryland LLC (“Finance Maryland”), and FM Appraisals, LLC (“FM Appraisals”). FirstMariner Bank is the largest operating subsidiary of the Company with assetsexceeding $1.278 billion as of December 31, 2005. The Bank was formedin 1995 through the merger of several small financial institutions. The Bank’sprimary market area for its 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, operateson a regional and national basis. First Mariner Bank is an independentcommunity bank, 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 

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officers who are empoweredto act with flexibility to meet customers’ needs in an effort to foster anddevelop long-term loan and deposit relationships.

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 14 branchesand a central approval office in the state of Maryland and four branches in thestate of Delaware, which operate under the trade name “Finance Delaware.”Finance Maryland had total assets of $49.271 million as of December 31,2005.

FM Appraisals, whichcommenced operations in the fourth quarter of 2003, is a residential realestate appraisal preparation and management company that is headquartered inBaltimore City. FM Appraisals offers appraisal services for residential realestate lenders, including appraisal preparation, the compliance oversight ofsub-contracted appraisers, appraisal ordering and administration, and appraisalreview services. FM Appraisals has historically provided these services toFirst Mariner Mortgage and will begin marketing appraisal management servicesto outside lenders in 2006.

**Critical Accounting Policies**

The Company’s financial statements are prepared inaccordance with generally accepted accounting principles (“GAAP”) in the UnitedStates of America and follow general practices within the industry in which itoperates. Application of these principles requires management to makeestimates, assumptions, and judgments that affect the amounts reported in thefinancial statements and accompanying notes. These estimates, assumptions, andjudgments are based on information available as of the date of the financialstatements; accordingly, as this information changes, the financial statementscould reflect different estimates, assumptions, and judgments. Certain policiesinherently have a greater reliance on the use of estimates, assumptions, andjudgments and, as such, have a greater possibility of producing results thatcould be materially different than originally reported. Estimates, assumptions,and judgments are necessary when assets and liabilities are required to berecorded at fair value, when a decline in the value of an asset not carried onthe financial statements at fair value warrants an impairment write-down orvaluation reserve to be established, or when an asset or liability needs to berecorded contingent upon a future event. Carrying assets and liabilities atfair value inherently results in more financial statement volatility.

When applying accounting policies in such areas thatare subjective in nature, management must use its best judgment to arrive atthe carrying value of certain assets and liabilities. One of the most criticalaccounting policies applied is related to the valuation of the loan portfolio. Avariety of estimates impact the carrying value of the loan portfolio includingthe calculation of the allowance for loan losses, valuation of underlyingcollateral and the timing of loan charge-offs.

The allowance is established and maintained at a levelthat management believes is adequate to cover losses resulting from theinability of borrowers to make required payments on loans. Estimates for loanlosses are arrived at by analyzing risks associated with specific loans and theloan portfolio taken as a whole. Current trends in delinquencies andcharge-offs, the views of Bank regulators and independent loan review firms,changes in the size and composition of the loan portfolio and peer comparisonsare also factors. The analysis also requires consideration of the economicclimate and direction and change in the interest rate environment, which mayimpact a borrower’s ability to pay, legislation impacting the banking andfinancial services industry and economic conditions specific to our serviceareas. Because the calculation of the allowance for loan losses relies onestimates and judgments relating to inherently uncertain events, results maydiffer from our estimates.

Note 1 to the consolidated financial statementsdescribes the methodology used in determining the allowance for loan losses anda detailed discussion of factors influencing possible changes in this critical 

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accounting estimate isincluded in the “Credit Risk Management” section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

The following discussioncompares our financial condition at December 31, 2005 to the financialcondition at December 31, 2004 and results of operations for the yearsended December 31, 2005, 2004, and 2003. This discussion should be read inconjunction with our accompanying financial statements and related notes aswell as statistical information included in this report.

**Performance Overview**

We continued to achieve significant growth in loansand deposits while producing a record profit in 2005, 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 assets andaverage equity.

We recorded net income of $7.822 million for 2005compared to $6.101 million for 2004, an increase of 28.2%, marking ourhighest net income for any year since First Mariner’s formation, and the fifthconsecutive year of record profits. Diluted earnings per share were also thehighest in our history, totaling $1.20 per share for 2005, an increase of 25.0%from $0.96 per diluted share in 2004. The growth in net income and earnings pershare resulted as our gross revenue (net interest income and noninterestincome) increased $9.107 million or 14.8%, while our noninterest expenses,the provision for loan losses, and income tax expense increased by$7.386 million or 13.3%.

Our largest category of revenue, net interest income,grew $5.282 million or 12.4% due to growth in average earning assets of17.7%. Noninterest income increased $3.825 million or 19.9% due to higherlevels of mortgage banking revenue of $2.391 million and higher insurance salescommissions of $993,000. We experienced higher fee income from most other majorsources of operating noninterest income.

Our increase in total expenses resulted from highernoninterest expenses of $5.414 million and an increase in our income taxexpense of $928,000. Our provision for loan losses also increased by $1.044million. Noninterest expense growth was primarily the result of higher salariesand benefit costs. The increase in income tax expense reflects lower levels oftax-exempt interest income for income tax purposes relative to total pretaxincome and higher levels of pretax net income. The increase in our provisionfor loan losses is largely a function of our loan growth and resulted in anincrease in the allowance for loan losses to 1.38% of total loans as of December 31,2005 from 1.28% as of December 31, 2004.

Return on average assets was 0.59% for 2005 comparedto 0.54% for 2004. Return on average equity for 2005 was 11.44% compared to10.11% for 2004. Average equity to average assets was 5.13% for 2005 comparedto 5.36% for 2004.

Our total assets increased by $111.947 million or9.0%, reflecting a significant increase in loans and loans held for sale, whichwere funded by increases in deposits and borrowed funds. Loans outstandingincreased by $105.440 million or 14.1% and loans held for sale increased by$12.396 million or 15.5%, while our deposits grew by $50.593 million or6.1%. Stockholders’ equity increased $8.061 million or 12.5% reflectingthe retention of 2005’s earnings and shares sold and issued for the exercise ofoptions, warrants, and our employee stock purchase plan. These items wereoffset somewhat by the shares repurchased under our stock repurchase plan, andthe reduction in other comprehensive income driven by the decline in the marketvalue of securities classified as available for sale.

We continued to enjoy favorable asset quality in 2005.Our allowance for loan losses was increased to $11.743 million and totaled297.3% of nonperforming assets as of December 31, 2005, compared to 204.1%as of December 31, 2004. Our ratio of net chargeoffs to average totalloans was 0.14% in 2005, compared to 0.21% in 2004. Our ratio of nonperformingassets to total assets decreased to 0.29% at December 31, 2005 from 0.38%at December 31, 2004.

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Capital adequacy levelsremained strong, exceeding the levels we are required to maintain for “well-capitalized”status as defined by banking regulation. December 31, 2005 ratios for ourcapital leverage, Tier 1 capital to risk weighted assets, and total capital torisk weighted assets were 7.4%, 9.5%, and 14.9%, respectively, compared to 7.1%,9.3%, and 14.1%, respectively, at December 31, 2004. Our regulatorycapital levels increased as the growth rate of regulatory capital exceededgrowth rates in total and risk-adjusted assets.

**Results of Operations**

***Net Interest Income/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.

Netinterest income for 2005 totaled $47.723 million, an increase of 12.4% over$42.441 million for 2004. The improvement in net interest income during2005 was due in large part to an increase in our average earning assets fromthe 2004 level of $1.045 billion to the 2005 level of $1.230 billion. Our yieldon earning assets also increased, from 6.24% for 2004 to 6.67% for 2005. Thebenefit realized from increased yields on earning assets was more than offsetby higher rates paid on interest-bearing deposits and borrowings, whichincreased from 2.49% for 2004 to 3.16% for 2005. As a result, the net interestmargin (net interest income divided by average earning assets) decreased to3.88% for 2005, as compared to 4.06% for the comparable period in 2004. Netinterest margin is the key performance measure for our net interest income. Ournet interest margin is affected by our loan pricing, our mix of earning assets,and our distribution and pricing of deposits and borrowings. The yields weearned on average total earning assets increased by 43 basis points, while the costof interest bearing deposits and borrowings we paid increased by 67 basispoints.

*Interestincome.*   Total interest income increased by$16.790 million primarily due to growth in average loans and loans held forsale. Average loans outstanding increased by $152.213 million, with increasesin almost every loan category. Average loans held for sale increased $53.530million.

Yields on earning assets for the period increased to6.67% from 6.24% due to the higher mix of loans and loans held for sale (whichcarry higher yields than investments and other earning assets) and increases inmarket interest rates. The yield on total loans (including loans held for sale)increased from 7.35% to 7.51% and was primarily driven by increased commercialand residential construction rates and consumer rates.

*Interestexpense.*   Interest expense increased by $11.508million, due to increases in both average interest-bearing liabilities, whichincreased by $167.856 million, and the average rate paid on interest-bearingliabilities, which increased from 2.49% for the year ended December 31,2004 to 3.16% for the year ended December 31, 2005. The increase inaverage interest-bearing deposits of $34.575 million was driven by increases insavings, money market, and time deposits. An increase in average borrowings of$133.281 million was due to additional short-term advances from the FederalHome Loan Bank of Atlanta (the “FHLB”).  The increase in the average rate paid oninterest-bearing liabilities was a result of increased mix of borrowings as apercentage of interest-bearing funding sources and higher interest rates.

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**ComparativeAverage Balances Yields and Rates**

| ** **                             | ** ** | **2005**     | ** ** | **2004**     | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                             | ** ** | **Average**  | ** ** | ** **   | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Balance**  | ** ** | **Interest** | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                             | ** ** | *** *** | ** ** |
| ASSETS                                 | * *   | * *     | * *   |         | * *   | * *   |       |   | * * | * * |   | * * | * * |   | * * | * * |   |   | * * | * * |   | * * | * * |   | * * | * * |   |   | * * | * * |   |
| Loans:                                 |       |         |       |         |       | * *   |       |   |   | * * |   |   |   |   |   | * * |   |   |   | * * |   |   |   |   |   | * * |   |   |   | * * |   |

| Commercial loans and lines of credit            |   | $         | 68,035    |   |   | $        | 3,791    | * * |   |     | 5.57     | *%*       |   | $         | 76,370 |     |   | $        | 4,474  | * * |   |     | 5.86   | *%*    |    | $        | 66,971 |   |     | $        | 4,215  | * * |     |   | 6.29 | *%* |   |
|-------------------------------------------------|--------|-----------|-----------|--------|--------|----------|----------|----------|--------|----------|----------|-----------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|--------|---------|----------|--------|--------|----------|----------|--------|----------|----------|--------|------|-----|--------|
| Comm/res construction                           |   | 88,634    |      |   | 6,987  | * * |     |     | 7.88   | *%*      |     | 49,328    |   |      | 3,698  | * * |   |     | 7.50   | *%*      |   | 36,112   |   |   | 2,570   | * * |   |   | 7.12     | *%*      |   |
| Commercial mortgages                            |   | 331,975   |      |   | 22,899 | * * |     |     | 6.90   | *%*      |     | 256,960   |   |      | 17,908 | * * |   |     | 6.97   | *%*      |   | 215,143  |   |   | 15,610  | * * |   |   | 7.26     | *%*      |   |
| Residential construction-consumer               |   | 130,535   |      |   | 9,245  | * * |     |     | 7.08   | *%*      |     | 123,759   |   |      | 8,882  | * * |   |     | 7.18   | *%*      |   | 121,240  |   |   | 9,476   | * * |   |   | 7.82     | *%*      |   |
| Residential mortgages                           |   | 41,798    |      |   | 2,499  | * * |     |     | 5.98   | *%*      |     | 40,880    |   |      | 2,692  | * * |   |     | 6.59   | *%*      |   | 39,945   |   |   | 3,029   | * * |   |   | 7.58     | *%*      |   |
| Consumer                                        |   | 143,742   |      |   | 16,520 | * * |     |     | 11.49  | *%*      |     | 105,209   |   |      | 11,431 | * * |   |     | 10.87  | *%*      |   | 73,117   |   |   | 7,755   | * * |   |   | 10.61    | *%*      |   |
| Total loans                                     |   | 804,719   |      |   | 61,941 | * * |     |     | 7.70   | *%*      |     | 652,506   |   |      | 49,085 | * * |   |     | 7.52   | *%*      |   | 552,528  |   |   | 42,655  | * * |   |   | 7.72     | *%*      |   |
| Loans held for  sale                            |   | 102,321   |      |   | 6,195  | * * |     |     | 6.05   | *%*      |     | 48,791    |   |      | 2,464  | * * |   |     | 5.05   | *%*      |   | 96,071   |   |   | 4,856   | * * |   |   | 5.05     | *%*      |   |
| Securities  available for sale, at fair value   |   | 299,709   |      |   | 13,066 | * * |     |     | 4.36   | *%*      |     | 316,878   |   |      | 13,219 | * * |   |     | 4.17   | *%*      |   | 151,634  |   |   | 7,352   | * * |   |   | 4.85     | *%*      |   |
| Interest-bearing  deposits                      |   | 9,428     |      |   | 284    | * * |     |     | 3.01   | *%*      |     | 19,546    |   |      | 235    | * * |   |     | 1.20   | *%*      |   | 59,286   |   |   | 621     | * * |   |   | 1.05     | *%*      |   |
| Restricted stock  investments, at cost          |   | 13,997    |      |   | 574    | * * |     |     | 4.10   | *%*      |     | 7,507     |   |      | 267    | * * |   |     | 3.56   | *%*      |   | 3,750    |   |   | 141     | * * |   |   | 3.76     | *%*      |   |
| Total earning  assets                           |   | 1,230,174 |      |   | 82,060 | * * |     |     | 6.67   | *%*      |     | 1,045,228 |   |      | 65,270 | * * |   |     | 6.24   | *%*      |   | 863,269  |   |   | 55,625  | * * |   |   | 6.44     | *%*      |   |
| Allowance for loan  losses                      |   | (10,470   | )         |   |   | * * |     |     |   | * * |     | (8,995    | )      |      |   | * * |   |     |   | * * |   | (8,016   | )      |   |    | * * |   |   |     | * * |   |
| Cash and other  nonearning assets               |   | 113,118   |      |   |   | * * |     |     |   | * * |     | 89,415    |   |      |   | * * |   |     |   | * * |   | 77,738   |   |   |    | * * |   |   |     | * * |   |
| Total assets                                    |   | $         | 1,332,822 |   |   | 82,060   | * * |     |   |     | * * |      | $      | 1,125,648 |   |     | 65,270 | * * |   |     |   | * * |   | $      | 932,991 |     |   | 55,625 | * * |     |   |     | * * |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY      |   |      |      |   |   | * * |     |     |   | * * |     |      |   |      |   | * * |   |     |   | * * |   |     |   |   |    | * * |   |   |     | * * |   |
| Interest-bearing  deposits:                     |   |      |      |   |   | * * |     |     |   | * * |     |      |   |      |   | * * |   |     |   | * * |   |     |   |   |    | * * |   |   |     | * * |   |
| NOW deposits                                    |   | $         | 13,065    |   |   | 26       | * * |     |   | 0.20     | *%*      |      | $      | 55,488    |   |     | 191    | * * |   |     | 0.34   | *%*      |   | $      | 59,314  |     |   | 315    | * * |     |   | 0.53     | *%*      |   |
| Savings deposits                                |   | 71,789    |      |   | 218    | * * |     |     | 0.30   | *%*      |     | 67,009    |   |      | 235    | * * |   |     | 0.35   | *%*      |   | 56,556   |   |   | 369     | * * |   |   | 0.65     | *%*      |   |
| Money market deposits                           |   | 203,222   |      |   | 3,215  | * * |     |     | 1.58   | *%*      |     | 158,802   |   |      | 1,341  | * * |   |     | 0.84   | *%*      |   | 149,441  |   |   | 1,509   | * * |   |   | 1.01     | *%*      |   |
| Time deposits                                   |   | 395,645   |      |   | 13,270 | * * |     |     | 3.35   | *%*      |     | 367,847   |   |      | 11,041 | * * |   |     | 3.00   | *%*      |   | 328,411  |   |   | 11,186  | * * |   |   | 3.41     | *%*      |   |
| Total  interest-bearing deposits                |   | 683,721   |      |   | 16,729 | * * |     |     | 2.45   | *%*      |     | 649,146   |   |      | 12,808 | * * |   |     | 1.97   | *%*      |   | 593,722  |   |   | 13,379  | * * |   |   | 2.25     | *%*      |   |
| Borrowings                                      |   | 401,530   |      |   | 17,608 | * * |     |     | 4.39   | *%*      |     | 268,249   |   |      | 10,021 | * * |   |     | 3.74   | *%*      |   | 161,993  |   |   | 7,835   | * * |   |   | 4.84     | *%*      |   |
| Total  interest-bearing liabilities             |   | 1,085,251 |      |   | 34,337 | * * |     |     | 3.16   | *%*      |     | 917,395   |   |      | 22,829 | * * |   |     | 2.49   | *%*      |   | 755,715  |   |   | 21,214  | * * |   |   | 2.81     | *%*      |   |
| Noninterest-bearing  demand deposits            |   | 174,115   |      |   |   | * * |     |     |   | * * |     | 143,706   |   |      |   | * * |   |     |   | * * |   | 119,707  |   |   |    | * * |   |   |     | * * |   |
| Other  noninterest-bearing liabilities          |   | 5,091     |      |   |   | * * |     |     |   | * * |     | 4,204     |   |      |   | * * |   |     |   | * * |   | 3,220    |   |   |    | * * |   |   |     | * * |   |
| Stockholders’  equity                      |   | 68,365    |      |   |   | * * |     |     |   | * * |     | 60,343    |   |      |   | * * |   |     |   | * * |   | 54,349   |   |   |    | * * |   |   |     | * * |   |
| Total liabilities and stockholders’ equity |   | $         | 1,332,822 |   |   | 34,337   | * * |     |   |     | * * |      | $      | 1,125,648 |   |     | 22,829 | * * |   |     |   | * * |   | $      | 932,991 |     |   | 21,214 | * * |     |   |     | * * |   |
| Net interest  income/net interest spread        |   |      |      |   | $      | 47,723   | * * |     |   | 3.51     | *%*      |      |   |      |   | $        | 42,441 | * * |   |     | 3.75   | *%*      |   |   |    |     | $      | 34,411 | * * |     |   | 3.63     | *%*      |   |
| Net interest margin                             |   |      |      |   |   | * * |     |     | 3.88   | *%*      |     |      |   |      |   | * * |   |     | 4.06   | *%*      |   |     |   |   |    | * * |   |   | 3.99     | *%*      |   |

 

30

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The “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 have been allocated to rate andvolume changes in proportion to the absolute dollar amounts of the change ineach. We maintain an asset and liability management policy designed to providea proper balance between rate sensitive assets and rate sensitive liabilitiesto attempt to optimize interest margins while providing adequate liquidity forour anticipated needs.

**Rate/VolumeAnalysis**

| ** **                                    | ** ** | **2005 Compared to 2004**          | ** ** | **2004 Compared to 2003**          | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **Change Due to Variance In** | ** ** | **Change Due to Variance In** | ** ** |
| ***(dollars in thousands)***        | ** ** | **Rates**                                         | ** ** | **Volume**                                        | ** ** | **Total** | ** ** | **Rates** | ** ** | **Volume** | ** ** | **Total** | ** ** |
| INTEREST INCOME                               |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Loans:                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Commercial loans and lines of credit     |       | $                                                 | (211       | )                                                 | $          | (472 | ) | $ | (683 | ) | $ | (304 | ) | $ | 563 |   | $ | 259 |   |
| Comm/res construction                         |       | 200                                               |       | 3,089                                             |       | 3,289 |   | 144 |   | 984 |   | 1,128 |   |
| Commercial mortgages                          |       | (186                                              | )          | 5,177                                             |       | 4,991 |   | (637 | ) | 2,935 |   | 2,298 |   |
| Residential  construction—

consumer     |       | (118                                              | )          | 481                                               |       | 363 |   | (788 | ) | 194 |   | (594 | ) |
| Residential mortgages                         |       | (252                                              | )          | 59                                                |       | (193 | ) | (406 | ) | 69 |   | (337 | ) |
| Consumer                                      |       | 693                                               |       | 4,396                                             |       | 5,089 |   | 194 |   | 3,482 |   | 3,676 |   |
| Total loans                                   |       | 126                                               |       | 12,730                                            |       | 12,856 |   | (1,797 | ) | 8,227 |   | 6,430 |   |
| Loans held for sale                           |       | 574                                               |       | 3,157                                             |       | 3,731 |   | (6 | ) | (2,386 | ) | (2,392 | ) |
| Securities available for sale,  at fair value |       | 583                                               |       | (736                                              | )          | (153 | ) | (1,153 | ) | 7,020 |   | 5,867 |   |
| Interest-bearing deposits                     |       | 217                                               |       | (168                                              | )          | 49 |   | 81 |   | (467 | ) | (386 | ) |
| Restricted stock  investments,

at cost       |       | 45                                                |       | 262                                               |       | 307 |   | (8 | ) | 134 |   | 126 |   |
| Total interest income                         |       | 1,545                                             |       | 15,245                                            |       | 16,790 |   | (2,883 | ) | 12,528 |   | 9,645 |   |
| INTEREST EXPENSE                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                   |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| NOW deposits                                  |       | (58                                               | )          | (107                                              | )          | (165 | ) | (105 | ) | (19 | ) | (124 | ) |
| Savings deposits                              |       | (32                                               | )          | 15                                                |       | (17 | ) | (193 | ) | 59 |   | (134 | ) |
| Money market deposits                         |       | 1,419                                             |       | 455                                               |       | 1,874 |   | (258 | ) | 90 |   | (168 | ) |
| Time deposits                                 |       | 1,355                                             |       | 874                                               |       | 2,229 |   | (1,408 | ) | 1,263 |   | (145 | ) |
| Total interest-bearing deposits               |       | 2,684                                             |       | 1,237                                             |       | 3,921 |   | (1,964 | ) | 1,393 |   | (571 | ) |
| Borrowings                                    |       | 1,966                                             |       | 5,621                                             |       | 7,587 |   | (2,085 | ) | 4,271 |   | 2,186 |   |
| Total interest expense                        |       | 4,650                                             |       | 6,858                                             |       | 11,508 |   | (4,049 | ) | 5,664 |   | 1,615 |   |
| Net interest  income                          |       | $                                                 | (3,105     | )                                                 | $          | 8,387 |   | $ | 5,282 |   | $ | 1,166 |   | $ | 6,864 |   | $ | 8,030 |   |

 

***Noninterest Income***

We derive noninterest income principally frommortgage-banking activities, service fees on our deposit accounts, ATM fees,commissions we earn on sales of insurance products and income from bank-ownedlife insurance. Our noninterest income for the year ended December 31,2005 totaled $23.015 million, as compared to $19.190 million for the yearended December 31, 2004, an increase of $3.825 million or 19.9%.

31

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Higher revenue from our mortgage banking activities,and an increase in insurance sales commissions were the primary causes of theincrease in noninterest income. Gains on sales of loans, which are derived fromboth the volume of loans sold and the pricing at which they are sold, increasedby $1.669 million or 49.8% compared to the year ended December 31,2004. Total volume of mortgage loans we sold into the secondary marketincreased 83.3%. The higher revenue from increased volume was somewhat offsetby modestly tighter pricing margins and increases in forfeited revenue forearly prepayments and defaults. Our other mortgage banking fees increased by$722,000 or 46.1%. Origination related income increased by $560,000, while ourmortgage servicing revenue decreased $9,000. The increase in our originationrelated income occurred primarily due to the growth in volume of mortgageoriginations. Income from reinsurance, appraisal and inspection activitiesincreased by $171,000.

