**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.**

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**FORM 10-K**

**(MarkOne)**

| **x**      | ** ** | **ANNUAL REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**          |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the fiscal year ended December 31,  2006.**                                                  |
| ** ** | ** ** | **or**                                                                                                  |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                         **

**Commissionfile number 0-21815**

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**FIRST MARINER BANCORP**

(Exact name of registrantas specified in its charter)

| **Maryland**                              |   | **52-1834860**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                 |   | (IRS Employer  Identification Number) |
| **1501 S. Clinton Street, Baltimore, MD** |   | **21224**                             |
| (Address of  principal executive offices) |   | (zip code)                            |

 

**410-342-2600**

(Telephone number)

Securities registeredunder Section 12(b) of the Exchange Act:

|                                          | **Title of each Class** | ** **                   |   | ** ** | **Name of each exchange on which  registered** | ** ** |
|------------------------------------------|-------------------------|------------------------------|--------|------------|------------------------------------------------|------------|
| COMMON STOCK, par  value $0.05 per share |                    | The Nasdaq Stock  Market LLC |

 

**Securities registered under Section 12(g) of theExchange Act:**None

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

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

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler   o             Acceleratedfiler   x             Non-acceleratedfiler   o

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

The aggregate market valueof the voting stock held by non-affiliates of the registrant as of the lastbusiness day of the registrant’s most recently completed second fiscal quarterwas approximately $97.238 million. Shares of Common Stock owned by eachexecutive officer and directors have not been included as such persons aredeemed to be affiliates.

The number of shares ofcommon stock outstanding as of March 1, 2007 is 6,420,225 shares.

Documents incorporated byreference:

Proxy Statement—Part III.

 

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**FIRST MARINERBANCORP**

**Annual Report on Form 10-KDecember 31, 2006**

**TABLEOF CONTENTS**

|            | ** ** | ** **                                                                                                             | ** ** | **Page** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** ** |       | **PART I**                                                                                                        |       |     |
| Item 1     |       | Business                                                                                                               |       |     | 3 |   |
| Item 1A    |       | Risk Factors                                                                                                           |       |     | 14 |   |
| Item 1B    |       | Unresolved Staff Comments                                                                                              |       |     | 20 |   |
| Item 2     |       | Properties                                                                                                             |       |     | 20 |   |
| Item 3     |       | Legal Proceedings                                                                                                      |       |     | 23 |   |
| Item 4     |       | Submission of Matters to a Vote of Security Holders                                                                    |       |     | 24 |   |
| Item 4A    |       | Executive Officers of the Registrant                                                                                   |       |     | 24 |   |
| ** ** |       | **PART II**                                                                                                       |       |     |   |   |
| Item 5     |       | Market for the Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities |       |     | 25 |   |
| Item  6    |       | Selected  Financial Data                                                                                               |       |     | 27 |   |
| Item 7     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                            |       |     | 28 |   |
| Item 7A    |       | Quantitative and Qualitative Disclosures About Market  Risk                                                            |       |     | 56 |   |
| Item 8     |       | Financial Statements and Supplementary Data                                                                            |       |     | 57 |   |
| Item 9     |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosures                                 |       |     | 91 |   |
| Item  9A   |       | Controls  and Procedures                                                                                               |       |     | 91 |   |
| Item 9B    |       | Other Information                                                                                                      |       |     | 94 |   |
| ** ** |       | **PART III**                                                                                                      |       |     |   |   |
| Item 10    |       | Directors and Executive Officers and Corporate  Governance                                                             |       |     | 94 |   |
| Item  11   |       | Executive  Compensation                                                                                                |       |     | 94 |   |
| Item 12    |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                   |       |     | 94 |   |
| Item 13    |       | Certain Relationships and Related Transactions and  Director Independence                                              |       |     | 95 |   |
| Item 14    |       | Principal Accountant Fees and Services                                                                                 |       |     | 95 |   |
| ** ** |       | **PART IV**                                                                                                       |       |     |   |   |
| Item 15    |       | Exhibits and Financial Statement Schedules                                                                             |       |     | 96 |   |

 