Service fees on our deposit accounts increased by$286,000 or 4.1% as we increased the number of demand deposit accounts by 1,116or 2.0%. We increased our pricing on some of our deposit service charges, suchas monthly maintenance fees, during 2005 compared to 2004. Our ATM feesincreased by $299,000 or 10.5%, due to increased customer transaction volume.

We didnot realize any net gains from the sale of investment securities in 2005,compared to net gains of $440,000 for 2004. Income from bank-owned lifeinsurance decreased by $41,000 in 2005 due to a decline in crediting rates onpolicies held. Commissions earned on the sale of nondeposit investment products(primarily fixed annuities) decreased $118,000 due to lower rates offered byinsurance carriers, which reduced demand for these products, which led to ourreduced production of these products. Commissions from the sale of otherinsurance products (primarily insurance products offered through FinanceMaryland) increased $993,000 due to expansion of Finance Maryland’s locationsand increased loan origination activity. Our other noninterest income notdetailed in the table below increased $455,000 or 53.0% and includes $357,000in rental income from other tenants in our headquarters building which wepurchased in 2005. Thefollowing table shows the breakout of noninterest income:

| ** **                                              | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gain on sale of  mortgage loans                         |       | $                                           | 5,018      |   | $ | 3,349 |   | $ | 5,239 |   |
| Other  mortgage-banking revenue                         |       | 2,289                                       |       | 1,567 |   | 1,708 |   |
| ATM fees                                                |       | 3,135                                       |       | 2,836 |   | 2,520 |   |
| Service fees on  deposits                               |       | 7,185                                       |       | 6,899 |   | 6,681 |   |
| Gain on sales of  investment securities, net            |       | —                                      |       | 440 |   | 1,371 |   |
| Commissions on  sales of nondeposit investment products |       | 531                                         |       | 649 |   | 862 |   |
| Income from  bank-owned life insurance                  |       | 1,031                                       |       | 1,072 |   | 737 |   |
| Commissions on  sales of other insurance products       |       | 2,512                                       |       | 1,519 |   | 1,049 |   |
| Other                                                   |       | 1,314                                       |       | 859 |   | 919 |   |
|                                                    |       | $                                           | 23,015     |   | $ | 19,190 |   | $ | 21,086 |   |

 

***Noninterest Expense***

Our noninterest expense totaled $56.340 millionfor the year ended December 31, 2005, compared to $50.926 million for2004, an increase of $5.414 million or 10.6%.

We paid higher salaries and benefits costs of$4.386 million or 16.5% compared to 2004, primarily due to additionalpersonnel costs for new positions supporting the increase in the number ofloans and deposits, staffing hired to support the expansion of the consumerfinance company and wholesale mortgage activities, and increased cost ofemployer provided health care and higher performance-based incentive costs. Ouroccupancy costs for 2005 decreased $151,000 or 2.4% compared to 2004,reflecting a decrease in lease expense due to the purchase of our headquartersbuilding in March of 2005.

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Our professional services increased by $265,000 or35.1% and totaled $1.021 million for 2005. We experienced higher service andmaintenance expenses of $348,000 or 23.4% due to an increase in our locations.Consulting fees increased by $349,000 or 90.6% due to our usage of outsideconsultants to enhance revenue results in retail banking and mortgage-banking.Our postage expenses decreased by $218,000 or 22.2%, as a result of a reductionin direct mail mortgage solicitations. Our other noninterest expenses notdetailed in the table below increased $295,000 or 11.3%, primarily due to increasesin charitable contributions of approximately $185,000. The following table shows the breakout ofnoninterest expense:

| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***            | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Salaries and  employee benefits                   |       | $                                           | 30,909     |   | $ | 26,523 |   | $ | 22,681 |   |
| Net occupancy                                     |       | 6,104                                       |       | 6,255 |   | 5,625 |   |
| Furniture,  fixtures, and equipment               |       | 3,057                                       |       | 3,005 |   | 2,875 |   |
| Professional  services                            |       | 1,021                                       |       | 756 |   | 873 |   |
| Advertising                                       |       | 1,352                                       |       | 1,455 |   | 1,193 |   |
| Data processing                                   |       | 2,006                                       |       | 2,079 |   | 2,032 |   |
| Service and  maintenance                          |       | 1,833                                       |       | 1,485 |   | 1,308 |   |
| Office supplies                                   |       | 680                                         |       | 697 |   | 691 |   |
| ATM servicing  expenses                           |       | 1,146                                       |       | 1,112 |   | 922 |   |
| Printing                                          |       | 543                                         |       | 712 |   | 795 |   |
| Corporate  insurance                              |       | 401                                         |       | 378 |   | 297 |   |
| Other real estate  owned expense                  |       | 28                                          |       | (73 | ) | 18 |   |
| FDIC premiums                                     |       | 113                                         |       | 115 |   | 109 |   |
| Consulting fees                                   |       | 734                                         |       | 385 |   | 506 |   |
| Marketing/promotion                               |       | 866                                         |       | 722 |   | 825 |   |
| Postage                                           |       | 764                                         |       | 982 |   | 756 |   |
| Overnight  delivery/courier                       |       | 809                                         |       | 736 |   | 770 |   |
| Security                                          |       | 151                                         |       | 310 |   | 294 |   |
| Dues and  subscriptions                           |       | 438                                         |       | 341 |   | 248 |   |
| Writeoff of  unamortized trust preferred expenses |       | —                                      |       | — |   | 945 |   |
| Loan collection  expenses                         |       | 471                                         |       | 332 |   | 239 |   |
| Other                                             |       | 2,914                                       |       | 2,619 |   | 1,881 |   |
|                                              |       | $56,340                                     |       | $ | 50,926 |   | $45,883 |   |
|                                                   |            |                                             |            |  |  |  |  |  |  |  |

 

***Income Tax Expense***

We recorded tax expense of $3.289 million in 2005for an effective tax rate of 29.6% compared to income tax expense of$2.361 million and an effective tax rate of 27.9% for 2004. The income taxexpense increase is due to higher pre-tax income for 2005 of $11.111 millioncompared to $8.462 million in 2004. The effective tax rate increased due tolower levels of tax-exempt income relative to pre-tax income in 2005 ascompared to 2004.

In September of 2003, we announced that the Bankhad earned significant state tax incentives through its participation in theOne Maryland Economic Development (“One Maryland”) and Job Creation Tax Creditprograms. The tax incentives we earned total $5.5 million based upon aconfirmation received from the Maryland Department of Business and EconomicDevelopment. We will realize the benefits of the incentives in our reportedearnings 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 

33

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expire in 2016. The JobCreation Tax Credit can be carried forward for five years. We expect the Bankto 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 31,2005. Our net operating loss carryforwards for state income tax purposesapproximated $6.940 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 $321,000 to reflect thisuncertainty.

**Financial Condition**

At December 31, 2005,our total assets were $1.362 billion as compared to $1.251 billion atDecember 31, 2004, an increase of 9.0%. Earning assets increased $73.567million or 6.3% to $1.240 billion from $1.167 billion. The growth in assets wasprimarily due to growth in loans outstanding (+$105.440 million) and higherlevels of loans held for sale (+12.396 million) offset by a decrease ininvestment securities (-$46.026 million). Premisesand equipment increased $22.957 million primarily due to the purchase of ourheadquarters building. Growth in total assets was funded by an increased levelof customer deposits of $50.593 million and by a net increase in borrowed funds(including junior subordinated deferrable interest debentures) and repurchaseagreements of $49.190 million. 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 expansion ofFinance Maryland, and successful development and marketing of our deposit andloan products.

***Investment securities available for sale***

Our investment portfolio at December 31, 2005, iscomprised of highly marketable securities, with over 71% 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, 2005, theaverage duration of our investment portfolio was 3.32 years, longer thanthe average duration of 2.94 years at December 31, 2004. This islargely the result of an increase in interest rates, which has extended theexpected maturity of mortgage-backed investment securities. We utilize the investment portfolio as partof our overall asset/liability management practices to minimize structuralinterest rate and market valuation risks associated with changes in interestrates. We continually monitor the credit risk associated with corporateinvestments; the risk is diversified, as the maximum exposure to any onecorporate issuer is slightly more than 1% of total investment securities.

Total investment securities declined $46.026 milliondue to normal principal payments on mortgage-backed securities, scheduledmaturities of other investments, and a decline in market values. At December 31,2005, our net unrealized loss on securities classified as available for saletotaled $5.402 million, compared to $216,000 at December 31, 2004. Weconsider the decline in market values to be temporary largely due to increasesin interest rates, and do not expect to realize losses on any of the securitiescurrently in the investment portfolio. Our investments in trust preferredsecurities, corporate obligations, and common stocks totaled $42.120 million asof December 31, 2005 compared to $37.935 million as of December 31,2004.

34

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Therewere no securities sold during the year ended December 31, 2005, andpurchase activity amounted to $10.367 million. The investment portfoliocomposition is as follows as of December 31:

| ***(dollars in thousands)***           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Mortgage-backed  securities                      |       | $        | 161,112    |     | $          | 200,708  |       | $        | 149,763    |     | $          | 73,842 |   | $ | 87,057 |   |
| Trust preferred  securities                      |       | 34,087   |       | 31,507   |       | 22,987   |       | 26,399   |       | 24,594   |       |
| U.S. government  agency notes                    |       | 68,271   |       | 78,949   |       | 107,314  |       | 12,159   |       | —   |       |
| U.S. Treasury  securities                        |       | 986      |       | 1,000    |       | 1,001    |       | 1,015    |       | 1,014    |       |
| Obligations of  state and municipal subdivisions |       | 2,969    |       | 2,973    |       | —   |       | —   |       | —   |       |
| Corporate  obligations                           |       | 1,777    |       | —   |       | —   |       | 5,921    |       | 2,051    |       |
| Equity securities                                |       | 1,310    |       | 1,531    |       | 1,274    |       | 2,824    |       | 2,624    |       |
| Foreign  government bonds                        |       | 1,481    |       | 1,400    |       | 1,250    |       | 850      |       | 600      |       |
| Other investment  securities                     |       | 4,946    |       | 4,897    |       | 4,848    |       | 4,800    |       | 1,913    |       |
|                                             |       | $        | 276,939    |     | $          | 322,965  |       | $        | 288,437    |     | $          | 127,810 |   | $ | 119,853 |   |

 

Theamortized cost, estimated fair values, and weighted average yields of debtsecurities at December 31, 2005, by contractual maturity, are shown below.Actual maturities may differ from contractual securities because issuers havethe right to call or prepay obligations.

| ** **                                        | ** ** | ** **    | ** ** | ** **     | ** ** | ** **    | ** ** | ** **          | ** ** | **Weighted-** | ** ** |
|---------------------------------------------------|------------|---------------|------------|----------------|------------|---------------|------------|---------------------|------------|---------------|------------|
| ** **                                        | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Average**         | ** ** |
| ***(dollars in thousands)***            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Fair Value** | ** ** | **Yield**     | ** ** |
| Mortgage-backed  securities:                      |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due one to five years                             |       | $             | 5,938      |           |       | $             | —     |                |       | $             | 208        |   | $ | 5,730 |   |   | 4.42 | % |   |
| Due five to ten years                             |       | 44,848        |       |           | —     |          |       | 1,691               |       | 43,157        |       |   | 4.18 | % |   |
| Due after ten years                               |       | 114,925       |       |           | 338        |          |       | 3,038               |       | 112,225       |       |   | 4.67 | % |   |
| Trust preferred  securities:                      |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due after ten years                               |       | 33,843        |       |           | 521        |          |       | 277                 |       | 34,087        |       |   | 7.83 | % |   |
| U.S. government  agency notes:                    |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due within one year                               |       | 4,999         |       |           | —     |          |       | 90                  |       | 4,909         |       |   | 2.20 | % |   |
| Due one to five years                             |       | 64,415        |       |           | —     |          |       | 1,053               |       | 63,362        |       |   | 3.25 | % |   |
| U.S. Treasury  securities:                        |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due one to five years                             |       | 999           |       |           | —     |          |       | 13                  |       | 986           |       |   | 3.13 | % |   |
| Obligations of  state and municipal subdivisions: |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due after ten years                               |       | 2,939         |       |           | 30         |          |       | —              |       | 2,969         |       |   | 4.60 | % |   |
| Corporate  obligations:                           |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due one to five years                             |       | 1,853         |       |           | —     |          |       | 76                  |       | 1,777         |       |   | 5.46 | % |   |
| Foreign  government bonds:                        |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due one to five years                             |       | 1,500         |       |           | —     |          |       | 19                  |       | 1,481         |       |   | 4.47 | % |   |
| Other investment  securities:                     |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due within one year                               |       | 1,985         |       |           | —     |          |       | —              |       | 1,985         |       |   | 3.00 | % |   |
| Due one to five years                             |       | 2,961         |       |           | —     |          |       | —              |       | 2,961         |       |   | 3.86 | % |   |
|                                              |       | $             | 281,205    |           |       | $             | 889        |                |       | $             | 6,465      |   | $ | 275,629 |   |   | 4.58 | % |   |

 

35

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Weighted yields are basedon amortized cost. Mortgage-backed securities are assigned to maturitycategories based on their final maturity.

***Loans***

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.

Thefollowing table sets forth the composition of our loan portfolio as of December 31:

| ***(dollars in thousands)*** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Commercial loans  and lines of credit  |       | $        | 67,759     |     | $          | 60,496   |       | $        | 65,934     |     | $          | 56,760 |   | $ | 64,157 |   |
| Commercial/residential  construction   |       | 112,383  |       | 63,847   |       | 51,225   |       | 31,878   |       | 34,411   |       |
| Commercial  mortgages                  |       | 349,430  |       | 315,676  |       | 244,316  |       | 202,994  |       | 144,836  |       |
| Residential  construction - consumer   |       | 126,708  |       | 135,841  |       | 119,973  |       | 135,189  |       | 125,954  |       |
| Residential  mortgages                 |       | 40,817   |       | 41,589   |       | 40,122   |       | 46,065   |       | 54,456   |       |
| Consumer                               |       | 154,489  |       | 128,697  |       | 88,277   |       | 61,079   |       | 44,851   |       |
| Total loans                            |       | $        | 851,586    |     | $          | 746,146  |       | $        | 609,847    |     | $          | 533,965 |   | $ | 468,665 |   |

 

Total loans increased $105.440 million during 2005. Theunderlying economic strength in our core market, affordable interest rates, andcontinued emphasis on business development all contributed to the continuedgrowth in loans. The largest increase in our loan portfolio occurred in thecommercial/residential construction category, which increased by$48.536 million, and in the commercial mortgages category, which increasedby $33.754 million. Growth in these types of our commercial loansreflected successful marketing and sales efforts of the Bank’s commerciallending unit, a strong regional economy, as well as the continuation of afavorable interest rate environment. Our consumer loans increased by$25.792 million due to successful marketing campaigns, a favorableeconomic and interest rate environment, growth in consumer finance receivablesgenerated by Finance Maryland, and successful cross-selling of homeequity products to first mortgage customers. Residential construction loans toconsumers decreased $9.133 million as our origination activity in thisproduct line decreased due to increased competition. Our residential realestate loans, which consist primarily of 3- and 5-yearadjustable-rate mortgages, decreased by $772,000.

Approximately 35.2% of our loans have adjustable ratesas of December 31, 2005 compared to approximately 34.1% at December 31,2004, including adjustable rate first mortgages indexed to either U.S. Treasuryobligations or LIBOR and variable home equity lines of credit tied to the Primeinterest rate. Our variable rate loans adjust to the current interest rateenvironment, whereas fixed rates do not allow this flexibility. If interestrates were to increase in the future, our interest earned on the variable rateloans would improve, and if rates were to fall, the interest we earn woulddecline, thus impacting our interest income. See our discussion in “InterestRate Sensitivity” later in this section for more information on interest ratefluctuations.

36

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Thefollowing table sets forth the maturity distribution for our loan portfolio at December 31,2005. Some of our loans may be renewed or repaid prior to maturity. Therefore,the following table should not be used as a forecast of our future cashcollections. 

| ** **                             | ** ** | **Maturing**                                | ** ** | ** **                                      | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **In one year or less** | ** ** | **After 1 through 5 years** | ** ** | **After 5 years** | ** ** | ** ** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Fixed**                                   | ** ** | **Variable**                                    | ** ** | **Fixed** | ** ** | **Variable** | ** ** | **Fixed** | ** ** | **Variable** | ** ** | **Total** | ** ** |
| Commercial loans and                   |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| lines of credit                        |       | $                                           | 23,762     |                                            | $          | 17,517 |   | $ | 15,509 |   | $ | 3,313 |   | $ | 678 |   | $ | 6,980 |   | $ | 67,759 |   |
| Commercial/                            |       |                                        |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| residential  construction              |       | 33,510                                      |       | 35,330                                          |       | 22,477 |   | 12,977 |   | 1,799 |   | 6,290 |   | 112,383 |   |
| Commercial  mortgages                  |       | 122,844                                     |       | 40,978                                          |       | 107,949 |   | 36,909 |   | 7,720 |   | 33,030 |   | 349,430 |   |
| Residential  construction -consumer    |       | 124,871                                     |       | —                                          |       | 1,796 |   | — |   | 41 |   | — |   | 126,708 |   |
| Residential  mortgages                 |       | 4,282                                       |       | 429                                             |       | 1,761 |   | 1,873 |   | 9,079 |   | 23,393 |   | 40,817 |   |
| Consumer                               |       | 24,018                                      |       | 9,746                                           |       | 34,200 |   | 35,452 |   | 15,835 |   | 35,238 |   | 154,489 |   |
| Total loans                            |       | $                                           | 333,287    |                                            | $          | 104,000 |   | $ | 183,692 |   | $ | 90,524 |   | $ | 35,152 |   | $ | 104,931 |   | $ | 851,586 |   |

 

***Credit Risk Management***

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 policies aredesigned 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.

The allowance consists of three elements: (1) specificreserves for individual credits; (2) general reserves for types orportfolios of loans based on historical loan loss experience, judgmentally adjustedfor current conditions and credit risk concentrations; and (3) unallocatedreserves. Combined specific reserves and general reserves by loan type areconsidered allocated reserves. All outstanding loans are considered inevaluating the adequacy of the allowance. The allowance does not provide forestimated losses stemming from uncollectible interest because we generallyrequire all accrued but unpaid interest to be reversed once a loan is placed onnonaccrual status.

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.

37

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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 underlyingcollateral. However, our determination of the appropriate allowance level isbased upon a number of assumptions we make about future events, which webelieve are reasonable, but which may or may not prove valid. Thus, there canbe no assurance that our charge-offs in future periods will not exceed ourallowance for loan losses or that we will not need to make additional increasesin our allowance for loan losses.

The process of establishing the allowance with respectto our commercial and commercial real estate loan portfolios begins when a loanofficer initially assigns each loan a risk grade, using established creditcriteria. Risk grades are subject to review and validation annually by anindependent consulting firm, as well as periodically by the our internal creditreview function. Management reviews, on a quarterly basis, current conditionsthat affect various lines of business and may warrant adjustments to historicalloss experience in determining the required allowance. Adjustment factors thatare considered include: the level and trends in past-due and nonaccrual loans;trends in loan volume; effects of any changes in lending policies andprocedures or underwriting standards; and the experience and depth of lendingmanagement. Historical factors by product type are adjusted each quarter basedon actual loss history. Management also evaluates credit risk concentrations,including trends in large dollar exposures to related borrowers, and industryand geographic concentrations. All nonaccrual loans in the commercial andnonresidential real estate portfolios, as well as other loans in the portfoliosidentified as having the potential for further deterioration, are analyzedindividually to confirm the appropriate risk grading and accrual status, and todetermine the need for a specific reserve.

Consumer and residential mortgage loans are segregatedinto homogeneous pools with similar risk characteristics. Trends and currentconditions in retail and residential mortgage pools are analyzed and historicalloss experience is adjusted accordingly. Adjustment factors for the retail andresidential mortgage portfolios are consistent with those for the commercialportfolios.

The unallocated portion of the allowance is intendedto provide for losses that are not identified when establishing the specificand general portions of the allowance and is based upon management’s evaluationof various conditions that are not directly measured in the determination ofthe formula and specific allowances. Such conditions include general economicand business conditions affecting key lending areas, credit quality trends(including trends in delinquencies and nonperforming loans expected to resultfrom existing conditions), loan volumes and concentrations, specific industryconditions within portfolio categories, recent loss experience in particularloan categories, duration of the current business cycle, bank regulatoryexamination results, findings of internal loan examiners, and management’sjudgment with respect to various other conditions including loan administrationand management and the quality of risk identification systems. Executivemanagement reviews these conditions quarterly. We have risk managementpractices designed to ensure timely identification of changes in loan riskprofiles; however, undetected losses may exist inherently within the loanportfolios. The judgmental aspects involved in applying the risk gradingcriteria, analyzing the quality of individual loans and assessing collateralvalues can also contribute to undetected, but probable, 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 increased theamount of our allowance in 2005 primarily due to loan growth. Our allowance forloan losses to our total loans was 1.38% as of December 31, 2005, up from1.28% as of December 31, 2004. Our provision for loan losses totaled$3.287 million for the year ended December 31, 2005, as compared to$2.243 million for the year ended December 31, 2004.

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Our allowance for loan losses at December 31,2005 totaled $11.743 million, as compared with the December 31, 2004balance of $9.580 million, an increase of $2.163 million or 22.6%. Werecognized net charge-offs of $1.124 million and $1.355 million for 2005 and2004, respectively. Our net charge-offs as a percentage of our average loanswere 0.14% for 2005 compared to 0.21% in 2004. Our net charge-off levels forthe Bank were $13,000 in 2005 compared to $412,000 in 2004, reflecting lowercharge-offs associated with construction loan and residential mortgage loans.Finance Maryland net charge-offs totaled $1.111 million (2.76% of averageconsumer finance loans) in 2005 compared to $943,000 (3.50% of average consumerfinance loans) in 2004. We consider the allowance to be sufficient to address thecredit losses inherent in the current loan portfolio.

The following table summarizes the activities in ourallowance:

| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Allowance for  loan losses, beginning of year |       | $                                           | 9,580      |   | $ | 8,692 |   | $ | 7,188 |   | $ | 5,524 |   | $ | 4,341 |   |
| Loans charged  off:                           |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                    |       | (15                                         | )          | — |   | — |   | — |   | (347 | ) |
| Commercial/residential construction           |       | —                                      |       | (4 | ) | — |   | (65 | ) | (50 | ) |
| Commercial mortgages                          |       | —                                      |       | — |   | — |   | — |   | — |   |
| Residential construction - consumer           |       | —                                      |       | (251 | ) | (244 | ) | (200 | ) | — |   |
| Residential mortgages                         |       | —                                      |       | — |   | (19 | ) | — |   | (5 | ) |
| Consumer                                      |       | (1,492                                      | )          | (1,318 | ) | (1,003 | ) | (288 | ) | (116 | ) |
| Total loans charged off                       |       | (1,507                                      | )          | (1,573 | ) | (1,266 | ) | (553 | ) | (518 | ) |
| Recoveries:                                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                    |       | —                                      |       | — |   | 17 |   | — |   | 69 |   |
| Commercial/residential construction           |       | —                                      |       | — |   | 65 |   | — |   | — |   |
| Commercial mortgages                          |       | —                                      |       | — |   | — |   | — |   | — |   |
| Residential construction - consumer           |       | 89                                          |       | 11 |   | — |   | — |   | — |   |
| Residential mortgages                         |       | —                                      |       | — |   | 1 |   | 9 |   | 1 |   |
| Consumer                                      |       | 294                                         |       | 207 |   | 151 |   | 33 |   | 6 |   |
| Total recoveries                              |       | 383                                         |       | 218 |   | 234 |   | 42 |   | 76 |   |
| Net charge-offs                               |       | (1,124                                      | )          | (1,355 | ) | (1,032 | ) | (511 | ) | (442 | ) |
| Provision for  loan losses                    |       | 3,287                                       |       | 2,243 |   | 2,536 |   | 2,175 |   | 1,625 |   |
| Allowance for  loan losses, end of period     |       | $                                           | 11,743     |   | $ | 9,580 |   | $ | 8,692 |   | $ | 7,188 |   | $ | 5,524 |   |
| Loans (net of  premiums and discounts):       |       |                                        |       |   |   |   |   |   |   |   |   |
| Period-end balance                            |       | $                                           | 851,586    |   | $ | 746,146 |   | $ | 609,847 |   | $ | 533,965 |   | $ | 468,665 |   |
| Average balance during period                 |       | 804,719                                     |       | 652,506 |   | 552,528 |   | 496,486 |   | 455,780 |   |
| Allowance as a  percentage of period-end      |       |                                        |       |   |   |   |   |   |   |   |   |
| loan balance                                  |       | 1.38                                        | %          | 1.28 | % | 1.43 | % | 1.35 | % | 1.18 | % |
| Percent of  average loans:                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                     |       | 0.41                                        | %          | 0.34 | % | 0.46 | % | 0.44 | % | 0.36 | % |
| Net charge-offs                               |       | 0.14                                        | %          | 0.21 | % | 0.19 | % | 0.10 | % | 0.10 | % |

 

39

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Thefollowing table summarizes our allocation of allowance by loan type as of December 31:

| ** **                             | ** ** | **2005**   | ** ** | **2004**          | ** ** | **2003**          | ** ** |
|----------------------------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **        | ** ** | **Percent**       | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **        | ** ** | **of Loans** | ** ** | ** ** | ** ** | ** ** | ** ** | **of Loans** | ** ** | ** ** | ** ** | ** ** | ** ** | **of Loans** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Percent**       | ** ** | **to Total** | ** ** | ** ** | ** ** | **Percent** | ** ** | **to Total** | ** ** | ** ** | ** ** | **Percent** | ** ** | **to Total** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Loans**         | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Loans** | ** ** |
| Commercial                             |       |       | $          | 1,302             |       |              |       | 11.1 | % |   |   | 8.0 | % |   |   | $ | 1,819 |   |   |   | 19.0 | % |   |   | 8.1 | % |   |   | $ | 978 |   |   |   | 11.3 | % |   |   | 10.8 | % |   |
| Commercial/residential                 |       |       |       |              |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| construction                           |       |       | 1,031      |              |       |              | 8.8        | % |   |   | 13.2 | % |   |   | 508 |   |   |   | 5.3 | % |   |   | 8.6 | % |   |   | 303 |   |   |   | 3.5 | % |   |   | 8.4 | % |   |
| Commercial mortgages                   |       |       | 2,908      |              |       |              | 24.8       | % |   |   | 41.0 | % |   |   | 2,804 |   |   |   | 29.3 | % |   |   | 42.3 | % |   |   | 2,481 |   |   |   | 28.5 | % |   |   | 40.0 | % |   |
| Residential construction  -            |       |       |       |              |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| consumer                               |       |       | 1,461      |              |       |              | 12.4       | % |   |   | 14.9 | % |   |   | 1,523 |   |   |   | 15.9 | % |   |   | 18.2 | % |   |   | 1,853 |   |   |   | 21.3 | % |   |   | 19.7 | % |   |
| Residential mortgages                  |       |       | 18         |              |       |              | 0.1        | % |   |   | 4.8 | % |   |   | 20 |   |   |   | 0.2 | % |   |   | 5.6 | % |   |   | 46 |   |   |   | 0.5 | % |   |   | 6.6 | % |   |
| Consumer                               |       |       | 2,242      |              |       |              | 19.1       | % |   |   | 18.1 | % |   |   | 1,653 |   |   |   | 17.2 | % |   |   | 17.2 | % |   |   | 1,139 |   |   |   | 13.1 | % |   |   | 14.5 | % |   |
| Unallocated                            |       |       | 2,781      |              |       |              | 23.7       | % |   |   | — |   |   |   | 1,253 |   |   |   | 13.1 | % |   |   | — |   |   |   | 1,892 |   |   |   | 21.8 | % |   |   | — |   |   |
| Total                                  |       |       | $          | 11,743            |       |              |       | 100.0 | % |   |   | 100.0 | % |   |   | $ | 9,580 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |   | $ | 8,692 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

| ** **                             | ** ** | **2002**   | ** ** | **2001**          | ** ** |
|----------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **        | ** ** | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **        | ** ** | **of Loans** | ** ** | ** ** | ** ** | ** ** | ** ** | **of Loans** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Percent**       | ** ** | **to Total** | ** ** | ** ** | ** ** | **Percent** | ** ** | **to Total** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Loans** | ** ** | **Amount** | ** ** | **of Total** | ** ** | **Loans** | ** ** |
| Commercial                             |       |       | $          | 826               |       |   |   | 11.5 | % |   |   | 10.6 | % |   |   | $ | 1,141 |   |   |   | 20.7 | % |   |   | 13.7 | % |   |
| Commercial/residential                 |       |       |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| construction                           |       |       | 254        |              |       |   | 3.5 | % |   |   | 6.0 | % |   |   | 81 |   |   |   | 1.5 | % |   |   | 7.3 | % |   |
| Commercial mortgages                   |       |       | 1,632      |              |       |   | 22.7 | % |   |   | 38.0 | % |   |   | 1,377 |   |   |   | 24.9 | % |   |   | 30.9 | % |   |
| Residential  construction -            |       |       |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| consumer                               |       |       | 2,128      |              |       |   | 29.6 | % |   |   | 25.3 | % |   |   | 936 |   |   |   | 16.9 | % |   |   | 26.9 | % |   |
| Residential mortgages                  |       |       | 23         |              |       |   | 0.3 | % |   |   | 8.6 | % |   |   | 99 |   |   |   | 1.8 | % |   |   | 11.6 | % |   |
| Consumer                               |       |       | 640        |              |       |   | 8.9 | % |   |   | 11.5 | % |   |   | 112 |   |   |   | 2.0 | % |   |   | 9.6 | % |   |
| Unallocated                            |       |       | 1,685      |              |       |   | 23.5 | % |   |   | — |   |   |   | 1,778 |   |   |   | 32.2 | % |   |   | — |   |   |
| Total                                  |       |       | $          | 7,188             |       |   |   | 100.0 | % |   |   | 100.0 | % |   |   | $ | 5,524 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

Loans are placed on nonaccrual status when they arepast-due 90 days as to either principal or interest or when, in the opinion ofmanagement, the collection of all interest and/or principal is in doubt.Management may grant a waiver from nonaccrual status for a 90-daypast-due loan that is both well secured and in the process of collection. Aloan remains in nonaccrual status until the loan is current as to payment ofboth principal and interest (or when past due payments are received in cash inthe case of Finance Maryland consumer loans) and the borrower demonstrates theability to pay and remain current. As a result of our ongoing review of theloan portfolio, 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 nonaccrual loans only when it isreceived.

Thefollowing table provides information concerning nonperforming assets andpast-due loans:

| ***(dollars in thousands)***      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Nonaccruing loans                           |       | $        | 3,019      |     | $          | 4,628    |       | $        | 4,774      |     | $          | 1,278 |   | $ | 1,652 |   |
| Real estate  acquired by foreclosure        |       | 931      |       | 65       |       | 296      |       | 2,247    |       | 2,683    |       |
| Total  nonperforming assets                 |       | $        | 3,950      |     | $          | 4,693    |       | $        | 5,070      |     | $          | 3,525 |   | $ | 4,335 |   |
| Loans past-due 90 days or more and accruing |       | $        | 860        |     | $          | 1,658    |       | $        | 2,258      |     | $          | 9,346 |   | $ | 5,257 |   |

 

As of December 31, 2005, we had$3.019 million in nonaccrual loans, as compared with $4.628 millionat December 31, 2004. We held other real estate owned of $931,000 at December 31,2005, compared to $65,000 at December 31, 2004. Our nonperforming assets,the total of nonaccrual loans and other real estate owned, decreased to 0.29%of our total assets at December 31, 2005 from 0.38% of our total assets 

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at December 31, 2004,reflecting the decrease in our total level of nonperforming assets and an increasein total assets.

Our allowance for loan losses represented 297.3% ofnonperforming assets as of December 31, 2005 compared to 204.1% as of December 31,2004. Our loans past-due 90 days or more and accruing decreasedsignificantly, ending 2005 at $860,000, compared to $1.658 million at theend of 2004.

Potential problem loans consist of loans that arecurrently performing in accordance with contractual terms; however, managementhas designated these assets as potential problem loans due to concerns aboutthe ability of the obligor to continue to comply with repayment terms that mayresult from the obligor’s potential operating or financial difficulties. At theend of 2005, loans of this type that are not included in the above table ofnonperforming and past-due loans amounted to approximately $5.449 million. Twoof the loans (44% of total potential problem loans) are commercialrelationships that are well secured by commercial real estate and otherbusiness assets that are considered sufficient to collect all amounts due inthe event of deterioration in the customer’s financial condition. The remainingsix loans (56% of total potential problem loans) are consumer residentialconstruction loans that are well secured by property with residential realestate as the highest and best use and have an appraised value in excess of thecarrying value of the loan. The average relationship was $681,000 and thelargest relationship was $2.243 million. Depending on changes in the economyand other future events, these loans and others not presently identified asproblem loans could be reclassified as nonperforming or impaired loans in thefuture.

A loan is determined to be impaired when, based oncurrent information and events, it is probable that we will be unable to collectall amounts due according to the contractual terms of the loan agreement. Aloan is not considered impaired during a period of delay in payment if weexpect to collect all amounts due, including past-due interest. We generallyconsider a period of delay in payment to include delinquency up to 90 days.

In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of aLoan” (“SFAS No. 114”), we measure impaired loans; (i) at the presentvalue of expected future cash flows discounted at the loan’s effective interestrate; (ii) at the observable market price; or (iii) at the fair valueof the collateral if the loan is collateral dependent.  If the measure of the impaired loan isless than the recorded investment in the loan, an impairment is recognizedthrough a valuation allowance and corresponding provision for credit losses.SFAS No. 114 does not apply to larger groups of smaller-balancehomogeneous loans such as consumer installment, residential first and secondmortgage loans, and credit card loans. These loans are collectively evaluatedfor impairment.

Loans we consider impairedat December 31, 2005 totaled $1.702 million compared to$3.474 million at December 31, 2004. At December 31, 2005 and2004, $687,000 and $1.867 million, respectively, of total impaired loans werereal estate collateral dependent. Real estate collateral dependent loans aremeasured based on the fair value of the collateral. The valuation allowance forimpaired loans was approximately $851,000 at December 31, 2005 and $1.434million at December 31, 2004. An impaired loan is charged off when theloan, or a portion thereof, is considered uncollectible.

***Deposits***

We use deposits as theprimary source of funding of our loans. We offer individuals andbusinesses a wide variety of deposit accounts. These accounts include checking,savings, money market, and certificates of deposit and are obtained primarilyfrom communities we serve. We have no brokered deposits.

Depositstotaled $876.010 million as of December 31, 2005, increasing $50.593million or 6.1% from the December 31, 2004 balance of $825.417 million. Theincrease in deposits is attributable to management’s growth strategy, whichincludes significant marketing, promotion, and cross selling of existingcustomers into additional products. Continued successful marketing campaignshave maintained a 

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strong mix of noninterest checking accounts, NOW, andmoney market accounts. The following table details the average amount and theaverage rate paid for each category of deposits as of December 31:

| ** **                             | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                             | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Balance** | ** ** | **Rate**    | ** ** | **Balance** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** |
| NOW accounts                           |       | $           | 13,065     |        |       | 0.20        | %          |   | $ | 55,488 |   |   | 0.34 | % |   | $ | 59,314 |   |   | 0.53 | % |   |
| Money market  accounts                 |       | 203,222     |       |        | 1.58       | %           |       | 158,802 |   |   | 0.84 | % |   | 149,441 |   |   | 1.01 | % |   |
| Savings accounts                       |       | 71,789      |       |        | 0.30       | %           |       | 67,009 |   |   | 0.35 | % |   | 56,556 |   |   | 0.65 | % |   |
| Certificates of  deposit               |       | 395,645     |       |        | 3.35       | %           |       | 367,847 |   |   | 3.00 | % |   | 328,411 |   |   | 3.41 | % |   |
| Total  interest-bearing deposits       |       | 683,721     |       |        | 2.45       | %           |       | 649,146 |   |   | 1.97 | % |   | 593,722 |   |   | 2.25 | % |   |
| Noninterest-bearing demand deposits    |       | 174,115     |       |        |       |        |       | 143,706 |   |   |   |   |   | 119,707 |   |   |   |   |   |
| Total deposits                         |       | $           | 857,836    |        |       | 1.95        | %          |   | $ | 792,852 |   |   | 1.62 | % |   | $ | 713,429 |   |   | 1.88 | % |   |

 

Thefollowing table provides the maturities of certificates of deposit in amountsof $100,000 or more at December 31:

| ***(dollars in thousands)*** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Maturing in:                           |       |     |       |     |       |     |       |
| 3 months or less                       |       | $        | 7,038      |     | $          | 3,636    |       | $ | 7,223 |   |
| Over 3 months through 6 months         |       | 6,899    |       | 5,411    |       | 6,310    |       |
| Over 6 months through 12 months        |       | 14,282   |       | 11,654   |       | 8,856    |       |
| Over 12 months                         |       | 132,239  |       | 124,378  |       | 93,438   |       |
|                                   |       | $        | 160,458    |     | $          | 145,079  |       | $ | 115,827 |   |

 

Core deposits represent deposits which we believe willnot be affected by changes in interest rates, and therefore, will be retainedregardless of the movement of interest rates. We consider our core deposits tobe all noninterest-bearing, NOW, money market accounts less than $100,000, andsaving deposits, as well as all time deposits less than $100,000 that mature ingreater than one year. As of December 31, 2005, our core deposits were$553.441 million. The remainder of our deposits could be susceptible toattrition due to interest rate movements.

***Borrowings***

Our borrowings consist of short-term promissory notesissued to certain qualified investors, short-term and long-term advances fromthe Federal Home Loan Bank at Atlanta (“FHLB”), a mortgage warehouse line ofcredit, long-term repurchase agreements with callable options, a mortgage loan,a long-term line of credit, and junior subordinated deferrable interestdebentures. Our short-term promissory notes are in the form of commercialpaper, which reprice daily and have maturities of 270 days or less. Ouradvances from the 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 15 years and generally contain prepayment penalties.

Long-term borrowings consist of advances from theFHLB, a mortgage loan on our headquarters building, and a line of credit andtotaled $131.000 million and $109.369 million at December 31, 2005 andDecember 31, 2004, respectively. The long-term line of credit is used tofund Finance Maryland’s lending business. As of December 31, 2005, totalborrowings under this line were $36.290 million, up from $24.369 million atDecember 31, 2004. In March of 2005, we purchased our headquartersbuilding and assumed the existing mortgage loan on the property. As ofDecember 31, 2005, the balance on the loan was $9.710 million.

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Short-term borrowings consist of short-term promissorynotes, short-term advances from the FHLB, and a mortgage warehouse line ofcredit secured by certain loans held for sale. Short-term borrowings increased$37.084 million, from $162.292 million at December 31, 2004 to $199.376million at December 31, 2005, reflecting increased borrowing required asgrowth in earning assets exceeded growth in deposits.

Our repurchase agreementsmay be short-term or long-term, are priced at origination, and cannot be prepaidwithout penalty. During the 2005, we repaid $25.000 million inrepurchase agreements.

***Junior Subordinated Deferrable Interest Debentures***

As an ongoing part of our funding and capitalplanning, we issue trust preferred securities from statutory trusts, which arewholly owned by First Mariner Bancorp. The proceeds from the sales of trustpreferred securities, combined with our equity investment in these trusts, areexchanged for subordinated deferrable interest debentures. We currentlymaintain seven of these trusts with aggregated debentures of $73.724 million asof December 31, 2005 compared to $58.249 as of December 31, 2004.

On August 18, 2005, we formed Mariner CapitalTrust VII, which issued $5.0 million of trust preferred securities at aninitial variable interest rate of 5.76%, where the interest rate will resetquarterly. These debentures, which have a maturity date of September 15,2035, may be redeemed at any time after September 15, 2010, and requirequarterly distributions by the trust to the holder of the trust preferredsecurities.

On December 28, 2005, we formed Mariner CapitalTrust VIII, which issued $10.0 million of trust preferred securities at aninitial fixed interest rate of 6.26%. The rate will remain fixed for afive-year term, then convert to a variable rate, resetting quarterly. Theselong-term borrowings, which bear a maturity date of December 30, 2035, maybe redeemed at any time after December 30, 2010, and require quarterlydistributions by the trust to the holder of the trust preferred securities. Thenotes under both trusts are subordinated to the prior payment of any otherindebtedness of the Company that, by its terms, is not similarly subordinated.The trust preferred securities issued by both trusts qualify as Tier 1 capital,subject to regulatory guidelines that limit the amount included to an aggregateof 25% of Tier 1 capital.

See Notes 9 and 10 ofthe Consolidated Financial Statements for more information concerning ourborrowings, repurchase agreements, and junior subordinated deferrable trustdebentures.

**Capital Resources**

Stockholders’ equity increased $8.061 million in 2005to $72.375 million as of December 31, 2005 from $64.314 million as of December 31,2004. Accumulated other comprehensive loss deteriorated by $3.184 million dueto the decrease in market values of securities classified as available forsale, which occurred as increases in market interest rates further devalued theavailable for sale securities portfolio. Retained earnings grew by theretention of net income of $7.822 million for 2005. Common stock and additionalpaid-in-capital increased by $3.423 million due to the sale of stock throughthe exercise of options and warrants ($4.629 million), and shares issuedthrough the employee stock purchase plan ($372,000), offset by stockrepurchases by the Company of $1.578 million.

Banking regulatory authorities have implemented strictcapital guidelines directly related to the credit risk associated with aninstitution’s assets. Banks and bank holding companies are required to maintaincapital levels based on their “risk adjusted” assets so that categories ofassets with higher “defined” credit risks will require more capital supportthan assets with lower risk. Additionally, capital must be maintained tosupport certain 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 

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from time to time throughan offering of common stock or other securities. As reflected in the tablebelow, both the Company and the Bank have exceeded their capital adequacyrequirements as of December 31, 2005 and 2004 and met the requirement for “wellcapitalized” status under Federal Banking Regulation. We continually monitorour capital adequacy ratios to ensure that we exceed regulatory capitalrequirements.

We have a total of $71.500 million in trust preferredsecurities which are eligible as capital for regulatory purposes. As of December 31,2005, $25.230 million in trust preferred securities was included in Tier 1capital and the remaining $46.270 million was included in Total Capital. SeeNote 10 of the Consolidated Financial Statements for more information concerningour trust preferred 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).

Ourcapital position is presented in the following table:

| ** **                               | ** ** | ** **            | ** ** | ** **           | ** ** | ** **                 | ** ** | **Minimum**                | ** ** | **To be Well**   | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | ** **            | ** ** | ** **           | ** ** | ** **                 | ** ** | **Requirements**           | ** ** | **Capitalized Under** | ** ** |
| ** **                               | ** ** | **December 31,** | ** ** | **for Capital** | ** ** | **Prompt Corrective** | ** ** |
| ** **                               | ** ** | **2005**              | ** ** | **2004**             | ** ** | **2003**                   | ** ** | **Adequacy Purposes** | ** ** | **Action Provision**  | ** ** |
| Regulatory  capital ratios:              |       |                  |       |                 |       |                       |       |                       |       |                       |       |   |   |   |   |
| Leverage:                                |       |                  |       |                 |       |                       |       |                       |       |                       |       |   |   |   |   |
| Consolidated                             |       | 7.4                   | %          | 7.1                  | %          | 7.7                        | %          |                       | 4.0        | %                          |       |   | 5.0 | % |   |
| Bank                                     |       | 6.8                   | %          | 6.5                  | %          | 7.2                        | %          |                       | 4.0        | %                          |       |   | 5.0 | % |   |
| Tier 1 capital to  risk-weighted assets: |       |                  |       |                 |       |                       |       |                       |       |                       |       |   |   |   |   |
| Consolidated                             |       | 9.5                   | %          | 9.3                  | %          | 10.2                       | %          |                       | 4.0        | %                          |       |   | 6.0 | % |   |
| Bank                                     |       | 9.0                   | %          | 8.7                  | %          | 9.7                        | %          |                       | 4.0        | %                          |       |   | 6.0 | % |   |
| Total capital to  risk-weighted assets:  |       |                  |       |                 |       |                       |       |                       |       |                       |       |   |   |   |   |
| Consolidated                             |       | 14.9                  | %          | 14.1                 | %          | 15.0                       | %          |                       | 8.0        | %                          |       |   | 10.0 | % |   |
| Bank                                     |       | 10.7                  | %          | 10.2                 | %          | 10.7                       | %          |                       | 8.0        | %                          |       |   | 10.0 | % |   |

 

**Liquidity**

Liquiditydescribes our ability to meet financial obligations, including lendingcommitments and contingencies, that arise during the normal course of business.Liquidity is primarily needed to meet the borrowing and deposit withdrawalrequirements of our customers, as well as to meet current and plannedexpenditures. These cash requirements are met on a daily basis through theinflow of deposit funds, and the maintenance of short-term overnightinvestments, maturities and calls in our investment portfolio, and availablelines of credit with the FHLB, which requires pledged collateral. Fluctuationsin deposit and short-term borrowing balances may be influenced by the interestrates paid, general consumer confidence and the overall economic environment.There can be no assurances that deposit withdrawals and loan fundings will notexceed all available sources of liquidity on a short-term basis. Such asituation would have an adverse effect on our ability to originate new loansand maintain reasonable loan and deposit interest rates, which would negativelyimpact earnings.

Theborrowing requirements of customers include commitments to extend credit andthe unused portion of lines of credit (collectively “commitments”) and totaled$374.944 million at December 31, 2005. Historically, many of thecommitments expire without being fully drawn; therefore, the total commitmentamounts do not necessarily represent future cash requirements. Commitments forreal estate development and construction, which totaled $160.289 million, or42.8% of the $374.944 million, are generally short-

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term in nature, satisfying cash requirements withprincipal repayments as construction properties financed are generally repaidwith permanent financing. Available credit lines represent the unused portionof credit previously extended and available to the customer as long as there isno violation of material contractual conditions. Commitments to extend creditfor residential mortgage loans of $97.067 million, or 25.9% of the $374.944million at December 31, 2005, generally expire within 60 days. Commercialcommitments to extend credit and unused lines of credit of $28.285 million, or7.5% of the $374.944 million at December 31, 2005, generally do not extendfor more than 12 months. Consumer commitments to extend credit and unused linesof credit of $15.817 million, or 4.2% of the $374.944 million at December 31,2005, are generally open ended. At December 31, 2005, available homeequity lines totaled $73.486 million. Home equity credit lines generally extendfor a period of 10 years.

Capitalexpenditures for various branch locations and equipment can be a significantuse of liquidity.  As of December 31,2005, we plan on expending approximately $8.521 million in the next 12 monthson our premises and equipment.