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**PART I**

**ITEM 1**                   BUSINESS

**General**

First Mariner Bancorp (“First Mariner,” on a parentonly basis, and “we,” “our,” or “us,” on a consolidated basis) is a financialholding company whose business is conducted primarily through its wholly ownedoperating subsidiaries: First Mariner Bank (the “Bank”), Finance Maryland LLC (“FinanceMaryland”), and FM Appraisals, LLC (“FM Appraisals”). We were formed in 1995and have total assets in excess of $1.263 billion as of December 31, 2006.Our executive offices are located in the Canton area of Baltimore City at 1501South Clinton 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 $1.157 billion as of December 31, 2006. 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 both 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,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 engages in traditional consumerfinance activities, making small direct cash loans to individuals, the purchaseof installment loan sales contracts from local merchants and retail dealers ofconsumer goods, and loans to individuals via direct mail solicitations. FinanceMaryland currently operates 17 branches and a central approval office in thestate of Maryland and four branches in the state of Delaware, which operateunder the trade name “Finance Delaware.” Finance Maryland had total assets of$65.911 million as of December 31, 2006.

FM Appraisals is a residential real estate appraisalpreparation and management company that is headquartered in Baltimore City. FMAppraisals offers appraisal services for residential real estate lenders,including appraisal preparation, the compliance oversight of sub-contractedappraisers, appraisal ordering and administration, and appraisal reviewservices. FM Appraisals provides these services to First Mariner Mortgage.

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 31,2006, we had over 1,000 employees, 25 full service bank branches, 12 mortgageloan offices, 21 consumer finance offices, and approximately 195 ATMs (35 ownedby us and 160 available to our customers through third party agreements) withtotal assets of $1.263 billion, loans of $866.459 million anddeposits of $924.938 million. We earned net income of $1.924 millionfor the year ending December 31, 2006.

We do not conduct any foreign operations.

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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 at www.1stmarinerbancorp.com as soon asreasonably practicable after we have filed them with the Securities andExchange Commission. The information on the websites listed above is not andshould not be considered part of this annual report on Form 10-K andis not incorporated by reference in this document.

**Our BusinessStrategy**

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

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

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

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

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

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

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

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

·                    Adhere torigorous credit standards to maintain good quality assets as we implement ourgrowth strategy.

**Financial ServicesWe 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 second mortgages, new and used auto loans, new and used boatloans, overdraft protection and unsecured personal credit lines.

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*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 is focused on building marketshare by offering competitive products and services, delivered by experiencedpersonnel who provide responsive service. Loan sizes are generally smaller thanthose originated by the Bank (approximately $2,800), and Finance Marylandcurrently serves approximately 23,000 customers in Maryland and Delaware.

**Our LendingActivities**

*LoanPortfolio Composition.**  *AtDecember 31, 2006, our loan portfolio totaled $866.459 million,representing approximately 68.6% of our total assets of $1.263 billion.Our loans are generally secured by residential and commercial real estate, andover 82% of our total loans as of December 31, 2006 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, 2006 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. These loans are made within the Federal regulatoryguidelines for maximum loan to value ratios. Generally, residentialconstruction loans are made for up to 85% of the appraised value of theproperty, taking into consideration private mortgage insurance. Commercial realestate construction loans are generally made for 80% or less of the appraisedvalue of the property. Development loans, made to improve raw land into lots onwhich structures may be built, are generally made for 75% or less of theappraised value of the property. Our real estate development andconstruction loan funds are disbursed periodically at pre-specified stages ofcompletion. We carefully monitor these loans with on-site inspections andcontrol 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 31,2006 for more detailed information concerning our real estate development andconstruction lending.

*ResidentialReal Estate Mortgage Loans.**  *We originate adjustable- and fixed-rate residentialmortgage loans. Our mortgage loans are generally originated under terms,conditions and documentation acceptable to the secondary mortgage market. Wewill place some of these loans into our portfolio, although the vast majorityare 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 value ratios of upto 100%, 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, home improvement loans, and loans originated thoughdirect mail solicitation. Loans made by Finance Maryland are generally forterms less than five years, carry a fixed rate of interest, and are generallysecured by consumer goods, including automobiles. Finance Maryland alsooriginates a limited number of closed-end home equity loans.

**Our CreditAdministration Process**

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

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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.

Commercial and mortgage loan officers have noindividual lending authority. Our loan committee of the Board of Directors isauthorized to approve loans up to our banking subsidiary’s legal lending limit,which approximates $16.7 million as of December 31, 2006. We haveestablished an in-house limit of $5.0 million, which is reviewedperiodically by the Board of Directors, and do have loans to a limited numberof customers in excess of that amount.