Customerwithdrawals are also a principal use of liquidity, but are generally mitigatedby growth in customer funding sources, such as deposits and short-termborrowings. While balances may fluctuate up and down in any given period,historically we have experienced a steady increase in total customer fundingsources.

TheBank’s principal sources of liquidity are cash and cash equivalents (which arecash on hand or amounts due from financial institutions, federal funds sold,money market mutual funds, and interest bearing deposits), available for salesecurities, loans held for sale, deposit accounts, and borrowings. The levelsof such sources are dependent on the Bank’s operating, financing, and investingactivities at any given time. We continue to primarily rely on core depositsfrom customers to provide stable and cost-effective sources of funding tosupport our loan growth. We also seek to augment such deposits with longer termand higher yielding certificates of deposit. Cash and cash equivalents, whichtotaled $45.835 million at December 31, 2005, have immediate availabilityto meet our short-term funding needs. Our entire investment portfolio isclassified as available for sale, is highly marketable, and available to meetour liquidity needs. Loans held for sale, which totaled $92.351 million atDecember 31, 2005, are committed to be sold into the secondary market andgenerally are funded within 60 days. Our residential real estate portfolioincludes loans that are underwritten to secondary market criteria and provideus an additional source of liquidity. Additionally, our residentialconstruction loan portfolio provides a source of liquidity as constructionperiods generally range from 9-12 months, and these loans aresubsequently financed with permanent first mortgages and sold into thesecondary market. Our loan to deposit ratio stood at 97.2% as of December 31,2005 and 90.4% at December 31, 2004.

Wealso have the ability to utilize established credit as an additional source ofliquidity. The Bank, as a member of the FHLB, must pledge certain loans and/orinvestment securities to the FHLB before advances can be obtained. Under thisline, the Bank may borrow up to $392.086 million. Other lines of creditavailable to the Bank include a mortgage warehouse line of credit and securedand unsecured federal funds purchased lines, and totaled $255.321 million atyear-end. As of December 31, 2005, our remaining borrowing capacity on allof our credit lines totaled $201.854 million based upon qualifying assets thatwe have not pledged to support existing borrowings.

We are not aware of any known trends, demands,commitments, or uncertainties that are reasonably likely to result in materialchanges in our liquidity.

**InterestRate Sensitivity**

Interestrate sensitivity is an important factor in the management of the compositionand maturity configurations of our earning assets and our funding sources. Theprimary objective of our asset/liability management is to ensure the steadygrowth of our primary earnings component, net interest income. Our net interestincome can fluctuate with significant interest rate movements. We may attemptto structure the statement of financial condition so that repricingopportunities exist for both assets and liabilities in 

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roughly equivalent amounts at approximately the sametime intervals. However, imbalances in these repricing opportunities at anypoint in time may be appropriate to mitigate risks from fee income subject tointerest rate risk, such as mortgage-banking activities.

Themeasurement of our interest rate sensitivity, or “gap,” is one of thetechniques used in asset/liability management. Interest sensitive gap is thedollar difference between our assets and liabilities which are subject tointerest rate pricing within a given time period, including both floating rateor adjustable rate instruments and instruments which are approaching maturity.

Ourmanagement and our board of directors oversee the asset/liability managementfunction and meet periodically to monitor and manage the statement of financialcondition, control interest rate exposure, and evaluate pricing strategies. Weevaluate the asset mix of the statement of financial condition continually interms of several variables: yield, credit quality, funding sources andliquidity. Our management of the liability mix of the statement of financialcondition focuses on expanding our various funding sources and promotion ofdeposit products with desirable repricing or maturity characteristics.

Intheory, we can diminish interest rate risk through maintaining a nominal levelof interest rate sensitivity. In practice, this is made difficult by a numberof factors including cyclical variation in loan demand, different impacts onour interest-sensitive assets and liabilities when interest rates change,and the availability of our funding sources. Accordingly, we strive to managethe interest rate sensitivity gap by adjusting the maturity of and establishingrates on the earning asset portfolio and certain interest-bearingliabilities commensurate with our expectations relative to market interestrates. Additionally, we may employ the use of off-balance sheet instruments,such as interest rate swaps or caps, to manage our exposure to interest ratemovements. Generally, we attempt to maintain a balance between rate-sensitiveassets and liabilities that is appropriate to minimize our overall interestrate risk, not just our net interest margin.

Ourinterest rate sensitivity position as of December 31, 2005 is presented inthe following table. Our assets and liabilities are scheduled based on maturityor repricing data except for mortgage loans and mortgage-backed securities thatare based on prevailing prepayments assumptions, and core deposits which arebased on core deposit studies done for banks in the Mid-Atlantic region. Thedifference between our rate-sensitive assets and rate-sensitive liabilities orthe interest rate sensitivity gap, is shown at the bottom of the table. As of December 31,2005, our interest sensitive assets exceeded our interest sensitive liabilitieswithin a one year period by $167.664 million or 12.3% of total assets. Asof December 31, 2004, our interest rate sensitive assets exceeded ourinterest-sensitive liabilities by $170.058 million or 13.6% of totalassets. The change in our interest rate sensitivity gap occurred primarily dueto increases in our funding sources repricing in one year or less.

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| ** **                             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **   | ** ** | **> 5**  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-------------------|------------|--------------------|------------|--------------|------------|------------------|------------|------------|------------|
| ** **                             | ** ** | ** **        | ** ** | ** **         | ** ** | ** **   | ** ** | **years**        | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **180 days** | ** ** | **181 days-** | ** ** | **One-five** | ** ** | **or non-** | ** ** | ** ** | ** ** |
| ***(dollars in thousands)*** | ** ** | **or less**  | ** ** | **one year**  | ** ** | **years**    | ** ** | **sensitive**    | ** ** | **Total**  | ** ** |
| Interest-earning assets:               |       |              |       |               |       |         |       |             |       |       |       |
| Interest-bearing deposits              |       | $                 | 5,678      |               | $          | —       |       | $                | —     |       | $          | — |   | $ | 5,678 |   |
| Securities available for sale          |       | 24,927            |       | 32,890             |       | 160,340      |       | 58,782           |       | 276,939    |       |
| Restricted stock investments           |       | 13,647            |       | —             |       | —       |       | —           |       | 13,647     |       |
| Loans held for sale                    |       | 92,351            |       | —             |       | —       |       | —           |       | 92,351     |       |
| Loans                                  |       | 474,845           |       | 91,996             |       | 239,855      |       | 44,890           |       | 851,586    |       |
| Total  interest-earning assets         |       | $                 | 611,448    |               | $          | 124,886      |       | $                | 400,195    |       | $          | 103,672 |   | $ | 1,240,201 |   |
| Interest-bearing  liabilities:         |       |              |       |               |       |         |       |             |       |       |       |
| Savings accounts                       |       | $                 | 3,855      |               | $          | 3,416        |       | $                | 27,515     |       | $          | 34,861 |   | $ | 69,647 |   |
| NOW accounts                           |       | 1,166             |       | 1,168              |       | 9,406        |       | 11,918           |       | 23,658     |       |
| Money market accounts                  |       | 156,193           |       | 2,020              |       | 16,255       |       | 20,568           |       | 195,036    |       |
| Certificates of deposit                |       | 46,885            |       | 44,836             |       | 313,491      |       | 408              |       | 405,620    |       |
| Borrowings and  junior subordinated    |       |              |       |               |       |         |       |             |       |       |       |
| debentures                             |       | 309,131           |       | —             |       | 85,259       |       | 9,710            |       | 404,100    |       |
| Total  interest-bearing liabilities    |       | $                 | 517,230    |               | $          | 51,440       |       | $                | 451,926    |       | $          | 77,465 |   | $ | 1,098,061 |   |
| Interest rate  sensitive gap position: |       |              |       |               |       |         |       |             |       |       |       |
| Period                                 |       | $                 | 94,218     |               | $          | 73,446       |       | $                | (51,731    | )          | $          | 26,207 |   |   |   |
| % of assets                            |       | 6.92              | %          | 5.39               | %          | (3.80        | )%         | 1.92             | %          |       |       |
| Cumulative                             |       | $                 | 94,218     |               | $          | 167,664      |       | $                | 115,933    |       | $          | 142,140 |   |   |   |
| % of assets                            |       | 6.92              | %          | 12.31              | %          | 8.51         | %          | 10.43            | %          |       |       |
| Cumulative risk  sensitive assets to   |       |              |       |               |       |         |       |             |       |       |       |
| risk sensitive liabilities             |       | 118.22            | %          | 129.48             | %          | 111.36       | %          | 112.94           | %          |       |       |

 

Whilewe monitor interest rate sensitivity reports, we primarily test our interestrate sensitivity through the deployment of simulation analysis. We use earningssimulation models to estimate what effect specific interest rate changes wouldhave on our net interest income and net income. Simulation analysis provides uswith a more rigorous and dynamic measure of interest sensitivity. Derivativefinancial instruments, such as interest rate caps, are included in theanalysis. Changes in prepayments have been included where changes in behaviorpatterns are assumed to be significant to the simulation, particularly mortgagerelated assets. Call features on certain securities and borrowings are based ontheir call probability in view of the projected rate change, and pricingfeatures such as interest rate floors are incorporated. Our fee income producedby mortgage-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 attempt to structure our asset and liabilitymanagement strategies to mitigate the impact on net interest income by changesin market interest rates. However, there can be no assurance that we will beable to manage interest rate risk so as to avoid significant adverse effects onnet interest income. At December 31, 2005, the simulation model providedthe following profile of our interest rate risk measured over a one-year timehorizon, assuming a parallel shift in a yield curve based off the U.S. dollarforward swap curve adjusted for certain pricing assumptions: 

| ** **           | ** ** | **Immediate Rate Change** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **+200BP**                          | ** ** | **-200BP** | ** ** |
| Net interest  income |       |                                | 0.33       | % |   | (0.31) | % |
|                      |            |                                     |            |  |  |  |  |

 

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Both of the above toolsused to assess interest rate risk have strengths and weaknesses. Because thegap analysis reflects a static position at a single point in time, it islimited in quantifying the total impact of market rate changes which do notaffect all earning assets and interest-bearing liabilities equally orsimultaneously. In addition, gap reports depict the existing structure,excluding exposure arising from new business. While the simulation process is apowerful tool in analyzing interest rate sensitivity, many of the assumptionsused in the process are highly qualitative and subjective, and are subject tothe risk that past historical activity may not generate accurate predictions ofthe future. The model also assumes parallel movements in interest rates, whichmeans both short-term and long-term rates will change equally. Nonparallelchanges in interest rates (short-term rates changing differently from long-termrates) could result in significant differences in projected income amounts whencompared to parallel tests. Both measurement tools taken together, however,provide an effective evaluation of our exposure to changes in interest rates,enabling management to better control the volatility of earnings.

***Rate Lock Commitments***

We enter into rate lockcommitments, under which we, through the mortgage-banking segment, originateresidential mortgage loans with interest rates determined prior to funding.Rate lock commitments on mortgage loans that we intend to sell in the secondarymarket are considered derivatives. The period of time between issuance of aloan commitment and closing and sale of the loan generally ranges from 14 daysto 60 days. For these rate lock commitments, we protect the Company fromchanges in interest rates through the use of best efforts forward deliverycommitments, whereby we commit to sell a loan at the time the borrower commitsto an interest rate with the intent that the buyer has assumed interest raterisk on the loan. As a result, we are not exposed to losses nor will we realizegains related to its rate lock commitments due to changes in interest ratesunless there would be a failure to honor the rate lock commitment by thecounterparty. We mitigate counterparty risk by entering into forward deliverycommitments with proven counterparties with whom we have significant previousexperience and have performed significant due diligence. At December 31,2005, we had $44.896 million in rate lock commitments.

**Off-Balance Sheet Arrangements**

We enter into off-balance sheet arrangements in thenormal course of business. These arrangements consist primarily of commitmentsto extend credit, lines of credit and letters of credit. In addition, theCompany has certain contractual obligations.

*CreditCommitments.*   Credit commitments are agreementsto lend to a customer as long as there is no violation of any condition to thecontract. Loan commitments generally have interest rates fixed at currentmarket amounts, fixed expiration dates, and may require payment of a fee. Linesof credit generally have variable interest rates. Such lines do not representfuture cash requirements because it is unlikely that all customers will drawupon their lines in full at any time. Letters of credit are commitments issuedto guarantee the performance of a customer to a third party.

Outstandingloan commitments, unused lines of credit, and letters of credit were as followsat December 31, 2005:

| ***(dollars in thousands)*** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| Commitments to  extend credit          |       | $          | 257,356    |   |
| Unused lines of  credit                |       | 117,588    |       |
| Letters of credit                      |       | 4,825      |       |
|                                   |       | $          | 379,769    |   |

 

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Our exposure to credit loss in the event ofnonperformance by the borrower is the contract amount of the commitment. Loancommitments, lines of credit, and letters of credit are made on the same terms,including collateral, as outstanding loans. We are not aware of any accountingloss we would incur by funding our commitments.

*ContractualObligations.**  *FirstMariner has certain obligations to make future payments under contract. At December 31,2005, the aggregate contractual obligations and commitments are:

| ** **                                                  | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                | ** ** | **Less than** | ** ** | **1-3** | ** ** | **3-5** | ** ** | **After** | ** ** |
| ***(dollars in thousands)***                      | ** ** | **Total**                                 | ** ** | **one year** | ** ** | **Years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| Certificates of  deposit $100,000 and over                  | ** ** | $                                         | 160,458    | ** ** | $ | 28,219 | ** ** | $ | 96,988 | ** ** | $ | 35,251 | ** ** | $ | — | ** ** |
| Borrowings and  repurchase agreements                       |       | 330,376                                   |       | 199,376 |   | 36,290 |   | 60,000 |   | 34,710 |   |
| Annual rental  commitments under  non-cancelable leases (1) |       | 26,823                                    |       | 3,213 |   | 7,158 |   | 5,445 |   | 11,007 |   |
|                                                        |       | $                                         | 517,657    |   | $ | 230,808 |   | $ | 140,436 |   | $ | 100,696 |   | $ | 45,717 |   |

----

(1)          Includes lease paymentson our new headquarters location which we anticipate will be ready foroccupancy July 1, 2006. However, no lease payments are required until thebuilding is fully constructed, the timing of which is not known for certain andis beyond our control.

In January of 2006, we entered into a strategy tosell and deliver certain residential mortgage loans on a mandatory basis ratherthan on best effort contracts and, accordingly, began to hedge the interestrate risk inherent in that portion of our pipeline of mortgage loans held forsale to protect our margin on the sale of loans. We expect this hedgingstrategy will generally produce stable and consistent results, andprofitability should generally increase as the cost of the hedge is more thanoffset by the increase in price realized on selling loans on a mandatory basis.

It is our intention toutilize instruments such as forward sale agreements whose change in value asinterest rates change is expected to offset the change in value of itsunderlying mortgage pipeline based on expected closing ratios. Initially, wewill be utilizing this strategy on approximately 40% of our mortgage-bankingloan originations, with the option of expanding our coverage in the future. Utilizingthis strategy, we will focus on trying to maintain stable profit margins withan emphasis on forecasting expected fallout to more precisely estimate ourrequired hedge coverage ratio and minimize hedge costs. By closely monitoringkey factors such as product type, business units, progress or “status” oftransactions, as well as changes in market interest rates since we committed arate to the borrower, we will seek to quantify the optional component of eachrate lock, and in turn, the aggregate rate lock pipeline. By accuratelyevaluating these factors, we hope to be able to minimize the purchase ofoptions and also stabilize gain on sale margins over different rateenvironments.

**Impactof Inflation and Changing Prices**

Inflation may be expected to have an impact on ouroperating costs and thus on net income. A prolonged period of inflation couldcause interest rates, wages, and other costs to increase and could adverselyaffect our results of operations unless the fees we charge could be increasedcorrespondingly.

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 

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sameextent as the price of goods and services. We believe that the impact ofinflation was not material for 2005 or 2004.

**Recent Accounting Pronouncements**

In January 2005, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 andservices, or (ii) incurs liabilities in exchange for goods and servicesthat are based on an entity’s equity instruments or that may be settled by theissuance of equity instruments. SFAS 123R eliminates the ability to account forstock-based compensation using Accounting Principles Bulletin (“APB”) No. 25and requires that such transactions be recognized as compensation cost in theincome statement based on their fair values on the date of the grant. In April 2005,the SEC adopted a rule to amend the compliance date for SFAS 123R. Underthe new rule, companies may implement SFAS 123R at the beginning of their nextfiscal year instead of the Statement’s original implementation date of the nextreporting period beginning after June 15, 2005. SFAS 123R is now effectiveon January 1, 2006 for the Company. 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 January 1, 2006. Additionally, compensation cost forawards for which requisite service has not been rendered (non-vested optionsand stock grants) that are outstanding as of January 1, 2006 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 January 1, 2006 will bebased on the same methods and on the same fair values previously determined forthe pro forma disclosures required for companies that did not previously adoptthe fair value accounting method for stock-based compensation.

In December 2004, the FASB issued SFAS No. 153,  “Exchanges of Nonmonetary Assets,” anamendment of APB No. 29, “Accounting for Nonmonetary Transactions.” Thisstatement amends the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged and more broadlyprovides for exceptions regarding exchanges occurring in fiscal periodsbeginning after June 15, 2005. The adoption of this standard is notexpected to have a material impact on our financial condition, results ofoperations, or liquidity.

In March 2004, the FASB Emerging Issues TaskForce (“EITF”) released Issue 03-01, “Meaning of Other Than TemporaryImpairment,” which addressed other-than-temporary impairment for certain debtand equity 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 consensus is reached.  In June 2005, the FASB staff issued anFSP that supersedes EITF 03-01 and effectively reverts the guidance forother-than-temporary impairments to previously established literature.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3.”  This statementrequires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. In the caseof impracticability in retrospective application, the statement gives guidanceas to the appropriate treatment of the change or correction. The statement iseffective for accounting changes made in fiscal years beginning after December 15,2005. The adoption of this standard is not expected to have a material impacton our financial condition, results of operations, or liquidity.

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In June 2005, the EITF released Issue 05-2,“The Meaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19,‘Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock’” to clarify the issue of an exception inIssue 00-19. Issue 00-19 contains an exception to its generalrequirements for evaluating whether, pursuant to SFAS No. 133, an embeddedderivative indexed to a company’s own stock would be classified as stockholders’equity. The exception applies to a “conventional convertible debt instrument”in which the holder may realize the value of the conversion option only byexercising the option and receiving all proceeds in a fixed number of shares orin the equivalent amount of cash (at the discretion of the issuer). Issue 05-2provides for the retention of the exception as described in Issue 00-19. TheIssue requires that instruments that provide the holder with an option toconvert into a fixed number of shares (or an equivalent amount of cash at theissuer’s discretion) for which the ability to exercise the option feature isbased on the passage of time or on a contingent event be considered “conventional”for purposes of applying Issue 00-19. Convertible preferred stock havinga mandatory redemption date may still qualify for the exception if the economiccharacteristics indicate that the instrument is more like debt than equity. Applicationof Issue 05-2 should be applied to new instruments entered into and/ormodified in periods beginning after June 29, 2005.

In June 2005, theEITF released Issue 05-6, “Determining the Amortization Period forLeasehold Improvements Purchased after Lease Inception or Acquired in aBusiness Combination.”  EITF Issue 05-6requires leasehold improvements that are acquired in a business combination tobe amortized over the shorter of (1) the useful life of the underlyingasset, or (2) a term that includes required lease periods and reasonablyassured renewal periods. Other leasehold improvements that are placed inservice significantly after the beginning of the lease term should be amortizedover the lesser of (1) the useful life of the underlying asset, or (2) aterm that includes required lease periods and reasonably assured renewalperiods, as of the date on which the leasehold improvements are purchased.

**Financial Review 2004/2003**

For the year ended December 31, 2004, we recordednet income of $6.101 million or $0.96 per diluted share, an increase of15.0% from net income of $5.307 million income or $0.88 per diluted sharein 2003. Our gross revenue (net interest income and noninterest income)increased $6.134 million while our noninterest expenses, the provision forcredit losses and income taxes increased by $5.340 million.

Our net interest income for 2004 increased$8.030 million or 23.3% from 2003, due to growth in average earning assetsof 21.1% over the prior year. Our net interest margin increased 7 basis pointsto 4.06% in 2004 compared to 3.99% in 2003. The increase in our net interest incomeresulted primarily due to the increase in average interest earning assets.

Our provision for loan losses decreased to$2.243 million in 2004 from $2.536 million in 2003. Our allowance forloan losses at December 31, 2004 represented 1.28% of loans outstanding, adecrease from December 31, 2003 of 1.43% of loans outstanding. Werecognized net chargeoffs of $1.355 million in 2004 compared to $1.032 millionin 2003.

Our total noninterest income decreased 9.0% to $19.190 million,which included a significant decrease in gains on sales of investmentsecurities. Securities gains in 2004 totaled $440,000 compared to $1.371million for 2003. Excluding gains on sales of securities, our noninterestincome decreased $965,000 or 4.9%. The decrease was mostly due to a decrease inour revenue from mortgage-banking activities that decreased by $2.031 millionor 29.2%, driven by lower levels of loans originated and sold into thesecondary market and lower pricing spreads on loans sold during 2004. Ourservice fees on deposits increased $218,000 or 3.3% as a result of increaseddemand deposit account volume. ATM fees increased $316,000 due to highervolumes of ATM transactions and pricing increases for non-customers. Incomefrom bank owned life insurance increased by $335,000, and sales of other insurance products from Finance Marylandincreased $470,000.

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We incurred noninterest expense growth of 11.0% to$50.926 million in 2004. Noninterest expenses for 2003 includednon-recurring expenses related to the early payoff of trust preferredsecurities, consulting fees related to obtaining tax credits, and establishmentof a charitable foundation which totaled $1.385 million. Excluding thenon-recurring expenses incurred in 2003, noninterest expense growth was $6.428million or 14.4%. Our salaries and benefits increased 16.9% to $26.523 millionprimarily due to staffing of Finance Maryland, new wholesale mortgageoperations, additional staffing increases to support our loan and deposit growth,regular salary increases, and higher benefits costs. Our occupancy cost grew by11.2% or $630,000. The increase was due to the addition of one branch, theadditional Finance Maryland offices and office space for wholesale mortgage.Our advertising expense increased by $262,000 or 22.0% as we increased productadvertising and marketing during 2004. The increase in our other expenses isprimarily due to higher data processing, service and maintenance, dues andmemberships and postage, as well as increased loan origination and collectioncosts.

We recorded an income taxexpense of $2.361 million in 2004, compared to $1.771 millionrecorded in 2003. Our effective income tax rate for 2004 was 27.9% compared to25.0% for 2003. The increase in our effective tax rate was primarily due tolower utilization of income tax credits in 2004 ($200,000) compared to 2003($434,000).

**ITEM 7A**           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Results of operations forfinancial institutions, including us, may be materially and adversely affectedby changes in prevailing economic conditions, including declines in real estatevalues, rapid changes in interest rates and the monetary and fiscal policies ofthe federal government. Our loan portfolio is concentrated primarily in centralMaryland and portions of Maryland’s eastern shore and is, therefore, subject torisks associated with these local economies.

See “Interest Rate Sensitivity” in Item 7 of this Form 10-Kfor more information about market risk.

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**ITEM 8**                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**Report of Independent Registered Public AccountingFirm**

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, 2005 and 2004 and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2005.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 our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company and its subsidiaries as of December 31, 2005 and2004, and the results of their operations and cash flows for each of the threeyears in the period ended December 31, 2005, in conformity with accountingprinciples generally accepted in the United States of America.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005, basedon the criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 1,2006 expressed an unqualified opinion on management’s assessment of internalcontrol over financial reporting and an unqualified opinion on theeffectiveness of internal control over financial reporting.

|                     |   | /s/ Stegman & Company |
|---------------------|--------|--------------------------------|
| Baltimore, Maryland |   |                           |
| March 1, 2006  |   |                           |

 

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**FIRST MARINERBANCORP AND SUBSIDIARIES**

**ConsolidatedStatements of Financial Condition**

| ** **                                                             | ** ** | **December 31,  2005**            | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|
| ** **                                                             | ** ** | ***(dollars in thousands)*** | ** ** |
| **ASSETS**                                                             |       |                                   |       |                        |       |   |   |   |   |
| Cash and due from  banks                                               |       |                                   | $          | 40,157                      |       |   |   | $ | 29,765 |   |   |
| Federal funds  sold and interest-bearing deposits                      |       |                                   | 5,678      |                        |       |   | 5,682 |   |   |
| Securities  available for sale, at fair value                          |       |                                   | 276,939    |                        |       |   | 322,965 |   |   |
| Loans held for  sale                                                   |       |                                   | 92,351     |                        |       |   | 79,955 |   |   |
| Loans receivable                                                       |       |                                   | 851,586    |                        |       |   | 746,146 |   |   |
| Allowance for  loan losses                                             |       |                                   | (11,743    | )                           |       |   | (9,580 | ) |   |
| Loans, net                                                             |       |                                   | 839,843    |                        |       |   | 736,566 |   |   |
| Other real estate  owned                                               |       |                                   | 931        |                        |       |   | 65 |   |   |
| Restricted stock  investments                                          |       |                                   | 13,647     |                        |       |   | 11,886 |   |   |
| Premises and  equipment, net                                           |       |                                   | 40,402     |                        |       |   | 17,445 |   |   |
| Accrued interest  receivable                                           |       |                                   | 8,037      |                        |       |   | 6,417 |   |   |
| Deferred income  taxes                                                 |       |                                   | 5,940      |                        |       |   | 2,976 |   |   |
| Bank-owned life  insurance                                             |       |                                   | 27,375     |                        |       |   | 26,338 |   |   |
| Prepaid expenses  and other assets                                     |       |                                   | 11,178     |                        |       |   | 10,471 |   |   |
| Total assets                                                           |       |                                   | $          | 1,362,478                   |       |   |   | $ | 1,250,531 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                         |       |                                   |       |                        |       |   |   |   |   |
| Liabilities:                                                           |       |                                   |       |                        |       |   |   |   |   |
| Deposits:                                                              |       |                                   |       |                        |       |   |   |   |   |
| Noninterest-bearing                                                    |       |                                   | $          | 182,049                     |       |   |   | $ | 160,538 |   |   |
| Interest-bearing                                                       |       |                                   | 693,961    |                        |       |   | 664,879 |   |   |
| Total deposits                                                         |       |                                   | 876,010    |                        |       |   | 825,417 |   |   |
| Short-term borrowings                                                  |       |                                   | 199,376    |                        |       |   | 162,292 |   |   |
| Repurchase agreements                                                  |       |                                   | —     |                        |       |   | 25,000 |   |   |
| Long-term borrowings                                                   |       |                                   | 131,000    |                        |       |   | 109,369 |   |   |
| Junior subordinated deferrable interest debentures                     |       |                                   | 73,724     |                        |       |   | 58,249 |   |   |
| Accrued expenses and other liabilities                                 |       |                                   | 9,993      |                        |       |   | 5,890 |   |   |
| Total liabilities                                                      |       |                                   | 1,290,103  |                        |       |   | 1,186,217 |   |   |
| Stockholders’  equity:                                            |       |                                   |       |                        |       |   |   |   |   |
| Common stock,  $.05 par value; 20,000,000 shares authorized; 6,262,442 |       |                                   |       |                        |       |   |   |   |   |
| and 5,826,011 shares issued and outstanding,  respectively             |       |                                   | 313        |                        |       |   | 291 |   |   |
| Additional paid-in capital                                             |       |                                   | 55,193     |                        |       |   | 51,792 |   |   |
| Retained earnings                                                      |       |                                   | 20,185     |                        |       |   | 12,363 |   |   |
| Accumulated other comprehensive loss                                   |       |                                   | (3,316     | )                           |       |   | (132 | ) |   |
| Total stockholders’ equity                                        |       |                                   | 72,375     |                        |       |   | 64,314 |   |   |
| Total liabilities and  stockholders’ equity                       |       |                                   | $          | 1,362,478                   |       |   |   | $ | 1,250,531 |   |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRST MARINERBANCORP AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

| ** **                                              | ** ** | **For the Years Ended December 31,**                 | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ***(dollars in thousands,  except per share data)*** | ** ** |
| Interest income:                                        | * *   | * *                                                                      | * *   | * * | * * | * * | * * |
| Loans                                                   |       | $                                                                             | 68,136     |   | $ | 51,549 |   | $ | 47,511 |   |
| Investments and other earning assets                    |       | 13,924                                                                        |       | 13,721 |   | 8,114 |   |
| Total interest  income                                  |       | 82,060                                                                        |       | 65,270 |   | 55,625 |   |
| Interest expense:                                       |       |                                                                          |       |   |   |   |   |
| Deposits                                                |       | 16,729                                                                        |       | 12,808 |   | 13,379 |   |
| Short-term borrowings                                   |       | 6,596                                                                         |       | 1,259 |   | 264 |   |
| Long-term borrowings                                    |       | 11,012                                                                        |       | 8,762 |   | 7,571 |   |
| Total interest  expense                                 |       | 34,337                                                                        |       | 22,829 |   | 21,214 |   |
| Net interest  income                                    |       | 47,723                                                                        |       | 42,441 |   | 34,411 |   |
| Provision for  loan losses                              |       | 3,287                                                                         |       | 2,243 |   | 2,536 |   |
| Net interest  income after provision for loan losses    |       | 44,436                                                                        |       | 40,198 |   | 31,875 |   |
| Noninterest  income:                                    |       |                                                                          |       |   |   |   |   |
| Gain on sale of mortgage loans                          |       | 5,018                                                                         |       | 3,349 |   | 5,239 |   |
| Other mortgage-banking revenue                          |       | 2,289                                                                         |       | 1,567 |   | 1,708 |   |
| ATM fees                                                |       | 3,135                                                                         |       | 2,836 |   | 2,520 |   |
| Service fees on deposits                                |       | 7,185                                                                         |       | 6,899 |   | 6,681 |   |
| Gain on sales of investment securities, net             |       | —                                                                        |       | 440 |   | 1,371 |   |
| Commissions on sales of nondeposit investment  products |       | 531                                                                           |       | 649 |   | 862 |   |
| Income from bank-owned life insurance                   |       | 1,031                                                                         |       | 1,072 |   | 737 |   |
| Commissions on sales of other insurance products        |       | 2,512                                                                         |       | 1,519 |   | 1,049 |   |
| Other                                                   |       | 1,314                                                                         |       | 859 |   | 919 |   |
| Total noninterest  income                               |       | 23,015                                                                        |       | 19,190 |   | 21,086 |   |
| Noninterest  expenses:                                  |       |                                                                          |       |   |   |   |   |
| Salaries and employee benefits                          |       | 30,909                                                                        |       | 26,523 |   | 22,681 |   |
| Net occupancy                                           |       | 6,104                                                                         |       | 6,255 |   | 5,625 |   |
| Furniture, fixtures, and equipment                      |       | 3,057                                                                         |       | 3,005 |   | 2,875 |   |
| Professional services                                   |       | 1,021                                                                         |       | 756 |   | 873 |   |
| Advertising                                             |       | 1,352                                                                         |       | 1,455 |   | 1,193 |   |
| Data processing                                         |       | 2,006                                                                         |       | 2,079 |   | 2,032 |   |
| ATM expenses                                            |       | 1,146                                                                         |       | 1,112 |   | 922 |   |
| Service and maintenance                                 |       | 1,833                                                                         |       | 1,485 |   | 1,308 |   |
| Other                                                   |       | 8,912                                                                         |       | 8,256 |   | 8,374 |   |
| Total noninterest  expenses                             |       | 56,340                                                                        |       | 50,926 |   | 45,883 |   |
| Net income before  income taxes                         |       | 11,111                                                                        |       | 8,462 |   | 7,078 |   |
| Income tax  expense                                     |       | 3,289                                                                         |       | 2,361 |   | 1,771 |   |
| Net income                                              |       | $                                                                             | 7,822      |   | $ | 6,101 |   | $ | 5,307 |   |
| Net income per common  share:                           |       |                                                                          |       |   |   |   |   |
| Basic                                                   |       | $                                                                             | 1.28       |   | $ | 1.06 |   | $ | 0.97 |   |
| Diluted                                                 |       | $                                                                             | 1.20       |   | $ | 0.96 |   | $ | 0.88 |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRST MARINERBANCORP AND SUBSIDIARIES**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

| ** **                                     | ** ** | **For the Years Ended December 31, 2005, 2004, and 2003** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Number of  Shares of  Common  Stock**                                                      | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income** | ** ** | **Total  Stockholders’  Equity** | ** ** |
| ** **                                     | ** ** | ***(dollars in thousands, except number of shares)***                    | ** ** |
| Balance at  January 1, 2003               |       | 5,394,586                                                                                              |       |   | $ | 270 |   |   |   | $ | 47,939 |   |   | $ | 955 |   |   | $ | 1,962 |   |   |   | $ | 51,126 |   |   |
| Net income                                     |       | —                                                                                                 |       |   | — |   |   |   | — |   |   | 5,307 |   |   | — |   |   |   | 5,307 |   |   |
| Common stock  issued, net of costs of issuance |       | 299,051                                                                                                |       |   | 15 |   |   |   | 2,778 |   |   | — |   |   | — |   |   |   | 2,793 |   |   |
| Other  comprehensive loss                      |       | —                                                                                                 |       |   | — |   |   |   | — |   |   | — |   |   | (792 | ) |   |   | (792 | ) |   |
| Balance at  December 31, 2003             |       | 5,693,637                                                                                              |       |   | 285 |   |   |   | 50,717 |   |   | 6,262 |   |   | 1,170 |   |   |   | 58,434 |   |   |
| Net income                                     |       | —                                                                                                 |       |   | — |   |   |   | — |   |   | 6,101 |   |   | — |   |   |   | 6,101 |   |   |
| 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 | ) |   |
| Other  comprehensive loss                      |       | —                                                                                                 |       |   | — |   |   |   | — |   |   | — |   |   | (1,302 | ) |   |   | (1,302 | ) |   |
| Balance at  December 31, 2004             |       | 5,826,011                                                                                              |       |   | 291 |   |   |   | 51,792 |   |   | 12,363 |   |   | (132 | ) |   |   | 64,314 |   |   |
| Net income                                     |       | —                                                                                                 |       |   | — |   |   |   | — |   |   | 7,822 |   |   | — |   |   |   | 7,822 |   |   |
| Common stock  issued, net of costs of issuance |       | 531,181                                                                                                |       |   | 27 |   |   |   | 4,974 |   |   | — |   |   | — |   |   |   | 5,001 |   |   |
| Common stock  repurchased, net of costs        |       | (94,750                                                                                                | )          |   | (5 | ) |   |   | (1,573 | ) |   | — |   |   | — |   |   |   | (1,578 | ) |   |
| Other  comprehensive loss                      |       | —                                                                                                 |       |   | — |   |   |   | — |   |   | — |   |   | (3,184 | ) |   |   | (3,184 | ) |   |
| Balance at  December 31, 2005             |       | 6,262,442                                                                                              |       |   | $ | 313 |   |   |   | $ | 55,193 |   |   | $ | 20,185 |   |   | $ | (3,316 | ) |   |   | $ | 72,375 |   |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRST MARINERBANCORP AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

| ** **                                                                  | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                  | ** ** | ***(dollars in thousands)***                        | ** ** |
| Cash flows from operating activities:                                       | * *   | * *                                                      | * *   | * * | * * | * * | * * |
| Net income                                                                  |       | $                                                             | 7,822      |   | $ | 6,101 |   | $ | 5,307 |   |
| Adjustments to reconcile net income to net cash from  operating activities: |       |                                                          |       |   |   |   |   |
| Depreciation and  amortization                                              |       | 3,872                                                         |       | 3,323 |   | 3,099 |   |
| Amortization of unearned  loan fees and costs, net                          |       | (923                                                          | )          | (1,078 | ) | (850 | ) |
| Amortization of premiums  and discounts on loans, net                       |       | (724                                                          | )          | (914 | ) | (546 | ) |
| Amortization of premiums  and discounts on mortgage-backed securities, net  |       | 267                                                           |       | 563 |   | 462 |   |
| Gain on sale of mortgage  loans                                             |       | (5,018                                                        | )          | (3,349 | ) | (5,239 | ) |
| Gain on sale of  securities available for sale                              |       | —                                                        |       | (440 | ) | (1,371 | ) |
| Gain on other real estate  owned                                            |       | —                                                        |       | (62 | ) | (156 | ) |
| Valuation allowance of  other real estate owned                             |       | —                                                        |       | — |   | 162 |   |
| Increase in accrued  interest receivable                                    |       | (1,620                                                        | )          | (1,462 | ) | (415 | ) |
| Provision for loan losses                                                   |       | 3,287                                                         |       | 2,243 |   | 2,536 |   |
| Increase in cash  surrender value of bank-owned life insurance              |       | (1,031                                                        | )          | (1,072 | ) | (737 | ) |
| Originations of mortgage  loans held for sale                               |       | (1,199,017                                                    | )          | (674,984 | ) | (873,863 | ) |
| Proceeds from mortgage  loans held for sale                                 |       | 1,191,639                                                     |       | 654,084 |   | 913,107 |   |
| Deferred taxes                                                              |       | (961                                                          | )          | 390 |   | (493 | ) |
| Net increase in accrued  expenses and other liabilities                     |       | 4,103                                                         |       | 1,027 |   | 241 |   |
| Net (increase) decrease  in prepaids and other assets                       |       | (715                                                          | )          | 3,654 |   | (10,260 | ) |
| Net cash provided by  (used in) operating activities                        |       | 981                                                           |       | (11,976 | ) | 30,984 |   |
| Cash flows from investing activities:                                       |       |                                                          |       |   |   |   |   |
| Loan disbursements, net  of principal repayments                            |       | (105,782                                                      | )          | (132,424 | ) | (75,877 | ) |
| Purchases of premises and  equipment                                        |       | (27,067                                                       | )          | (2,767 | ) | (3,529 | ) |
| Disposals of premises and  equipment                                        |       | 239                                                           |       | — |   | — |   |
| Purchases of restricted  stock investments                                  |       | (1,761                                                        | )          | (4,621 | ) | (3,975 | ) |
| Activity in securities available for sale:                                  |       |                                                          |       |   |   |   |   |
| Sales                                                                       |       | —                                                        |       | 18,674 |   | 8,909 |   |
| Maturities/calls/repayments                                                 |       | 50,939                                                        |       | 153,175 |   | 138,567 |   |
| Purchases                                                                   |       | (10,367                                                       | )          | (208,549 | ) | (308,492 | ) |
| Proceeds from sales for  other real estate owned                            |       | —                                                        |       | 404 |   | 2,569 |   |
| Construction  disbursements - other real estate owned                       |       | —                                                        |       | — |   | (227 | ) |
| Purchase of bank-owned  life insurance                                      |       | —                                                        |       | (10,000 | ) | — |   |
| Net cash used in  investing activities                                      |       | (93,799                                                       | )          | (186,108 | ) | (242,055 | ) |
| Cash flows from financing activities:                                       |       |                                                          |       |   |   |   |   |
| Net increase in deposits                                                    |       | 50,593                                                        |       | 77,684 |   | 79,564 |   |
| Net increase in other borrowed funds and junior                             |       |                                                          |       |   |   |   |   |
| subordinated debentures                                                     |       | 74,190                                                        |       | 108,087 |   | 99,587 |   |
| Repayment of repurchase  agreements                                         |       | (25,000                                                       | )          | — |   | — |   |
| Proceeds from stock  issuance, net of costs                                 |       | 5,001                                                         |       | 1,690 |   | 2,793 |   |
| Repurchase of common  stock, net of costs                                   |       | (1,578                                                        | )          | (609 | ) | — |   |
| Net cash provided by  financing activities                                  |       | 103,206                                                       |       | 186,852 |   | 181,944 |   |
| Net increase (decrease)  in cash and cash equivalents                       |       | 10,388                                                        |       | (11,232 | ) | (29,127 | ) |
| Cash and cash equivalents  at beginning of period                           |       | 35,447                                                        |       | 46,679 |   | 75,806 |   |
| Cash and cash equivalents  at end of period                                 |       | $                                                             | 45,835     |   | $ | 35,447 |   | $ | 46,679 |   |
| Supplemental information:                                                   |       |                                                          |       |   |   |   |   |
| Interest paid on deposits  and borrowed funds                               |       | $                                                             | 33,769     |   | $ | 22,494 |   | $ | 20,796 |   |
| Income taxes paid                                                           |       | 3,509                                                         |       | 2,064 |   | 2,970 |   |
| Real estate acquired in satisfaction of loans                               |       | 866                                                           |       | 115 |   | 400 |   |

 

*Seeaccompanying notes to Consolidated Financial Statements*

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**FIRST MARINER BANCORP AND SUBSIDIARIESNotes to Consolidated Financial StatementsFor the Years Ended December 31, 2005, 2004, and 2003**

**(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 Appraisals, LLC(“FM Appraisals”).

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 3 describes thetypes of securities that we invest in, and Note 4 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 2005.

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,obtains independent appraisals for significant properties and prepares fairvalue analyses. 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 ofFinancial Condition under the captions “Cash and due from banks” and “Federalfunds sold and interest-bearing deposits” are considered cash or cashequivalents. For financial statement purposes, these assets are carried atcost. Cash and due from banks, federal funds sold, and interest-bearingdeposits have overnight maturities and are generally in excess of amounts thatwould be recoverable under Federal Deposit Insurance Corporation (“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 debt and equity securities not classified astrading securities are considered available for sale and are reported atestimated fair value, with unrealized gains and losses reported as a separatecomponent of 

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stockholders’ equity, netof tax effects, in accumulated other comprehensive income. As of December 31,2005 and 2004, 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 is determinedbased 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 (or when past due payments are received in cash for FinanceMaryland consumer loans) 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 in paymentif we expect to collect all amounts due, including interest past-due. Generallywe 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 or partially,all cash receipts are applied to principal. Once the recorded principal balancehas been reduced to zero, future cash receipts are applied to interest income,to the extent any interest has been foregone, and then they are recorded asrecoveries of any amounts previously charged off. When this doubt no longerexists, cash receipts are applied under the contractual terms of the loanagreements. Origination and commitment fees and direct origination costs onloans held for investment generally are deferred and amortized to income overthe contractual lives of the related loans using the interest method. Undercertain circumstances, commitment fees are recognized over the commitmentperiod or upon expiration of the commitment. Fees to extend loans three monthsor less are recognized in income upon receipt. Unamortized loan fees arerecognized in income when the related loans are sold or prepaid.

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***Rate Lock Commitments***

The Company enters into commitments to originateresidential mortgage loans whereby the interest rate on the loan is determinedprior to funding (i.e., rate lock commitments). Such rate lock commitments onmortgage loans to be sold in the secondary market are considered to bederivatives. The period of time between issuance of a loan commitment andclosing and sale of the loan generally range from 15 to 90 days. The Companyprotects itself from changes in interest rates through the use of best effortsforward delivery commitments, whereby the Company commits to sell a loan at thetime the borrower commits to an interest rate with the intent that the buyerhas assumed interest rate risk on the loan. As a result, the Company is notexposed to losses nor will it realize gains related to its rate lockcommitments due to changes in interest rates unless there would be a failure tohonor the rate lock commitment by the counterparty. We mitigate counterpartyrisk by entering into forward delivery commitments with proven counterpartieswith whom we have significant previous experience and have performed significantdue diligence.

The market values of ratelock commitments and best efforts contracts are not readily ascertainable withprecision because rate lock commitments and best efforts contracts are notactively traded. Because of the high correlation between the rate lockcommitments and best efforts contracts, no gain or loss occurs on the rate lockcommitments.

***Allowance for Loan Losses***

Our allowance for loan losses represents an amountthat, in management’s judgment, will be adequate to absorb probable losses onexisting loans that may become uncollectible. The allowance for loan lossesconsists of an allocated component and an unallocated component. The componentsof the allowance for loan losses represent an estimation done pursuant toeither Statement of Financial Accounting Standards (“SFAS”) No. 5, *Accounting for Contingencies,* or SFAS No. 114,*Accounting by Creditors for Impairment of aLoan.* The adequacy of the allowance for loan losses is determinedthrough careful and continuous review and evaluation of the loan portfolio andinvolves the balancing of factors as outlined below to establish a prudentlevel. Loans deemed uncollectible are charged against, while recoveries arecredited to, the allowance. Management adjusts the level of the allowancethrough the provision for loan losses, which is recorded as a current periodoperating expense. Our methodology for assessing the appropriateness of theallowance consists of several key elements, which include the formulaallowance, specific allowance and the unallocated allowance.

The formula allowance is calculated by applying lossfactors to corresponding categories of outstanding homogenous loans. Lossfactors are based on our historical loss experience, or for newer classes ofloans, management’s estimate of probable losses. The use of these loss factorsis intended 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 in particular loan categories, duration of the current businesscycle, bank regulatory examination results, 

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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 and the Board of Directors reviewthese 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 atthe time 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 asset size andon amounts borrowed from the FHLB. Because no ready market exists for thisstock and it has no quoted market value, the Bank’s investment in this stock iscarried 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 is 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 thedevelopment project over the construction period at the rate of the company’sincremental borrowing 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 assetsare included 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 18. 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 “Federal funds soldand interest-bearing deposits” 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 14.

***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.

Sincethe option price is equal to the market price of the common stock at the dateof grant for all of our options granted in 2005, 2004, and 2003, we do notrecord compensation expense related to options 

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granted. If we had applied the fair value-basedmethod to recognize compensation cost for the options granted, our net incomeand net income per share would have been changed to the following pro formaamounts for the years ended December 31:

| ***(dollars in thousands, except per share data)***                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income, as  reported                                                                                                                          |       | $        | 7,822      |     | $          | 6,101    |       | $ | 5,307 |   |
| Deduct: Total  stock-based employee compensation expense determined using the fair value  based method for all awards, net of related tax effects |       | (1,471   | )          | (567     | )          | (526     | )          |
| Pro forma net  income                                                                                                                             |       | $        | 6,351      |     | $          | 5,534    |       | $ | 4,781 |   |
| Earnings per  share:                                                                                                                              |       |     |       |     |       |     |       |
| Basic - as reported                                                                                                                               |       | $        | 1.28       |     | $          | 1.06     |       | $ | 0.97 |   |
| Basic - pro forma                                                                                                                                 |       | 1.04     |       | 0.96     |       | 0.88     |       |
| Diluted - as reported                                                                                                                             |       | 1.20     |       | 0.96     |       | 0.88     |       |
| Diluted - pro  forma                                                                                                                              |       | 0.98     |       | 0.87     |       | 0.80     |       |

 

During 2005, the Compensation Committee of the Boardof Directors of the Company approved an immediate acceleration of the vestingfor all unvested stock options previously awarded. On that date, alloutstanding options became fully vested. This acceleration reduced the pro formanet income for 2005 by $400,000. If this acceleration had not occurred, pro formanet income would have been $6.751 million or $1.11 per basic share and $1.04per diluted share for 2005.