We generally do not make loans to be held in our loanportfolio outside our market area unless the borrower has an establishedrelationship with us and conducts its principal business operations within ourmarket area. Consequently, we and our borrowers are affected by the economicconditions prevailing in our market area. Approximately 76% of our residentialreal estate development and construction loan portfolio consisted of loans toMaryland customers; an additional 20% consisted of loans to customers in thesurrounding states and the District of Columbia; and 4% consisted of loans tocustomers in other states in the country. Approximately 82% of our commercialloan portfolio (commercial, commercial real estate, and commercialconstruction) consisted of loans to Maryland customers with an additional 16%consisting of loans to customers in the surrounding states and the District ofColumbia. Commercial and commercial real estate loans to customers in otherstates in the country amounted to approximately 2% 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,including the eastern shore of Maryland and particularly Baltimore City and thecounties of Baltimore, Anne Arundel, Harford, and Howard. Lending activitiesare broader and include areas outside of our core market area such as otherMaryland counties, the District of Columbia and certain markets in contiguousstates.

**Our Competition**

*Bankingand consumer finance.*   We operate in a highlycompetitive environment, competing for deposits and loans with commercialbanks, thrifts, mortgage companies, finance companies, Internet-based financialcompanies and other financial entities. Our principal competitors include othercommunity commercial banks and larger financial institutions with branches inour market area. Numerous mergers and consolidations involving banks in ourmarket area have occurred in recent years, requiring us to compete with banksand finance companies with greater resources.

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 laws facilitate interstate branchingand merger activity among banks. This may result in an even greater degree ofcompetition in the banking industry and we may be brought into competition withinstitutions with which we do not currently compete. As a result, intensecompetition in our market area may be expected to continue for the foreseeablefuture.

*Mortgage-banking.*   Ourmortgage-banking division also operates in an extremely competitive environment.In addition to competing with mortgage-banking divisions of other financialinstitutions, we compete with mortgage banking firms that are not under thesame level of regulation as we are. Without similar regulatory constraints,these lesser regulated firms can be more responsive to customers. Additionally,competition in the mortgage-banking industry comes from the continuingevolution of the secondary mortgage market, the proliferation of mortgageproducts, increasing interest rate volatility, compounded by homeowners’increasing tendency to refinance their mortgages as the refinance processbecomes more efficient and cost effective. These swings in mortgage originationvolume have placed significant operational and financial pressures on mortgagelenders.

To compete effectively inthis environment, we maintain a very high level of operational, technologicaland managerial expertise, consistently offer a wide selection of mortgage loansthrough all marketing channels on a regional scale, provide high-qualityservice, and price our mortgage loans at competitive rates.

**Supervision andRegulation**

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 

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securities of FirstMariner is required to give 60 days written notice of the acquisition tothe Federal Reserve, which may prohibit the transaction, and to publish noticeto the public.

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

First Mariner’s subsidiary bank is subject to certainquantitative and qualitative restrictions on extensions of credit to thefinancial holding company or its subsidiaries, investments in its securities,and the use of its securities as collateral for loans to any borrower. Theseregulations and restrictions may limit the ability to obtain funds from FirstMariner’s subsidiary bank for its cash needs including funds for the payment ofdividends, interest and operating expenses. Further, a financial holdingcompany and its subsidiaries are prohibited from engaging in certain tie-inarrangements in connection with any extension of credit, lease or sale ofproperty, or furnishing of services. For example, a bank may not generallyrequire a customer to obtain other services from itself or its affiliates, andmay not require that a customer promise not to obtain other services from acompetitor as a condition to 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 theholding company does not have the resources to provide it. In addition,depository institutions insured by the FDIC can be held liable for any lossesincurred by, or reasonably anticipated to be incurred by, the FDIC inconnection with the default of, or assistance provided to, a commonlycontrolled FDIC-insured depository institution. Accordingly, in the event thatany insured subsidiary of First Mariner causes a loss to the FDIC, otherinsured subsidiaries could be required to compensate the FDIC by reimbursing itfor the estimated amount of such loss. Such cross guaranty liabilitiesgenerally are superior in priority to the obligations of the depository institutionto its stockholders due solely to their status as stockholders and obligationsto other affiliates.