Theweighted average fair values of our option grants during 2005, 2004, and 2003were $6.01, $6.90, and $5.50, 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:

| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield           |       | —   |       | —   |       | —   |       |
| Expected  volatility     |       | 15.74    | %          | 14.15    | %          | 26.21    | %          |
| Risk-free  interest rate |       | 4.25     | %          | 4.19     | %          | 4.09     | %          |
| Expected lives           |       | 8 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 are notavailable 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.

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***Advertising***

Weexpense our advertising costs as incurred, except payments for majorsponsorships which are amortized over an estimated life not to exceed one year.Advertising expenses were $1.352 million, $1.455 million, and$1.193 million for the years ended December 31, 2005, 2004, and 2003,respectively.

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

The Bank is required by the Federal Reserve System tomaintain certain cash reserve balances based principally on depositliabilities. At both December 31, 2005 and 2004, the required reservebalance was $1.000 million.

**(3)**                               SecuritiesAvailable for Sale

Thecomposition of our securities available for sale is as follows at December 31:

| ** **                                       | ** ** | **2005**            | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| ***(dollars in thousands)***           | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Mortgage-backed  securities                      |       | $                   | 165,711    |   |   | $ | 338 |   |   |   | $ | 4,937 |   |   | $ | 161,112 |   |
| Trust preferred  securities                      |       | 33,843              |       |   | 521 |   |   |   | 277 |   |   | 34,087 |   |
| Equity securities                                |       | 1,136               |       |   | 194 |   |   |   | 20 |   |   | 1,310 |   |
| U.S. Treasury securities                         |       | 999                 |       |   | — |   |   |   | 13 |   |   | 986 |   |
| Obligations of state and  municipal subdivisions |       | 2,939               |       |   | 30 |   |   |   | — |   |   | 2,969 |   |
| U.S. government agency  notes                    |       | 69,414              |       |   | — |   |   |   | 1,143 |   |   | 68,271 |   |
| Corporate obligations                            |       | 1,853               |       |   | — |   |   |   | 76 |   |   | 1,777 |   |
| Foreign government bonds                         |       | 1,500               |       |   | — |   |   |   | 19 |   |   | 1,481 |   |
| Other bonds and  annuities                       |       | 4,946               |       |   | — |   |   |   | — |   |   | 4,946 |   |
|                                             |       | $                   | 282,341    |   |   | $ | 1,083 |   |   |   | $ | 6,485 |   |   | $ | 276,939 |   |

 

| ** **                                             | ** ** | **2004**            | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|
| ***(dollars in thousands)***                 | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| 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 |   |

 

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Contractualmaturities of debt securities at December 31, 2005 and 2004 are shownbelow. Actual maturities may differ from contractual maturities becauseborrowers have the right to call or prepay obligations with or without call orprepayment penalties.

| ** **                             | ** ** | **2005**            | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ***(dollars in thousands)*** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Due in one year  or less               |       | $                   | 6,984      |   | $ | 6,894 |   |
| Due after one  year through five years |       | 71,728              |       | 70,567 |   |
| Due after ten  years                   |       | 36,782              |       | 37,056 |   |
| Mortgage-backed  securities            |       | 165,711             |       | 161,112 |   |
|                                   |       | $281,205            |       | $ | 275,629 |   |
|                                        |            |                     |            |  |  |  |  |

 

Thefollowing table shows the level of our gross unrealized losses and the fairvalue of the associated securities by type and maturity: 

| ** **                             | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**                      | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ***(dollars in thousands)*** | ** ** | **Estimated  Fair Value**         | ** ** | **Unrealized  Losses**               | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Mortgage-backed  securities            |       |                                   | $          | 47,187                               |       |                           |       | $ | 1,162 |   |   | $ | 105,220 |   |   | $ | 3,775 |   |   | $ | 152,407 |   |   | $ | 4,937 |   |   |
| Trust preferred  securities            |       |                                   | 8,409      |                                 |       |                           | 247        |   |   | 1,082 |   |   | 30 |   |   | 9,491 |   |   | 277 |   |   |
| Equity securities                      |       |                                   | 365        |                                 |       |                           | 15         |   |   | 83 |   |   | 5 |   |   | 448 |   |   | 20 |   |   |
| U.S. Treasury  securities              |       |                                   | 986        |                                 |       |                           | 13         |   |   | — |   |   | — |   |   | 986 |   |   | 13 |   |   |
| U.S. government  agency notes          |       |                                   | —     |                                 |       |                           | —     |   |   | 68,271 |   |   | 1,143 |   |   | 68,271 |   |   | 1,143 |   |   |
| Corporate  obligations                 |       |                                   | 1,777      |                                 |       |                           | 76         |   |   | — |   |   | — |   |   | 1,777 |   |   | 76 |   |   |
| Foreign government  bonds              |       |                                   | 1,231      |                                 |       |                           | 19         |   |   | — |   |   | — |   |   | 1,231 |   |   | 19 |   |   |
|                                   |       |                                   | $          | 59,955                               |       |                           |       | $ | 1,532 |   |   | $ | 174,656 |   |   | $ | 4,953 |   |   | $ | 234,611 |   |   | $ | 6,485 |   |   |

 

Gross unrealized losses totaled $6.485 million as of December 31,2005 and equaled 2.76% of the fair value of securities with unrealized lossesas of this date. A total of 73 securities were in an unrealized loss positionas of December 31, 2005, with the largest single unrealized loss in anyone security totaling $318,000. Thirty-nine securities were in an unrealizedloss 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.

Trust preferred securities considered temporarilyimpaired are issues of other banks and bank holding companies we currently holdin our portfolio. There are sixteen issues that are considered impaired, one ofwhich has been impaired for the last twelve months or more. In addition toincreases in interest rates, which have resulted in declines in market value,we believe other factors have impacted market values in this segment of ourinvestment portfolio. Certain securities have experienced declines in creditratings from credit rating firms, which has devalued these specific securities.Also, changes in the market 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 of these issuers continue to possess more than acceptable credit riskin management’s opinion. Management closely monitors these securities forchanges in credit risk, and we 

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have the ability to holdthese securities to their maturity. Management does not consider the impairmentof these securities to be other than temporary.

At December 31, 2005, 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 2005, 2004, and 2003, we recognized gross gainson sale of securities of $0, $440,000, and $1.371 million, respectively. Therewere no losses for any of the years shown.

At December 31,2005, we held available for sale securities with an aggregate carrying value(fair value) of approximately $207.796 million that we have pledged ascollateral for Federal Home Loan Bank advances and other borrowings.

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

Approximately 85% 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 conditionsin our 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.

Loansreceivable are summarized as follows at December 31:

| ***(dollars in thousands)***                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Loans secured by first  mortgages on real estate: |       |     |       |     |       |
| Residential                                       |       | $40,928  |       | $41,558  |       |
| Commercial                                        |       | 350,228  |       | 316,363  |       |
| Consumer residential construction                 |       | 126,492  |       | 135,820  |       |
| Construction, net of undisbursed principal        |       | 113,395  |       | 64,542   |       |
|                                              |       | 631,043  |       | 558,283  |       |
| Commercial                                        |       | 67,818   |       | 60,854   |       |
| Loans secured by  second mortgages on real estate |       | 96,746   |       | 79,771   |       |
| Consumer                                          |       | 55,619   |       | 47,389   |       |
| Loans secured by  deposits and other              |       | 1,093    |       | 1,068    |       |
| Total loans                                       |       | 852,319  |       | 747,365  |       |
| Unamortized loan  discounts, net                  |       | (121     | )          | (273     | )          |
| Unearned loan  fees, net                          |       | (612     | )          | (946     | )          |
|                                              |       | $851,586 |       | $746,146 |       |

 

Included in consumer loan totals in the above tableare overdrawn commercial and retail checking accounts totaling $435,000 and$753,000 as of December 31, 2005 and 2004, respectively. Included inunearned loan fees and costs in the above table is unearned income oninstallment loans of $501,000 and $612,000 as of December 31, 2005 and2004, respectively.

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Thefollowing table provides information concerning nonperforming assets andpast-due loans:

| ***(dollars in thousands)***                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Nonaccruing loans                            |       | $3,019   |       | $4,628   |       |
| Real estate  acquired by foreclosure         |       | 931      |       | 65       |       |
| Total  nonperforming assets                  |       | $3,950   |       | $4,693   |       |
| Loans past-due 90  days or more and accruing |       | $860     |       | $1,658   |       |

 

The interest income which would have been recorded onnonaccrual loans if those loans had been handled in accordance with theircontractual terms was approximately $395,000, $440,000, and $360,000 in 2005,2004, and 2003, respectively. The actual interest income recorded on theseloans in 2005, 2004, and 2003 was approximately $118,000, $272,000, and$217,000, respectively.

Loans we consider impaired at December 31, 2005and 2004 totaled $1.702 million compared to $3.474 million,respectively. The valuation allowance for impaired loans was approximately$851,000 at December 31, 2005 and $1.434 million at December 31,2004. The average recorded investment in our impaired loans was approximately$2.035 million, $1.601million, and $644,000 for the years ended December 31,2005, 2004, and 2003, respectively, and no income has been accrued or collectedon these loans while they have been classified as impaired.

Changesin the allowance for losses on loans are summarized as follows:

| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)*** | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance at  beginning of year          |       | $                                           | 9,580      |   | $ | 8,692 |   | $ | 7,188 |   |
| Provision for  loan losses             |       | 3,287                                       |       | 2,243 |   | 2,536 |   |
| Charge-offs                            |       | (1,507                                      | )          | (1,573 | ) | (1,266 | ) |
| Recoveries                             |       | 383                                         |       | 218 |   | 234 |   |
| Balance at end of year                 |       | $                                           | 11,743     |   | $ | 9,580 |   | $ | 8,692 |   |

 

Fromtime to time, we retain servicing on certain loans we sell into the secondarymarket. At December 31, 2005, 2004, and 2003 our servicing portfolio totaled$1.834 million, $2.997 million, and $3.533 million, respectively.Servicing loans for others generally consists of collecting mortgage payments,disbursing payments to investors and foreclosure processing. Loan servicingincome is recorded upon receipt and includes servicing fees from investors andcertain charges collected from borrowers, such as late payment fees. Ourmortgage servicing rights had a carrying value of $0, $0, and $1,000, as of December 31,2005, 2004, and 2003, respectively. Estimated fair values of these servicingrights approximate carrying value. Amortization expense and impairment ofservicing rights was $0, $1,000, and $106,000 for the years ended December 31,2005, 2004, and 2003 respectively.

**(5)**                               CreditCommitments

Commitments to extend credit are agreements to lend tocustomers, provided that terms and conditions established in the relatedcontracts are met. At December 31, 2005 and 2004, we had commitments tooriginate first mortgage loans on real estate of approximately $97.067 millionand $85.800 million, respectively, most of which were committed for sale in thesecondary market.

At December 31, 2005 and 2004, we also hadcommitments to loan funds under unused home equity lines of credit aggregatingapproximately $73.486 million and $57.541 million, respectively, andunused commercial lines of credit, retail checking lines of credit, as well asunfunded construction commitments aggregating approximately $204.391 millionand $166.958 million, respectively. Such commitments generally carry afixed rate of interest, while home equity lines of credit are generallyvariable.

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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 31,2005 and 2004 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.

Lettersof credit are commitments issued to guarantee the performance of a customer toa third party. At December 31, 2005 and 2004, letters of credit totaled$4.825 million and $5.437 million, respectively.

**(6)**                               RelatedParty Transactions

Duringthe ordinary course of business, we make loans to our directors and theiraffiliates and several of our policy making officers on substantially the sameterms, including interest rates and collateral, as those prevailing forcomparable transactions with other customers.  During the years ended December 31, 2005,2004, and 2003, transactions in related party loans were as follows:

| ***(dollars in thousands)*** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                      |       | $        | 1,882      |     | $          | 2,352    |       | $ | 3,044 |   |
| Additions                              |       | 247      |       | 80       |       | 323      |       |
| Repayments                             |       | (501     | )          | (550     | )          | (1,015   | )          |
|                                   |       | $        | 1,628      |     | $1,882     |     | $          | 2,352 |   |
|                                        |            |          |            |          |            |          |            |  |  |  |

 

Unused loan commitments to directors and policy-makingofficers totaled $1.410 million as of December 31, 2005 and $776,000 as ofDecember 31, 2004. Letters of credit issued on behalf of directors andpolicy-making officers totaled $780,000 for December 31, 2005 compared to$763,000 at December 31, 2004.

We lease from Hale Properties, LLC, a company owned byEdwin F. Hale, Sr., CEO of the Company, 34,500 square feet of generaloffice space at 1516 Baylis Street, Baltimore, Maryland, which houses asignificant portion of the Company’s servicing and operations units. We paid$389,000 rent expense on this location in 2005. We also lease 18,400 squarefeet of storage space and disaster recovery facilities at two other locationsowned by Mr. Hale. In 2005 we paid $83,000 in rent for these facilities. Forthe first three months of 2005, we also leased our headquarters building fromHale Properties, LLC. Rent expense on this location amounted to approximately$334,000 for 2005. In March of 2005, we purchased the building from Mr.Hale for a purchase price of $20 million.

In May of 2005, we signed a lease forapproximately 56,500 square feet of office space in a new building currentlyunder construction by Mr. Hale. On November 15, 2005, we signed anamendment to the lease that increased the square footage we will occupy to74,061. This building is adjacent to the current headquarters building at 3301Boston Street and is anticipated to be completed in the second quarter of 2006.At that time, the operations facility at 1516 Baylis Street will be vacated. Theadditional space will be utilized for growth and the annual rent will beapproximately $1.851 million.

The Company sponsors the activities of the BaltimoreBlast, a professional soccer team owned by Edwin F. Hale, Sr. The companypaid approximately $150,000 for a sponsorship package which includes printedmaterial and Company banners displayed at Baltimore Blast games, prizegiveaways, free tickets, and employee recognition nights. We have a letter ofcredit with the Baltimore Blast in the amount of $400,000 that is secured bycash.

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We have obtained the naming rights to the major indoorsports/entertainment facility in Baltimore from Mr. Hale who obtained themfrom the City of Baltimore. We pay Mr. Hale $75,000 per year for thenaming rights, which is the same as Mr. Hale pays the City of Baltimore.We have a letter of credit with the City of Baltimore in the amount of $375,000securing performance under the contract.

We have a letter of credit with Canton Crossing, LLC,a limited liability company wholly owned by Mr. Hale for $363,000 that issecured by cash.

All related party transactions are subject to reviewby management and the Audit Committee and approved by the full Board ofDirectors. We believe that the terms for all related party transactions are atleast as favorable as those that could be obtained from a third party.

**(7)**                               Premisesand Equipment

We own property andequipment as follows at December 31:

| ***(dollars in thousands)***           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                             |       | $        | 9,078      |     | $          | 2,300 |   |
| Buildings and  improvements                      |       | 21,818   |       | 6,952    |       |
| Leasehold improvements                           |       | 6,428    |       | 5,176    |       |
| Furniture, fixtures and  equipment               |       | 21,519   |       | 17,817   |       |
| Total at cost                                    |       | 58,843   |       | 32,245   |       |
| Less: accumulated  depreciation and amortization |       | (18,441  | )          | (14,800  | )          |
| Total premises and equipment                     |       | $        | 40,402     |     | $          | 17,445 |   |

 

Depreciation expense for the years ended December 31,2005, 2004, and 2003 was $3.872 million, $3.323 million, and$3.099 million, respectively.

We lease various branch and general office facilitiesto conduct our operations. The leases have remaining terms which range from aperiod of less than 1 year to 14 years. Most leases contain renewal optionswhich are generally exercisable at increased rates. Some of the leases providefor increases in the rental rates at specified times during the lease terms,prior to the expiration dates.

The leases generally provide for payment of propertytaxes, insurance, and maintenance costs by the Company. The total rentalexpense for all real property leases amounted to $2.919 million, $3.576million, and $3.284 million for 2005, 2004, and 2003, respectively.

Our minimum leasepayments due for each of the next five years are as follows:

| ***(dollars in thousands)*** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2006                                   |       | $          | 3,213      |   |
| 2007                                   |       | 3,702      |       |
| 2008                                   |       | 3,456      |       |
| 2009                                   |       | 3,091      |       |
| 2010                                   |       | 2,354      |       |
| Thereafter                             |       | 11,007     |       |
|                                   |       | $          | 26,823     |   |

 

The above schedule includeslease payments on our new headquarters location which we anticipate will beready for occupation during the second quarter of 2006. However, no leasepayments are required until the building is fully constructed, the timing ofwhich is not known for certain and is beyond our control.

During 2005, we capitalized approximately $20,000 ofinterest related to the construction of our various premises.

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**(8)**                               Deposits

Depositsare summarized as follows at December 31:

| ** **                             | ** ** | **2005**   | ** ** | **2004**                                | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **Weighted-  Average  Effective  Rate** | ** ** | **Amount** | ** ** | **Weighted-  Average  Effective  Rate** | ** ** |
| Noncertificate:                        |       |       |       |                                    |       |   |   |   |   |   |   |   |   |
| Savings                                |       | $          | 69,647     |                                    |       | 0.30 | % |   | $ | 68,642 |   |   | 0.35 | % |   |
| Interest-bearing demand                |       | 23,658     |       |                                    | 0.20       | % |   | 30,176 |   |   | 0.34 | % |   |
| Money market accounts                  |       | 195,036    |       |                                    | 1.58       | % |   | 192,394 |   |   | 0.84 | % |   |
| Noninterest-bearing  demand            |       | 182,049    |       |                                    |       |   |   | 160,538 |   |   |   |   |   |
| Total noncertificate  deposits         |       | 470,390    |       |                                    |       |   |   | 451,750 |   |   |   |   |   |
| Certificates of deposit:               |       |       |       |                                    |       |   |   |   |   |   |   |   |   |
| Original maturities:                   |       |       |       |                                    |       |   |   |   |   |   |   |   |   |
| Under 12 months                        |       | 2,362      |       |                                    | 2.35       | % |   | 3,015 |   |   | 1.48 | % |   |
| 12 to 60 months                        |       | 366,007    |       |                                    | 3.33       | % |   | 337,216 |   |   | 2.97 | % |   |
| IRA and KEOGH                          |       | 37,251     |       |                                    | 3.69       | % |   | 33,436 |   |   | 3.48 | % |   |
| Total certificates of  deposit         |       | 405,620    |       |                                    |       |   |   | 373,667 |   |   |   |   |   |
| Total deposits                         |       | $          | 876,010    |                                    |       |   |   |   | $ | 825,417 |   |   |   |   |   |

 

Timedeposits mature as follows:

| ** **                             | ** ** | **2005**   | ** ** | **2004**             | ** ** |
|----------------------------------------|------------|------------|------------|----------------------|------------|
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Within 6 months                        |       | $          | 46,453     |                 | 11.45      | % | $ | 36,549 |   | 9.78 | % |
| Over 6 months – 12  months        |       | 45,095     |       | 11.12                | %          | 34,480 |   | 9.23 | % |
| Over 12 months – 24  months       |       | 136,324    |       | 33.61                | %          | 110,773 |   | 29.64 | % |
| Over 24 months – 36  months       |       | 117,959    |       | 29.08                | %          | 60,077 |   | 16.08 | % |
| Over 36 months – 48  months       |       | 39,675     |       | 9.78                 | %          | 101,550 |   | 27.18 | % |
| Over 48 months                         |       | 20,114     |       | 4.96                 | %          | 30,238 |   | 8.09 | % |
|                                   |       | $          | 405,620    |                 | 100.00     | % | $ | 373,667 |   | 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, 2005, certificates thatpermitted early withdrawal totaled $142.896 million.

Certificatesof deposit of $100,000 or more totaled approximately $160.458 million and$145.079 million at December 31, 2005 and 2004, respectively.

**(9)**                               Borrowingsand Repurchase Agreements

Our borrowings consist of short-term and long-termadvances from the Federal Home Loan Bank of Atlanta (FHLB), short-termpromissory notes, a warehouse line of credit, long-term repurchase agreementswith callable options, a mortgage loan, and a long-term line of credit. TheFHLB advances are available under a specific collateral pledge and securityagreement, which currently allows us to borrow up to 30% of the Bank’s totalassets and requires that we maintain collateral for all of our borrowings inthe form of specific first and second mortgage loans or commercial mortgageswith outstanding principal equal to 133% of the advances, overnight investmentsequal to 100% of advances, or securities equal to 103% of advances. Long-termFHLB advances are fixed-rate instruments with various call provisions.Short-term advances are in the form of overnight borrowings with rates changingdaily. In the fourth quarter of 2005, 

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we secured a $75.000million mortgage warehouse line of credit to assist in the funding of ourmortgage-banking business that is secured by the pledging of loans from theCompany’s loans held for sale portfolio. Long-term repurchase agreements arefixed-rate obligations and require the company to pledge Government NationalMortgage Association (“GNMA”) securities or cash. The long-term line of creditrepresents borrowings by Finance Maryland and is a long-term line of creditmaintained with a commercial bank which permits Finance Maryland to borrow upto $40.000 million at a variable rate of interest. The line of credit issecured by eligible receivables of Finance Maryland and is also guaranteed byFirst Mariner Bancorp. Other covenants relating to the line of credit requireFinance Maryland to maintain predetermined levels of operating performance,credit quality, and equity levels, as well as other usual and customaryrequirements. The mortgage loan on our headquarters building is with acommercial bank on which we pay a fixed rate of 5.58% until maturity in 2031. Thecarrying value of the property securing the loan was approximately $19.434million as of December 31, 2005.

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Certain information regarding our borrowings andrepurchase agreements are as follows as of December 31:

| ***(dollars in thousands)***           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Amount outstanding at  year-end:                 |       |     |       |     |       |     |       |
| FHLB short-term advances                         |       | $        | 163,500    |     | $          | 132,000  |       | $ | 59,000 |   |
| FRB short-term borrowings                        |       | —   |       | —   |       | —   |       |
| Short-term promissory notes                      |       | 32,720   |       | 30,292   |       | 29,884   |       |
| Warehouse line of credit                         |       | 3,156    |       | —   |       | —   |       |
| FHLB long-term advances                          |       | 85,000   |       | 85,000   |       | 85,000   |       |
| Long-term repurchase agreements                  |       | —   |       | 25,000   |       | 25,000   |       |
| Long-term line of credit                         |       | 36,290   |       | 24,369   |       | —   |       |
| Mortgage loan                                    |       | 9,710    |       | —   |       | —   |       |
| Weighted-average  interest rate at year-end:     |       |     |       |     |       |     |       |
| FHLB short-term advances                         |       | 4.44     | %          | 2.44     | %          | 1.12     | %          |
| FRB short-term borrowings                        |       | —   |       | —   |       | —   |       |
| Short-term promissory notes                      |       | 0.56     | %          | 0.61     | %          | 0.75     | %          |
| Warehouse line of credit                         |       | 5.14     | %          | —   |       | —   |       |
| FHLB long-term advances                          |       | 5.99     | %          | 4.84     | %          | 4.84     | %          |
| Long-term repurchase agreements                  |       | —   |       | 5.06     | %          | 5.06     | %          |
| Long-term line of credit                         |       | 7.42     | %          | 5.62     | %          | —   |       |
| Mortgage loan                                    |       | 5.58     | %          | —   |       | —   |       |
| Maximum outstanding at  any month-end:           |       |     |       |     |       |     |       |
| FHLB short-term advances                         |       | $        | 225,500    |     | $          | 132,000  |       | $ | 59,000 |   |
| FRB short-term borrowings                        |       | —   |       | —   |       | —   |       |
| Short-term promissory notes                      |       | 36,955   |       | 41,058   |       | 43,981   |       |
| Warehouse line of credit                         |       | 3,156    |       | —   |       | —   |       |
| FHLB long-term advances                          |       | 85,000   |       | 85,000   |       | 85,000   |       |
| Long-term repurchase agreements                  |       | 15,000   |       | 25,000   |       | 25,000   |       |
| Long-term line of credit                         |       | 36,290   |       | 24,369   |       | —   |       |
| Mortgage loan                                    |       | 9,799    |       | —   |       | —   |       |
| Average outstanding:                             |       |     |       |     |       |     |       |
| FHLB short-term advances                         |       | $        | 173,510    |     | $          | 62,060   |       | $ | 8,452 |   |
| FRB short-term borrowings                        |       | 71       |       | —   |       | —   |       |
| Short-term promissory notes                      |       | 30,640   |       | 30,821   |       | 25,647   |       |
| Warehouse line of credit                         |       | 62       |       | —   |       | —   |       |
| FHLB long-term advances                          |       | 85,000   |       | 85,000   |       | 61,507   |       |
| Long-term repurchase agreements                  |       | 15,123   |       | 25,000   |       | 25,000   |       |
| Long-term line of credit                         |       | 30,213   |       | 16,360   |       | —   |       |
| Mortgage loan                                    |       | 7,379    |       | —   |       | —   |       |
| Weighted-average  interest rate during the year: |       |     |       |     |       |     |       |
| FHLB short-term advances                         |       | 3.59     | %          | 1.78     | %          | 1.22     | %          |
| FRB short-term borrowings                        |       | 4.36     | %          | —   |       | —   |       |
| Short-term promissory notes                      |       | 1.20     | %          | 0.51     | %          | 0.63     | %          |
| Warehouse line of credit                         |       | 4.07     | %          | —   |       | —   |       |
| FHLB long-term advances                          |       | 4.91     | %          | 4.93     | %          | 5.99     | %          |
| Long-term repurchase agreements                  |       | 4.33     | %          | 5.17     | %          | 5.13     | %          |
| Long-term line of credit                         |       | 6.64     | %          | 5.24     | %          | —   |       |
| Mortgage loan                                    |       | 5.63     | %          | —   |       | —   |       |

 

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Theprincipal maturities of long-term borrowings are as follows as of December 31,2005:

| ***(dollars in thousands)*** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2006                                   |       | $          | —     |   |
| 2007                                   |       | —     |       |
| 2008                                   |       | 36,290     |       |
| 2009                                   |       | —     |       |
| 2010                                   |       | 60,000     |       |
| After 2010                             |       | 34,710     |       |
|                                   |       | $          | 131,000    |   |

 

The maturities listed in the above table for 2010 arecallable immediately at the option of the issuer, while $25.000 millionmaturing after 2010 is callable beginning in 2010.

We have pledged securitieswith a carrying value (fair value) of $207.796 million and loans with acarrying value of $212.581 million as collateral for short-term andlong-term FHLB advances, the warehouse line of credit, and the long-term lineof credit.

**(10)**                        JuniorSubordinated Deferrable Interest Debentures

Thefollowing table shows the subordinated debt issued by First Mariner Bancorp andthe related Trust Preferred Securities issued at December 31, 2005:

| **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    |       |                                              | $          | 10,310,000              |       |                                                    | Floating rate Trust Preferred Securities |                                  | $          | 10,000,000                         |       | December 10, 2002    |       | December 15, 2007 |   | December 10, 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 18, 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 |   |
| MCT VII   |       |                                              | 5,155,000  |                    |       | Floating rate Trust Preferred Securities                |                                     | 5,000,000                             |       | August 18, 2005                    |       | September 15, 2010   |       | September 15, 2035 |   |
| MCT VIII  |       |                                              | 10,310,000 |                    |       | 5-year Fixed Trust Preferred Securities                 |                                     | 10,000,000                            |       | December 28, 2005                  |       | December 30, 2010    |       | December 30, 2035 |   |
| Total     |       |                                              | $          | 73,724,000              |       |                                                    |                                     |                                  | $          | 71,500,000                         |       |                 |       |   |   |   |   |

 

We have issued subordinated debt to Mariner CapitalTrusts (“MCT”), including MCT II, MCT III, MCT IV, MCT V, MCT VI, MCT VII, andMCT VIII (the “Trusts”). The Trusts are Delaware business trusts for which allthe common securities are owned by First Mariner and which were formed for thepurpose of issuing Trust Preferred Securities. In accordance with theprovisions of FIN46, we have deconsolidated the Trusts, and their financialposition and results of operations are not included in our consolidatedfinancial position and results of operations. The terms of the subordinateddebt issued to the Trusts and the Trust Preferred Securities issued by theTrusts are identical.

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 Preferred Securities issued byMCT II accrue interest at a variable rate of interest equal to the 3-monthLIBOR rate plus 335 basis points. The Trust Preferred Securities issued by MCTIII accrue interest at a fixed rate of interest, initially at 5.66% on theoutstanding securities. The interest rate will reset July 7, 2008 to afloating rate equal to 3-month LIBOR rate plus 325 basis points. 

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The Floating Rate TrustPreferred Securities issued by MCT IV accrue interest at a variable rate ofinterest equal to the 3-month LIBOR rate plus 305 basis points. TheFloating Rate Trust Preferred Securities issued by MCT V accrue interest at avariable rate of interest equal to the 3-month LIBOR rate plus 310 basispoints. The Floating Rate Trust Preferred Securities issued by MCT VI accrueinterest at a variable rate of interest equal to the 3-month LIBOR rateplus 205 basis points. The Floating Rate Trust Preferred Securities issued byMCT VII accrue interest at a variable rate of interest equal to the 3-monthLIBOR rate plus 195 basis points. The Trust Preferred Securities issued by MCTVIII accrue interest at an initial fixed rate of interest of 6.26%, then resetto the 3-month LIBOR rate plus 150 basis points.

The interest expense (including amortization of thecost of issuance) on Trust Preferred Securities was $3.762 million in 2005,$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.

Under applicableregulatory guidelines, a portion of the Trust Preferred Securities will qualifyas Tier I capital, and the remaining portion will qualify as Tier II capital.Under applicable regulatory guidelines, $25.230 million of the outstandingTrust Preferred Securities qualify as Tier I capital and the remaining$46.270 million of the Trust Preferred Securities qualify as Tier IIcapital at December 31, 2005.

**(11)**                        EmployeeBenefit Plans

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

We established a definedcontribution plan in 1997, covering our employees meeting certain age andservice eligibility requirements. The Plan provides for cash deferralsqualifying under Section 401(k). We make matching contributions to theplan which totaled $481,000, $392,000, and $378,000 in 2005, 2004, and 2003,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. On December 19, 2005,the Compensation Committee of the Board of Directors of the Company approved animmediate acceleration of the vesting for all unvested stock options previouslyawarded. On that date, all outstanding options became fully vested. Prior tothat date, options granted had a three-year vesting schedule with the firstyear vested upon issuance. As of December 31, 2005, all outstandingoptions are fully vested. All of our options expire ten years after the date ofgrant.

Informationwith respect to stock options is as follows for the years ended December 31,2005, 2004, and 2003:

| ** **                        | ** ** | **2005**                   | ** ** | **2004**                                | ** ** | **2003**                   | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **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 |       | 738,239                    |       |                                    | $          | 10.05                      |       |   | 701,888 |   |   | $ | 9.48 |   |   | 514,538 |   |   | $ | 8.58 |   |   |
| Granted                           |       | 271,800                    |       |                                    | 17.66      |                       |       | 51,350 |   |   | 18.32 |   |   | 193,850 |   |   | 11.85 |   |   |
| Exercised                         |       | (23,800                    | )          |                                    | 9.95       |                       |       | (12,165 | ) |   | 10.66 |   |   | (6,500 | ) |   | 9.01 |   |   |
| Forfeited/Cancelled               |       | (4,305                     | )          |                                    | 10.69      |                       |       | (2,834 | ) |   | 16.41 |   |   | — |   |   | — |   |   |
| Oustanding at end of  year        |       | 981,934                    |       |                                    | 12.16      |                       |       | 738,239 |   |   | 10.05 |   |   | 701,888 |   |   | 9.48 |   |   |

 

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Optionsoutstanding are summarized as follows at December 31, 2005:

| **Exercise Price**      | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Options  Exercisable  (Shares)** | ** ** |
|------------------------------|------------|------------|------------|------------|------------|----------------------------------------------------------------------|------------|------------------------------------|------------|
| $  4.00            |       | 1,200      |       |       | 5.0        |                                                                 |       |                               | 1,200      |   |   |
|     5.50 |       | 94,350     |       |       | 5.1        |                                                                 |       |                               | 94,350     |   |   |
|     5.63 |       | 41,250     |       |       | 4.2        |                                                                 |       |                               | 41,250     |   |   |
|     6.25 |       | 3,000      |       |       | 4.4        |                                                                 |       |                               | 3,000      |   |   |
|     6.45 |       | 400        |       |       | 5.5        |                                                                 |       |                               | 400        |   |   |
|     7.10 |       | 5,000      |       |       | 5.3        |                                                                 |       |                               | 5,000      |   |   |
|     7.40 |       | 350        |       |       | 5.7        |                                                                 |       |                               | 350        |   |   |
|     8.69 |       | 10,000     |       |       | 3.9        |                                                                 |       |                               | 10,000     |   |   |
|     9.09 |       | 171,050    |       |       | 0.8        |                                                                 |       |                               | 171,050    |   |   |
|     9.16 |       | 950        |       |       | 6.0        |                                                                 |       |                               | 950        |   |   |
|     9.86 |       | 1,450      |       |       | 6.8        |                                                                 |       |                               | 1,450      |   |   |
|   10.45            |       | 120,000    |       |       | 6.0        |                                                                 |       |                               | 120,000    |   |   |
|   10.50            |       | 3,000      |       |       | 3.5        |                                                                 |       |                               | 3,000      |   |   |
|   10.70            |       | 650        |       |       | 6.2        |                                                                 |       |                               | 650        |   |   |
|   11.68            |       | 173,334    |       |       | 7.0        |                                                                 |       |                               | 173,334    |   |   |
|   11.75            |       | 12,500     |       |       | 3.1        |                                                                 |       |                               | 12,500     |   |   |
|   11.95            |       | 900        |       |       | 7.1        |                                                                 |       |                               | 900        |   |   |
|   12.03            |       | 5,500      |       |       | 6.3        |                                                                 |       |                               | 5,500      |   |   |
|   12.10            |       | 6,000      |       |       | 6.3        |                                                                 |       |                               | 6,000      |   |   |
|   13.00            |       | 800        |       |       | 7.3        |                                                                 |       |                               | 800        |   |   |
|   13.52            |       | 7,000      |       |       | 7.3        |                                                                 |       |                               | 7,000      |   |   |
|   16.67            |       | 9,100      |       |       | 9.3        |                                                                 |       |                               | 9,100      |   |   |
|   16.70            |       | 2,200      |       |       | 9.8        |                                                                 |       |                               | 2,200      |   |   |
|   16.86            |       | 1,000      |       |       | 8.5        |                                                                 |       |                               | 1,000      |   |   |
|   16.95            |       | 2,700      |       |       | 7.8        |                                                                 |       |                               | 2,700      |   |   |
|   17.45            |       | 51,000     |       |       | 10.0       |                                                                 |       |                               | 51,000     |   |   |
|   17.77            |       | 209,500    |       |       | 9.1        |                                                                 |       |                               | 209,500    |   |   |
|   18.20            |       | 9,450      |       |       | 8.3        |                                                                 |       |                               | 9,450      |   |   |
|   18.38            |       | 38,300     |       |       | 8.0        |                                                                 |       |                               | 38,300     |   |   |
|                         |       | 981,934    |       |       |       |                                                                 |       |                               | 981,934    |   |   |

 

***(c) Warrants***

We had outstandingwarrants of 482,682 to acquire shares of our common stock at $9.09 pershare exercisable at December 31, 2004. All of these warrants wereexercised during 2005.

***(d) Stock Purchase***

We currently offer anemployee stock purchase plan whereby our employees can purchase our stockthrough payroll deductions. We generally provide a discount of up to 10% of thepurchase price.

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**(12)**                        IncomeTaxes

Ourincome tax expense consists of the following for the years ended December 31:

| ***(dollars in thousands)*** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                                |       | $        | 2,328      |     | $          | 2,751    |       | $ | 1,278 |   |
| Deferred                               |       | 961      |       | (390     | )          | 493      |       |
| Income tax expense                     |       | $        | 3,289      |     | $          | 2,361    |       | $ | 1,771 |   |

 

Incometax expense is reconciled to the amount computed by applying the federalcorporate tax rate of 34% to income before taxes as follows for the years endedDecember 31:

| ** **                                             | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| ***(dollars in thousands)***                 | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Tax at statutory  federal rate                         |       |       | $          | 3,778    |       |       | 34.0       | % |   | $ | 2,877 |   |   | 34.0 | % |   | $ | 2,406 |   |   | 34.0 | % |
| State income  taxes, net of federal income tax benefit |       |       | (1         | )        |       | —     |       |   | 21 |   |   | 0.3 |   |   | (350 | ) |   | (4.9 | ) |
| Change in  valuation allowance                         |       |       | (25        | )        |       | (0.2       | )          |   | (10 | ) |   | (0.1 | ) |   | 34 |   |   | 0.4 |   |
| Bank-owned life  insurance                             |       |       | (351       | )        |       | (3.2       | )          |   | (365 | ) |   | (4.3 | ) |   | (250 | ) |   | (3.5 | ) |
| Federal income  tax credits                            |       |       | (168       | )        |       | (1.5       | )          |   | (166 | ) |   | (2.0 | ) |   | (84 | ) |   | (1.2 | ) |
| Other                                                  |       |       | 56         |     |       | 0.5        |       |   | 4 |   |   | — |   |   | 15 |   |   | 0.2 |   |
|                                                   |       |       | $          | 3,289    |       |       | 29.6       | % |   | $ | 2,361 |   |   | 27.9 | % |   | $ | 1,771 |   |   | 25.0 | % |

 

Thetax effects of temporary differences between the financial reporting basis andincome tax basis of assets and liabilities relate to the following at December 31:

| ***(dollars in thousands)***                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                                 |       |     |       |     |       |
| Allowance for losses on loans                                         |       | $        | 4,535      |     | $          | 3,700 |   |
| Amortization of intangible assets                                     |       | 125      |       | 138      |       |
| State net operating loss carryforward                                 |       | 321      |       | 346      |       |
| Other                                                                 |       | 73       |       | 95       |       |
| Total gross  deferred tax assets                                      |       | 5,054    |       | 4,279    |       |
| Less: valuation allowance                                             |       | (321     | )          | (346     | )          |
| Net deferred tax  assets                                              |       | 4,733    |       | 3,933    |       |
| Deferred tax liabilities:                                             |       |     |       |     |       |
| Depreciation                                                          |       | 880      |       | 1,041    |       |
| Total deferred  tax liabilities                                       |       | 880      |       | 1,041    |       |
| Net deferred tax  asset attributable to operations                    |       | 3,853    |       | 2,892    |       |
| Unrealized gain  on investments charged to other comprehensive income |       | 2,087    |       | 84       |       |
| Net deferred tax asset                                                |       | $        | 5,940      |     | $          | 2,976 |   |

 

First Mariner has net operating loss carryforwards forstate income tax purposes of approximately $6.940 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 $321,000 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 (“OneMaryland”) and Job Creation Tax Credit programs. The tax incentives total$5.5 million based upon a confirmation received from the MarylandDepartment of Business and Economic Development. We will realize the benefitsof the incentives in our reported earnings as the credits can be utilized, inaccordance with accounting standards that govern the recognition of investmenttax credits. The amount of the credit that we can utilize will be determined bythe level of Maryland taxable income for the Bank only, and will be recognizedas a reduction in our income tax expense. Any unused One Maryland credits canbe carried forward and will expire in 2016. The Job Creation Tax Credit can becarried forward for five years. The total tax credits not utilized as of December 31,2005 is $4.371 million. We expect the Bank to fully realize the full value ofthe credits before their expiration.

The Bank has invested in apartnership that owns and manages seven affordable housing projects in the Mid-Atlanticarea. Through its interest in the partnership, the Bank receives tax incentivesin the form of Federal tax credits that can be used to offset current Federalincome taxes. Tax credits associated with the limited partnership (assuming the5% limited partnership interest currently owned by the Bank) is projected tototal $1.599 million and will be available to the limited partners from January 2003through December 2012. The annual tax credits anticipated to be availableapproximate $168,000. The Bank invested $1.5 million to obtain its 5%interest in the partnership in July of 2003, and recognized $168,000 intax credits in 2005, $166,000 in 2004, and $84,000 in 2003.

**(13)**                        OtherExpenses

Thefollowing summarizes our other noninterest expenses for the years ended December 31:

| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***            | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Office supplies                                   |       | $                                           | 680        |   | $ | 697 |   | $ | 691 |   |
| Printing                                          |       | 543                                         |       | 712 |   | 795 |   |
| Corporate  insurance                              |       | 401                                         |       | 378 |   | 297 |   |
| Other real estate  owned expense                  |       | 28                                          |       | (73 | ) | 18 |   |
| FDIC premiums                                     |       | 113                                         |       | 115 |   | 109 |   |
| Consulting fees                                   |       | 734                                         |       | 385 |   | 506 |   |
| Marketing/promotion                               |       | 866                                         |       | 722 |   | 825 |   |
| Postage                                           |       | 764                                         |       | 982 |   | 756 |   |
| Overnight  delivery/courier                       |       | 809                                         |       | 736 |   | 770 |   |
| Security                                          |       | 151                                         |       | 310 |   | 294 |   |
| Dues and  subscriptions                           |       | 438                                         |       | 341 |   | 248 |   |
| Writeoff of  unamortized trust preferred expenses |       | —                                      |       | — |   | 945 |   |
| Loan collection  expenses                         |       | 471                                         |       | 332 |   | 239 |   |
| Other                                             |       | 2,914                                       |       | 2,619 |   | 1,881 |   |
|                                              |       | $                                           | 8,912      |   | $ | 8,256 |   | $ | 8,374 |   |

 

**(14)**                        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, out of surplus in excess of 100% of its required capital stock,after providing for due or accrued expenses, losses, interest, and taxes.

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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 general matter,insured banks and bank holding companies may pay dividends only out of prioroperating earnings. For a Maryland state-chartered bank or trust company,dividends may be paid out of undivided profits or, with the prior approval ofthe Commissioner, from surplus in excess of 100% of required capital 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:

| ***(dollars in thousands, except for per share data)*** | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Net income -  basic and diluted                                                            |       | $         | 7,822      |      | $          | 6,101     |       | $ | 5,307 |   |
| Weighted-average  share outstanding - basic                                                |       | 6,104,481 |       | 5,759,310 |       | 5,450,704 |       |
| Dilutive  securities - options and warrants                                                |       | 384,638   |       | 591,962   |       | 554,842   |       |
| Adjusted  weighted-average shares outstanding - dilutive                                   |       | 6,489,119 |       | 6,351,272 |       | 6,005,546 |       |
| Earnings per  share - basic                                                                |       | $         | 1.28       |      | $          | 1.06      |       | $ | 0.97 |   |
| Earnings per  share - diluted                                                              |       | $         | 1.20       |      | $          | 0.96      |       | $ | 0.88 |   |

 

Forthe year ended December 31, 2005, there were 222,199 weighted-averageshares which were antidilutive and excluded from the above computation.

**(15)**                        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,and possibly additional discretionary, actions by regulators that, ifundertaken, could have a direct material effect on our financial statements.Under capital adequacy guidelines and the regulatory framework for promptcorrective action, the Bank must meet specific capital guidelines that involvequantitative measures of assets, liabilities, and certain off-balance sheetitems as calculated under regulatory accounting practices. The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, 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, 2005, that theBank meets all capital adequacy requirements to which it is subject. As of December 31,2005, 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 and ratios as of December 31, 2005 and 2004,were as follows:

| ** **                                               | ** ** | ** **         | ** ** | ** ** | ** ** | **Minimum  Requirements  for Capital Adequacy  Purposes** | ** ** | **To be Well  Capitalized Under  Prompt Corrective  Action Provision** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ***(dollars in thousands)***                   | ** ** | **Actual  Amount** | ** ** | **Ratio**  | ** ** | **Amount**                                                          | ** ** | **Ratio**                                                                                       | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of December 31, 2005**                         |       |               |       |       |       |                                                                |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets):                |       |               |       |       |       |                                                                |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                             |       | $                  | 158,935    |       |       | 14.9                                                                | %          |                                                                                            | $          | 85,087 |   |   | 8.0 | % |   | $ | 106,359 |   |   | 10.0 | % |   |
| Bank                                                     |       | 105,160            |       |       | 10.7       | %                                                                   |       | 78,325                                                                                          |       |   | 8.0 | % |   | 97,906 |   |   | 10.0 | % |   |
| Tier 1 capital (to  risk-weighted assets):               |       |               |       |       |       |                                                                |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                             |       | 100,922            |       |       | 9.5        | %                                                                   |       | 42,543                                                                                          |       |   | 4.0 | % |   | 63,815 |   |   | 6.0 | % |   |
| Bank                                                     |       | 88,197             |       |       | 9.0        | %                                                                   |       | 39,162                                                                                          |       |   | 4.0 | % |   | 58,744 |   |   | 6.0 | % |   |
| Tier 1 capital (to  average fourth quarter assets): |       |               |       |       |       |                                                                |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                             |       | 100,922            |       |       | 7.4        | %                                                                   |       | 54,804                                                                                          |       |   | 4.0 | % |   | 68,505 |   |   | 5.0 | % |   |
| Bank                                                     |       | 88,197             |       |       | 6.8        | %                                                                   |       | 51,563                                                                                          |       |   | 4.0 | % |   | 64,453 |   |   | 5.0 | % |   |
| **As of  December 31, 2004**                        |       |               |       |       |       |                                                                |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Total capital (to  risk-weighted assets):                |       |               |       |       |       |                                                                |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                                             |       | $                  | 130,526    |       |       | 14.1                                                                | %          |                                                                                            | $          | 74,098 |   |   | 8.0 | % |   | $ | 92,623 |   |   | 10.0 | % |   |
| 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 | % |   |
| 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 | % |   |
| Bank                                                     |       | 75,812             |       |       | 6.5        | %                                                                   |       | 46,411                                                                                          |       |   | 4.0 | % |   | 58,014 |   |   | 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 to0.2% of total assets plus 4.5% of outstanding advances from the Bank. Purchasesand sales of stock are made directly with the Bank at par value.

**(16)**                        FairValue of Financial Instruments

Fair value estimates, methods, and assumptions are setforth below for our financial instruments as of December 31, 2005 and2004.

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The carrying value and estimated fair value offinancial instruments are summarized as follows:

| ** **                                          | ** ** | **2005**            | ** ** | **2004**                       | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| ***(dollars in thousands)***              | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** | **Carrying  Value** | ** ** | **Estimated  Fair Value** | ** ** |
| Assets:                                             |       |                |       |                           |       |   |   |   |   |
| Cash and interest-bearing deposits                  |       | $                   | 45,835     |                           | $          | 45,835 |   | $ | 35,447 |   | $ | 35,447 |   |
| Investment securities                               |       | 276,939             |       | 276,939                        |       | 322,965 |   | 322,965 |   |
| Loans receivable                                    |       | 851,586             |       | 859,234                        |       | 746,146 |   | 753,843 |   |
| Loans held for sale                                 |       | 92,351              |       | 92,351                         |       | 79,955 |   | 79,955 |   |
| Restricted stock investments                        |       | 13,647              |       | 13,647                         |       | 11,886 |   | 11,886 |   |
| Liabilities:                                        |       |                |       |                           |       |   |   |   |   |
| Deposits                                            |       | 876,010             |       | 869,279                        |       | 825,417 |   | 826,823 |   |
| Long- and short-term borrowings                     |       | 330,376             |       | 334,084                        |       | 271,661 |   | 288,177 |   |
| Repurchase agreements                               |       | —              |       | —                         |       | 25,000 |   | 25,197 |   |
| Junior  subordinated deferrable interest debentures |       | 73,724              |       | 79,890                         |       | 58,249 |   | 58,578 |   |
|                                                     |            |                     |            |                                |            |  |  |  |  |  |  |  |  |

 

***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***

Loans held for sale are carriedat the lower of cost or market, which may be indicated by the committed salesprice. Due to the short holding period of these loans, generally 14 to 60 days,the carrying amount of loans held for sale is a reasonable estimate of fairvalue.