*We haveagreed with the Federal Reserve Bank of Richmond (“FRB-Richmond”) to submitplans to improve our operating performance, reduce parent company leverage,enhance our enterprise-wide risk management and enhance the effectiveness of ourinternal audit program.  We have alsoagreed to give prior notice to the FRB-Richmond of any potential transactioninvolving a significant capital expenditure. Management believes it has taken actions to address these issues and theseagreements do not restrict or impede our ability to conduct normal business.*

*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. 

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Enforcement powers alsoregulate activities that are deemed to constitute unsafe or unsound practices.Enforcement actions may include the appointment of a conservator or receiver,the issuance of a cease and desist order, the termination of deposit insurance,the imposition of civil money penalties on the institution, its directors,officers, employees and institution-affiliated parties, the issuance ofdirectives to increase capital, the issuance of formal and informal agreements,the removal of or restrictions on directors, officers, employees andinstitution-affiliated parties, and the enforcement of any suchmechanisms through restraining orders or other court actions.

In its lending activities, the maximum legal rate ofinterest, fees, and charges that a financial institution may charge on aparticular loan depends on a variety of factors such as the type of borrower,the purpose of the loan, the amount of the loan and the date the loan is made.Other laws tie the maximum amount that may be loaned to any one customer andthe related interest to a financial institution’s capital levels. The Bank isalso subject to certain restrictions on extensions of credit to executiveofficers, directors, principal stockholders 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 andfamilies, consistent with the safe and sound operation of those banks. Thesefactors are also considered by all regulatory agencies in evaluating mergers,acquisitions and applications to open a branch or facility. As of the date ofits most recent examination 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, compensation, fees and benefits. FDICIA also imposednew capital standards on insured depository institutions. Institutions thatfail to meet those standards may be required by the agency to develop a planacceptable to the agency, specifying the steps that the institution will taketo meet the standards. Failure to submit or implement such a plan may subjectthe institution to regulatory sanctions. Management believes the Bank meetssubstantially 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 bankingoffice, these minimal levels increase by $120,000 to $900,000, based on thepopulation size of the municipal area in which the branch will be located.Prior to establishment of the branch, the Bank must obtain Commissioner andFDIC approval. 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 thesecurities, insurance, and other non-banking activities of any company thatcontrols an FDIC insured financial institution. Under the GLBA, bank holdingcompanies can elect, subject to certain qualifications, to become a “financialholding company.” First Mariner made an election to become a financial holdingcompany in 2002 and, as such, First Mariner may engage in activities that arein addition to the business of banking. The GLBA provides that a financialholding company may engage in a full range of financial activities, includinginsurance and securities sales and underwriting activities, real estatedevelopment, and, 

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with certain exceptions,merchant banking activities, with new expedited notice procedures. The GLBAalso permits certain qualified national banks to form “financial subsidiaries,”which have broad authority to engage in all financial activities exceptinsurance 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 Deposit Insurance Fund (“DIF”),administered by the FDIC. The FDIC is required to establish the semi-annualassessments for DIF-insured depository institutions at a rate determined to beappropriate to maintain or increase the reserve ratio of the respective depositinsurance funds at or above 1.25% of estimated insured deposits or at suchhigher percentage that the FDIC determines to be justified for that year bycircumstances raising significant risk of substantial future losses to the fund.Assessments are made on a risk-based premium system with nine riskclassifications based on certain capital and supervisory measures. Financialinstitutions with higher levels of capital and involving a low degree ofsupervisory 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 DepositInsurance Reform Act (“Reform Act”) of 2006 was signed into law. The Reform Actincreases the general limit on deposit insurance based on consumer priceinflation, with the first increase taking effect on January 1, 2011, andadditional adjustments made every five years thereafter. In addition, theReform Act gives the FDIC the authority to manage its reserves more flexiblyand over a longer time horizon by rescinding the automatic trigger of 1.25% ofestimated insured deposits.

*Limits on Dividends and Other Payments*.   FirstMariner’s current ability to pay dividends is largely dependent upon thereceipt of dividends from its banking subsidiary. Both federal and state lawsimpose restrictions on the ability of the Bank to pay dividends. Federal lawprohibits the payment of a dividend by an insured depository institution likethe Bank if the depository institution is considered “undercapitalized” or ifthe payment of the dividend would make the institution “undercapitalized.” See“Federal Deposit Insurance Corporation Improvement Act of 1991” below. We donot 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.

*Capital Requirements.*   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 anditems, such as letters of credit and recourse arrangements, which are recordedas off balance sheet items. Under these guidelines, nominal dollar amounts ofassets and credit equivalent amounts of off balance sheet items are multipliedby one of several risk adjustment percentages, which range from 0% for assetswith low credit risk, such as certain U.S. Treasury securities to 100% forassets with relatively high credit risk, such as business loans.

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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 ratio of Tier 1capital to risk-weighted assets of at least 4% and a ratio of total capital torisk-weighted assets of at least 8%. The appropriate regulatory authority mayset higher capital requirements when particular circumstances warrant. In additionto risk-based capital, banks and bank holding companies are required tomaintain a minimum amount of Tier 1 capital to quarterly average assets,referred to as the leverage capital ratio, of at least 4%. First Mariner andthe Bank maintained capital ratios that exceeded these minimum standards. See “Item7—Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” for the year ended December 31, 2006 for more detailedinformation concerning capital adequacy.

Federal banking agencies have adopted regulationsspecifying that the agencies will include, in their evaluations of a bank’scapital adequacy, an assessment of the bank’s interest rate risk (“IRR”)exposure. The standards for measuring the adequacy and effectiveness of abanking organization’s interest rate risk management includes a measurement ofboard of director and senior management oversight, and a determination ofwhether a banking organization’s procedures for comprehensive risk managementare appropriate to the circumstances of the specific banking organization. TheBank 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 the caseof depository institutions, the termination of deposit insurance by the FDIC,as well as the measures described under “Federal Deposit Insurance CorporationImprovement Act of 1991” below, as applicable to undercapitalized institutions.In addition, future changes in regulations or practices could further reducethe amount of capital recognized for purposes of capital adequacy. Such achange could affect the ability of the Bank to grow and could restrict theamount of profits, if any, available for the payment of dividends to FirstMariner.

*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.

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

FDICIA generally prohibits a depository institutionfrom making any capital distribution (including payment of a cash dividend) orpaying any management fees to its holding company if the depository institutionwould thereafter be undercapitalized. Undercapitalized depository institutionsare subject to growth limitations and are required to submit capitalrestoration plans. If a depository institution fails to submit an acceptableplan, it is treated as if it is significantly undercapitalized. Significantlyundercapitalized depository institutions may be subject to a number of otherrequirements and restrictions including orders to sell sufficient voting stockto become adequately capitalized, requirements to reduce 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 personal financial information aboutcustomers to non-affiliated third parties. Under these rules, financialinstitutions must provide initial notices to customers about their privacypolicies that provide a description of the conditions under which they maydisclose non-public personal information to non-affiliated third parties andaffiliates. Institutions must also provide annual notices to current customersthat provide a reasonable method for customers to “opt out” of disclosures tonon-affiliated parties. These policies affect how customer information istransmitted through diversified 

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financial companies andconveyed to third parties. We have implemented our privacy policies inaccordance 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 financial businesses to report cash transactions in excess of$10,000 to the U.S. Treasury Department, and also requires reporting ofsuspicious 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 Company, withequity or debt securities registered under the Securities Exchange Act of 1934.In particular, the Sarbanes-Oxley Act established, among other things: 1) newrequirements for audit committees, including independence, expertise, andresponsibilities; 2) additional responsibilities regarding financial statementsfor the Chief Executive Officer and Chief Financial Officer of the reportingcompany; 3) new standards for auditors and regulation of audits; 4) increaseddisclosure and reporting obligations for the reporting company and itsdirectors and executive officers; and 5) new and increased civil and criminalpenalties for violation of the securities laws.

**Economic MonetaryPolicies 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 business activity for the foreseeablefuture will be to act as a financial holding company. Our future profitabilitywill therefore depend on the success and growth of First Mariner Bank (the“Bank”) and Finance Maryland, LLC (“Finance Maryland”). Our growth will depend,in large part, on our ability to leverage our existing infrastructure. Theinability of the Bank to expand its business without substantially increasingthe number of branches, the inability of our mortgage division to grow itsresidential mortgage business without substantially increasing its number ofoffices, or the inability of Finance Maryland to grow its consumer portfoliowithout substantially increasing its number of offices may prevent us fromrealizing our growth objectives.