***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 Junior SubordinatedNotes***

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, 2005.

***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 a one-time sale of ourtotal holdings of a particular financial instrument. Because no market existsfor a significant portion of our financial instruments, fair value estimatesare based on judgments regarding future expected loss experience, currenteconomic conditions, risk characteristics of various financial instruments, andother factors. These estimates are subjective in nature and involveuncertainties and matters of significant judgment and therefore cannot bedetermined with precision. Changes in assumptions could significantly affectestimates.

**(17)**                        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, 2005**

| ***(dollars in thousands)***                   | ** ** | **Commercial and  Consumer Banking** | ** ** | **Consumer  Finance** | ** ** | **Mortgage-  Banking** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------|------------|
| Interest income                                          |       |                                           | $          | 65,398                |       |                   |       | $         | 10,467     |   |   |   | $ | 6,195 |   |   | $ | 82,060 |   |
| Interest expense                                         |       |                                           | 28,700     |                  |       |                   | 2,005      |      |       |   | 3,632 |   |   | 34,337 |   |
| Net interest income                                      |       |                                           | 36,698     |                  |       |                   | 8,462      |      |       |   | 2,563 |   |   | 47,723 |   |
| Provision for  loan losses                               |       |                                           | 1,575      |                  |       |                   | 1,712      |      |       |   | — |   |   | 3,287 |   |
| Net interest income after provision for loan losses |       |                                           | 35,123     |                  |       |                   | 6,750      |      |       |   | 2,563 |   |   | 44,436 |   |
| Noninterest  income                                      |       |                                           | 13,462     |                  |       |                   | 2,581      |      |       |   | 6,972 |   |   | 23,015 |   |
| Noninterest  expense                                     |       |                                           | 39,686     |                  |       |                   | 7,757      |      |       |   | 8,897 |   |   | 56,340 |   |
| Net intersegment  income                                 |       |                                           | (905       | )                     |       |                   | —     |      |       |   | 905 |   |   | — |   |
| Net income before  income taxes                          |       |                                           | $          | 7,994                 |       |                   |       | $         | 1,574      |   |   |   | $ | 1,543 |   |   | $ | 11,111 |   |
| Total assets                                             |       |                                           | $          | 1,220,856             |       |                   |       | $         | 49,271     |   |   |   | $ | 92,351 |   |   | $ | 1,362,478 |   |

 

**For the year ended December 31, 2004**

| ***(dollars in thousands)***              | ** ** | **Commercial and  Consumer Banking** | ** ** | **Consumer  Finance** | ** ** | **Mortgage-  Banking** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------|------------|
| 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 |   |   | — |   |
| Net income before  income taxes                     |       |                                           | $          | 9,708                 |       |                   |       | $         | 1,022      |   |   |   | $ | (2,268 | ) |   | $ | 8,462 |   |
| Total assets                                        |       |                                           | $          | 1,136,054             |       |                   |       | $         | 34,522     |   |   |   | $ | 79,955 |   |   | $ | 1,250,531 |   |

 

**For the year ended December 31, 2003**

| ***(dollars in thousands)***              | ** ** | **Commercial and  Consumer Banking** | ** ** | **Consumer  Finance** | ** ** | **Mortgage-  Banking** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------|------------|
| 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 | ) |   | — |   |
| Net income before  income taxes                     |       |                                           | $          | 4,884                 |       |                   |       | $         | 164        |   |   |   | $ | 2,030 |   |   | $ | 7,078 |   |
| Total assets                                        |       |                                           | $          | 975,615               |       |                   |       | $         | 23,183     |   |   |   | $ | 59,055 |   |   | $ | 1,057,853 |   |

 

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**(18)**                        ComprehensiveIncome

Comprehensive income is defined as net income plustransactions and other occurrences which are the result of nonowner changes inequity. Our nonowner equity changes are comprised of unrealized gains or losseson available for sale securities that will be accumulated with net income indetermining comprehensive income.

Componentsof our comprehensive income are as follows for the years ended December 31:

| ***(dollars in thousands)***                                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                                                                                              |       | $        | 7,822      |     | $          | 6,101    |       | $ | 5,307 |   |
| Other comprehensive  income items:                                                                                                      |       |     |       |     |       |     |       |
| Unrealized holding (losses) gains arising during the  period (net of tax (benefit) expense of $(2,002), $(582), and $19,  respectively) |       | (3,184   | )          | (1,027   | )          | 49       |       |
| Less: reclassification adjustment for gains (net of  tax expense of $0, $165, and $530, respectively) included in net income            |       | —   |       | 275      |       | 841      |       |
| Total other  comprehensive loss                                                                                                         |       | (3,184   | )          | (1,302   | )          | (792     | )          |
| Total comprehensive  income                                                                                                             |       | $        | 4,638      |     | $          | 4,799    |       | $ | 4,515 |   |

 

**(19)**                        QuarterlyResults of Operations

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended December 31, 2005 and 2004:

| ** **                                                                                                                                                      | ** ** | **Year Ended December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ***(dollars in thousands)***                                                                                                                          | ** ** | **Fourth Quarter**                              | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
| Interest income                                                                                                                                                 |       |                                                 | $          | 22,059 |   |   |   | $ | 21,809 |   |   |   | $ | 20,033 |   |   |   | $ | 18,159 |   |   |
| Interest expense                                                                                                                                                |       |                                                 | 9,935      |   |   |   | 9,394 |   |   |   | 8,093 |   |   |   | 6,915 |   |   |
| Net interest  income                                                                                                                                            |       |                                                 | 12,124     |   |   |   | 12,415 |   |   |   | 11,940 |   |   |   | 11,244 |   |   |
| Provision for  loan losses                                                                                                                                      |       |                                                 | 776        |   |   |   | 1,116 |   |   |   | 981 |   |   |   | 414 |   |   |
| Other operating  income                                                                                                                                         |       |                                                 | 6,341      |   |   |   | 6,707 |   |   |   | 5,441 |   |   |   | 4,526 |   |   |
| Operating  expenses                                                                                                                                             |       |                                                 | 14,035     |   |   |   | 14,865 |   |   |   | 13,952 |   |   |   | 13,488 |   |   |
| Income before  taxes                                                                                                                                            |       |                                                 | 3,654      |   |   |   | 3,141 |   |   |   | 2,448 |   |   |   | 1,868 |   |   |
| Income tax  expense                                                                                                                                             |       |                                                 | 1,147      |   |   |   | 928 |   |   |   | 721 |   |   |   | 493 |   |   |
| Net income                                                                                                                                                      |       |                                                 | $          | 2,507 |   |   |   | $ | 2,213 |   |   |   | $ | 1,727 |   |   |   | $ | 1,375 |   |   |
| Net income per  common share (basic)                                                                                                                            |       |                                                 | $          | 0.41 |   |   |   | $ | 0.35 |   |   |   | $ | 0.28 |   |   |   | $ | 0.24 |   |   |
| Net income per  common share (diluted)                                                                                                                          |       |                                                 | $          | 0.37 |   |   |   | $ | 0.34 |   |   |   | $ | 0.27 |   |   |   | $ | 0.22 |   |   |
| Market prices:  high                                                                                                                                            |       |                                                 | $          | 18.45 |   |   |   | $ | 18.86 |   |   |   | $ | 17.82 |   |   |   | $ | 18.30 |   |   |
|                           low |       |                                                 | 16.50      |   |   |   | 16.05 |   |   |   | 15.18 |   |   |   | 17.30 |   |   |

 

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| ** **                                                                                                                                                 | ** ** | **Year Ended December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(***dollars in thousands)*                                                                                                                     | ** ** | **Fourth Quarter**                              | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
| 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 |   |   |
| Market prices:  high                                                                                                                                       |       |                                                 | $          | 17.91 |   |   |   | $ | 17.20 |   |   |   | $ | 19.75 |   |   |   | $ | 20.03 |   |   |
|                           low |       |                                                 | 16.80      |   |   |   | 15.51 |   |   |   | 15.65 |   |   |   | 17.65 |   |   |

 

**(20)**                        FinancialInformation of Parent Company

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

**Statementsof Financial Condition**

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ***(dollars in thousands)***          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Assets:                                         |       |                  |       |   |   |
| Cash and  interest-bearing deposits             |       | $                     | 17,920     |   | $ | 16,525 |   |
| Subordinated  notes                             |       | 7,500                 |       | 5,000 |   |
| Loans receivable                                |       | 7,256                 |       | 11,331 |   |
| Securities available  for sale                  |       | 1,310                 |       | 1,531 |   |
| Investment in  subsidiaries                     |       | 108,429               |       | 84,485 |   |
| Company-owned  life insurance                   |       | 2,678                 |       | 2,578 |   |
| Other assets                                    |       | 1,983                 |       | 1,464 |   |
| Total assets                                    |       | $                     | 147,076    |   | $ | 122,914 |   |
| Liabilities and  stockholders’ equity:     |       |                  |       |   |   |
| Other liabilities                               |       | $                     | 977        |   | $ | 351 |   |
| Junior  subordinated debentures                 |       | 73,724                |       | 58,249 |   |
| Stockholders’  equity                      |       | 72,375                |       | 64,314 |   |
| Total liabilities and stockholders’ equity |       | $                     | 147,076    |   | $ | 122,914 |   |

 

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**Statements ofincome**

| ** **                                                      | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ***(dollars in thousands)***                          | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income:                                                         |       |                                                          |       |   |   |   |   |
| Interest on investments  and interest-bearing deposits          |       | $                                                             | 130        |   | $ | 150 |   | $ | 189 |   |
| Interest on subordinated  note                                  |       | 411                                                           |       | 274 |   | — |   |
| Interest on loans                                               |       | 645                                                           |       | 470 |   | 736 |   |
| Gain on sale of  securities                                     |       | —                                                        |       | — |   | 1,124 |   |
| Other income                                                    |       | 846                                                           |       | 741 |   | 642 |   |
| Total income                                                    |       | 2,032                                                         |       | 1,635 |   | 2,691 |   |
| Expenses:                                                       |       |                                                          |       |   |   |   |   |
| Interest expense                                                |       | 3,762                                                         |       | 2,426 |   | 2,631 |   |
| Professional expenses                                           |       | 259                                                           |       | 248 |   | 204 |   |
| Other expenses                                                  |       | 402                                                           |       | 304 |   | 1,279 |   |
| Total expenses                                                  |       | 4,423                                                         |       | 2,978 |   | 4,114 |   |
| Loss before income tax  benefit                                 |       | (2,391                                                        | )          | (1,343 | ) | (1,423 | ) |
| Income tax benefit                                              |       | (96                                                           | )          | (107 | ) | (451 | ) |
| Loss before equity in  undistributed net income of subsidiaries |       | (2,295                                                        | )          | (1,236 | ) | (972 | ) |
| Equity in undistributed  net income of subsidiaries             |       | 10,117                                                        |       | 7,337 |   | 6,279 |   |
| Net income                                                      |       | $                                                             | 7,822      |   | $ | 6,101 |   | $ | 5,307 |   |

 

**Statements of CashFlows**

| ** **                                                                    | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ***(dollars in thousands)***                                        | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                         |       |                                                          |       |   |   |   |   |
| Loss before  undistributed net income of subsidiaries                         |       | $                                                             | (2,295     | ) | $ | (1,236 | ) | $ | (972 | ) |
| Gain on sale of  securities                                                   |       | —                                                        |       | — |   | (1,124 | ) |
| Increase in other assets                                                      |       | (436                                                          | )          | (251 | ) | (559 | ) |
| Income from Company-owned  life insurance                                     |       | (100                                                          | )          | (78 | ) | — |   |
| Increase (decrease) in  other liabilities                                     |       | 627                                                           |       | (1,067 | ) | 523 |   |
| Net cash used in  operating activities                                        |       | (2,204                                                        | )          | (2,632 | ) | (2,132 | ) |
| Cash flows from investing activities:                                         |       |                                                          |       |   |   |   |   |
| Investment in  subsidiaries                                                   |       | (16,874                                                       | )          | (1,428 | ) | (4,374 | ) |
| Loans (disbursements)  repayments, net                                        |       | 4,075                                                         |       | 10,287 |   | (11,968 | ) |
| Purchase of subordinated  notes                                               |       | (2,500                                                        | )          | (5,000 | ) | — |   |
| Purchase of securities  available for sale                                    |       | —                                                        |       | (170 | ) | (256 | ) |
| Sale of securities  available for sale                                        |       | —                                                        |       | — |   | 2,711 |   |
| Purchase of Company-owned  life insurance                                     |       | —                                                        |       | (2,500 | ) | — |   |
| Net cash provided by  (used in) investing activities                          |       | (15,299                                                       | )          | 1,189 |   | (13,887 | ) |
| Cash flows from financing activities:                                         |       |                                                          |       |   |   |   |   |
| Proceeds from stock  issuance, net                                            |       | 5,001                                                         |       | 1,690 |   | 2,793 |   |
| Repurchase of common  stock, net                                              |       | (1,578                                                        | )          | (609 | ) | — |   |
| Repayment of junior  subordinated deferrable interest debentures              |       | —                                                        |       | — |   | (22,050 | ) |
| Proceeds from issuance  of junior subordinated deferrable interest debentures |       | 15,475                                                        |       | 10,310 |   | 37,639 |   |
| Net cash provided by  financing activities                                    |       | 18,898                                                        |       | 11,391 |   | 18,382 |   |
| Net increase in cash and  cash equivalents                                    |       | 1,395                                                         |       | 9,948 |   | 2,363 |   |
| Cash and cash equivalents  at beginning of year                               |       | 16,525                                                        |       | 6,577 |   | 4,214 |   |
| Cash and cash equivalents at end of year                                      |       | $                                                             | 17,920     |   | $ | 16,525 |   | $ | 6,577 |   |

 

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**ITEM 9**                   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

**ITEM 9A**           CONTROLSAND PROCEDURES

**Conclusion Regarding The Effectiveness Of DisclosureControls And Procedures**

Senior management maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in our exchange act reports is recorded, processed, summarized, andreported within the time periods provided in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including the Chief Executive Officer and Chief Financial Officer, as appropriate,to allow 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 31,2005, we carried out an evaluation under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as defined in rule 13a-15(e) and15d-15(e) under the Exchange Act. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective.

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**Management’s Report On Internal Control Over FinancialReporting**

The management of First Mariner Bancorp (“the Company”)is responsible for establishing and maintaining adequate internal control overfinancial reporting. The internal control process has been designed under oursupervision to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of the Company’s consolidated financialstatements for external reporting purposes in accordance with accountingprinciples generally accepted in the United States of America.

Management has conducted an assessment of theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005, utilizing the framework established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this assessment, managementhas determined that the Company’s internal control over financial reporting asof December 31, 2005 is effective.

Our internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

Any internal control system, no matter how welldesigned, will have inherent limitations. Therefore, even those systemsdetermined to be effective can provide only reasonable assurance with respectto financial statement preparation and presentation. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

Management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2005 has been audited by Stegman and Company, anindependent registered public accounting firm, and their report followsmanagement’s report.

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**Report Of Independent Registered Public AccountingFirm**

The Board ofDirectors and StockholdersFirst Mariner BancorpBaltimore, Maryland

We have auditedmanagement’s assessment, included in the preceding Management’s Report onInternal Control Over Financial Reporting, that First Mariner Bancorp (the “Company”)maintained effective internal control over financial reporting as of December 31,2005, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policiesor procedures may deteriorate.

Inour opinion, management’s assessment that the Company maintained effectiveinternal control over financial reporting as of December 31, 2005, isfairly stated, in all material respects, based on criteria established in *Internal Control-Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Also,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, basedon criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the Company’sconsolidated statements of financial condition as of December 31, 2005 and2004 and the related consolidated statements of operations, changes instockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2005 and our report dated March 1, 2006 expressedan unqualified opinion on those consolidated financial statements.

| Baltimore,  Maryland |   | /s/ Stegman & Company |
|----------------------|--------|--------------------------------|
| March 1,  2006  |   |                           |

** **

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**Changes In InternalControl Over Financial Reporting**

During the quarter ended December 31,2005, there have been no changes in our internal controls over financialreporting that has materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

**ITEM 9B**          OTHERINFORMATION

None.

**PART III**

**ITEM 10**           DIRECTORSAND EXECUTIVE 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 2,2006, 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.”

**Code of Ethics**

We have a Code of Conductand Ethics that applies to our employees, officers, and directors, includingour principal 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**           EXECUTIVECOMPENSATION

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 2,2006, 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**           SECURITYOWNERSHIP OF 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 Annual Meeting of Stockholders to be held on May 2, 2006, which proxystatement will be filed with the Securities and Exchange Commission no laterthan 120 days after the close of our fiscal year.

For information regardingthe Company’s equity compensation plans, please refer to the table captioned “EquityCompensation Plan Information” in Item 5 of this Form 10-K.

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**ITEM 13**           CERTAINRELATIONSHIPS AND 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 2, 2006, which proxystatement will be filed with the Securities and Exchange Commission no laterthan 120 days after the close of our fiscal year. Information is alsoincluded in Note 6 to the Consolidated Financial Statements set forth herein inItem 8—“Financial Statements and Supplementary Data.”

**ITEM 14**           PRINCIPALACCOUNTANT’S FEES AND SERVICES

Information regarding fees paid to our independentaccountants, Stegman & Company, is incorporated by reference hereinfrom our definitive proxy statement in connection with our Annual Meeting ofStockholders to be held on May 2, 2006, which proxy statement will befiled with the Securities and Exchange Commission no later than 120 daysafter the close of our fiscal year.

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**PART IV**

**ITEM 15**           EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

| a.     |   | (1), (2) Financial Statements                                                                                          |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|   |   | Report of Independent Registered Public Accounting  Firm                                                                    |   |
|   |   | Consolidated Statements of Financial Condition as of  December 31, 2005 and 2004                                       |   |
|   |   | Consolidated Statements of Operations for the years  ended December 31, 2005, 2004, and 2003                           |   |
|   |   | Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 31, 2005, 2004, and 2003 |   |
|   |   | Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004, and 2003                           |   |
|   |   | Notes to Consolidated Financial Statements for the  years ended December 31, 2005, 2004, and 2003                      |   |
|   |   | (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,  2006 |     | 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 persons on behalf of the registrant in theircapacities as indicated on the 16th day of March, 2006.

| /s/ EDWIN F. HALE SR.                       |   | /s/ MARK A. KEIDEL                            |
|---------------------------------------------|--------|-----------------------------------------------|
| Edwin F. Hale  Sr., Chief Executive Officer |   | Mark A. Keidel,  Chief Financial Officer      |
| and 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/  JOHN J. OLIVER                           |
| Barry B.  Bondroff, Director                |   | John J. Oliver,  Director                     |
| /s/  JOHN BROWN III                         |   | /s/  PATRICIA SCHMOKE                         |
| John Brown III,  Director                   |   | Patricia Schmoke,  Director                   |
| /s/  THOMAS L. BROMWELL                     |   | /s/  HANAN Y. SIBEL                           |
| Thomas L.  Bromwell, Director               |   | Hanan Y. Sibel,  Director                     |
| /s/  EDITH B. BROWN                         |   | /s/  LEONARD STOLER                           |
| Edith B. Brown,  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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**EXHIBIT INDEX**

| 3.1   |   | Amended and Restated Articles of Incorporation of  First Mariner Bancorp (Incorporated by reference to Exhibit 3.1 of the  Registrant’s Registration Statement on Form SB-2, as amended, file  no. 333-16011 (the “1996 Registration Statement”)) |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amended and Restated  Bylaws of First Mariner Bancorp (Incorporated by reference to  Exhibit 3.2 of First Mariner’s Form 10-Q for the quarter  ended September 30, 2002)                                                                               |
| 10.1  |   | 1996 Stock Option Plan  of First Mariner Bancorp (Incorporated by reference to Exhibit 10.1 of  the Registration Statement)                                                                                                                                           |
| 10.2  |   | Employment Agreement  dated May 1, 1995 between First Mariner Bancorp and First Mariner Bank  and George H. Mantakos (Incorporated by reference to Exhibit 10.2 of the  1996 Registration Statement)                                                             |
| 10.3  |   | Lease Agreement dated  March 1, 1996 between First Mariner Bank and Mars Super  Markets, Inc. (Incorporated by reference to Exhibit 10.3 of the  1996 Registration Statement)                                                                               |
| 10.4  |   | Lease Agreement dated  November 1, 1997 between Edwin F. Hale, Sr. and First Mariner Bank  (Incorporated by reference to Exhibit 10.4 of Pre-Effective  Amendment Number 1 to Form S-1, file no. 333-53789-01)                                    |
| 10.5  |   | 1998 Stock Option Plan  of First Mariner Bancorp (Incorporated by reference to Exhibit 10.5 of  Pre-Effective Amendment Number 1 to Form S-1, file  no. 333- 53789-01)                                                                                      |
| 10.6  |   | Employee Stock Purchase  Plan of First Mariner Bancorp (Incorporated by reference to Exhibit 10.6  of Pre-Effective Amendment Number 1 to Form S-1, file  no. 333-53789-01)                                                                                 |
| 10.7  |   | Lease Agreement dated as  of June 1, 1998 between Building #2, L.L.C. and First Mariner Bank  (Incorporated by reference to Exhibit 10.7 of Pre-Effective  Amendment Number 1 to Form S-1, file no. 333-53789-01)                                      |
| 10.8  |   | Lease Agreement dated  June 18, 2002 between Hale Properties, LLC and First Mariner Bank  (Incorporated by reference to Exhibit 10.8 to First Mariner’s  Form 10-Q for the quarter ended 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.)                       |
| 10.17 |   | Change of Control  Agreement dated April 2, 2003 between First Mariner Bancorp and Brett J.  Carter (Incorporated by reference to Exhibit 10.17 to the Company’s  Form 10-Q for the quarter ended March 31, 2003.)                                |
| 10.18 |   | Lease Agreement dated  June 2, 2003 between Canton Crossing LLC and First Mariner Bank  (Incorporated by reference to Exhibit 10.18 to the Company’s  Form 10-Q for the quarter ended September 30, 2003)                                         |
| 10.19 |   | First Mariner Bancorp  2004 Long-Term Incentive Plan (incorporated by reference to Appendix B to  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)                                            |
| 10.24 |   | Lease Agreement dated  May 12, 2005 between First Mariner Bancorp and Hale Properties, LLC (Incorporated  by reference to Exhibit 10.1 to the Company’s Form 8-K filed  on May 17, 2005.)                                                         |
| 10.25 |   | First Amendment to Lease  Agreement dated November 15, 2005 between First Mariner Bancorp and  Canton Crossing Tower, LLC (Incorporated by reference to Exhibit 10.1 to  the Company’s Form 8-K filed on November 15, 2005.)                      |
| 21.1  |   | 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.                                                                                              |

 

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