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***A Significant Amount of OurBusiness is Concentrated in Real Estate Lending, and Most of this LendingInvolves Maryland Real Estate***

Approximately 27% 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 thefinancial strength and cash flow characteristics of the borrower in each case,the Bank often secures its loans with real estate collateral. At December 31,2006, approximately 82% of the Bank’s loans have real estate as a primary,secondary or tertiary component of collateral. The real estate collateral ineach case provides an alternate source of repayment in the event of default bythe borrower, and may deteriorate in value during the time the credit isextended. If we are required to liquidate the collateral securing a loan duringa period of reduced real estate values to satisfy the debt, our earnings andcapital could be adversely affected.

***We Have A High Percentage OfCommercial, Commercial Real Estate, And Real Estate Acquisition And DevelopmentLoans In Relation To Our Total Loans And Total Assets***

Our loan portfolio contains a high percentage ofcommercial, commercial real estate, real estate acquisition and developmentloans in relation to our total loans and total assets. The Board of Governorsof the Federal Reserve System and the Federal Deposit Insurance Corporation,along with other federal banking regulators, issued final guidance on December 6,2006 entitled, *Concentrations in CommercialReal Estate Lending, Sound Risk Management Practices,* directed atinstitutions that have particularly high concentrations of commercial realestate loans within their lending portfolios. These types of loans alsotypically are larger than residential real estate loans and other commercialloans. Because the loan portfolio contains a number of commercial andcommercial real estate loans with relatively large balances, the deteriorationof one or a few of these loans may cause a significant increase innonperforming loans. An increase in nonperforming loans could result in a lossof earnings from these loans, an increase in the provision for loan losses, oran increase in loan charge-offs, which could have an adverse impact onfinancial results.

This recent guidancesuggests that institutions whose commercial real estate loans exceed certainpercentages of capital should implement heightened risk management practicesappropriate to their concentration risk and may be required to maintain highercapital ratios than institutions with lower concentrations in commercial realestate lending. Based on our commercial real estate concentration as of December 31,2006, we may be subject to further supervisory analysis during futureexaminations. Although we continuously evaluate our concentration and riskmanagement strategies, we cannot guarantee that any risk management practiceswe implement will be effective to prevent losses relating to our commercialreal estate portfolio. Management cannot predict the extent to which thisguidance will impact our operations or capital requirements.

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

A significant portion ofour business involves making residential mortgage loans through our mortgagedivision, which accounted for approximately 44% and 32% of our noninterestincome for the years ended December 31, 2006 and 2005, respectively. Realestate loan origination activity, including refinancings, is generally greaterduring periods of low or declining interest rates and favorable economic 

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conditions,which had been favorably affected by relatively lower market interest ratesduring the past three years. However, we did experience a deterioration inmarket conditions during 2006 and continued adverse changes in marketconditions could have an adverse impact on our earnings. Moreover, most of ourresidential mortgage loans are secured by Maryland real estate; therefore, adeterioration in local economic conditions could also adversely impact ourearnings and has done so in 2006.

***We Experience Interest Rate Risk On Our Loans Held ForSale Portfolio***

We are exposed to interestrate risk in both our pipeline of mortgage originations (loans that have yet toclose with the borrower) and in our warehouse loans (those loans that haveclosed with the borrower but have yet to be funded by investors). We now managethis interest rate risk primarily in two ways. On the majority of the loans weoriginate, we enter into agreements to sell our loans through the use of bestefforts forward delivery contracts. Under this type of agreement we commit tosell a loan at an agreed price to an investor at the point in time the borrowercommits to an interest rate on the loan, with the intent that the buyer assumesthe interest rate risk on the loan. Beginning in January 2006, a portionof our mortgage loan pipeline and warehouse were hedged utilizing forward salesof mortgage-backed securities and Eurodollars for loans to be sold undermandatory delivery contracts on a pooled or bulk basis. We expect that thesederivative financial instruments (forward sales of mortgage-backed securitiesand Eurodollars) will experience changes in fair value opposite to the changein fair value of the derivative loan commitments and our warehouse. However,the process of selling loans on a bulk basis and use of forward sales ofmortgage-backed securities and Eurodollars to hedge interest rate riskassociated with customer interest rate lock commitments involves greater riskthan selling loans on an individual basis through best efforts forward deliverycommitments. Hedging interest rate risk in bulk sales requires management toestimate the expected “fallout” (rate lock commitments with customers that donot complete the loan process). Additionally, the fair value of the hedge maynot correlate precisely with the change in fair value of the rate lockcommitments with the customer due to changes in market conditions, such asdemand for loan products, or prices paid for differing types of loan products. Variancesfrom management’s estimates for customer fallout or market changes making theforward sale of mortgage-backed securities and/or Eurodollars non-effective mayresult in higher volatility in our profits from selling mortgage loansoriginated for sale. We have engaged an experienced third party to assist us inmanaging our activities in hedging and marketing our bulk sales deliverystrategy.

***We Experience Credit Risk Related To Our ResidentialMortgage Production Activities***

We also face credit riskrelated to our residential mortgage production activities. Credit risk is thepotential for financial loss resulting from the failure of a borrower or aninstitution to honor its contractual obligations to us, including the risk thatan investor will fail to honor its obligation under a best efforts forwarddelivery contract to purchase the loan from us. We manage mortgage credit riskprincipally by selling substantially all of the mortgage loans that we produce,limiting credit recourse to the Bank in those transactions, and by retaininghigh credit quality mortgages in our loan portfolio. We also limit our risk ofloss on mortgage loan sales by establishing limits on activity to any oneinvestor and by entering into contractual relationships with only thosefinancial institutions that are approved by our Secondary Marketing Committee. Whilethe period of time between closing on a loan commitment with the borrower andfunding by the investor ranges from between 15 and 90 days, the process ofselling loans on a bulk basis may extend the period of time we hold the loanand exposes us to a greater risk of early delinquency or default.

***We Experience Risk Related To Covenants In Our LoanSales Agreements With Investors***

Our sales agreements with investors who buy our loansgenerally contain covenants which may require us to repurchase loans undercertain provisions, including delinquencies, or return premiums paid by these 

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investors should the loanbe paid off early. Any loans we are required to repurchase may be consideredimpaired loans, with the potential for charge-offs and/or loss provisioncharges. The addition of these repurchased loans to our portfolio couldadversely affect our earnings and asset quality ratios.

There may be certain loansin our portfolio that were originated for sale, but for various reasons, areunable to be sold. These loans are transferred to our loan portfolio at fairmarket value. Any deterioration in value of the loan during the period held inthe portfolio would be charged as a valuation allowance and would reduce ourearnings.

***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 or FinanceMaryland 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 31,2006, the allowance for loan losses was $12.399 million, which represented1.43% of outstanding loans, net of unearned income. At such date, we hadnonaccruing loans totaling $4.158 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 tononperforming or performing loans. Material additions to the allowance for loanlosses would result in a decrease in net income and capital, and could have amaterial adverse effect on us.

***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 $33.492 million as of December 31, 2006.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.

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***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 31,2006, we had a one year cumulative interest sensitivity gap of $206.053 million.See Item 7A - “Quantitative and Qualitative Disclosures About Market Risk—InterestRate Sensitivity.”

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. In particular,our ability to make loans, attract deposits and realize gains on the sale ofresidential mortgage loans, as well as public demand for loans, could beadversely affected. See Item 1 - “ Business—Economic Monetary Policies andEconomic 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 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, 2006,our directors and executive officers beneficially owned approximately 1,869,000shares of our common stock (either directly or with options), or 29% of ouroutstanding 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 22% of our outstandingshares of common stock as of December 31, 2006. Because of the largepercentage of stock held by our 

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directorsand executive officers, these persons could influence the outcome of any mattersubmitted to a vote of our stockholders.

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

The average daily tradingvolume of our shares on The Nasdaq National Market for the previous threemonths was approximately 5,300 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, Internet-based deposit intermediaries,mutual funds, and other investment alternatives. Competition for loans comesprimarily from other commercial banks, savings associations, mortgage-bankingfirms, consumer finance companies, credit unions, and other financialintermediaries. Many of the financial intermediaries operating in our marketarea offer certain services, such as trust, investment, and internationalbanking services, which we do not offer. In addition, companies with a largercapitalization and financial intermediaries not subject to regulatoryrestrictions, have larger lending limits, and are thereby able to serve theneeds of larger customers. Finally, our continued growth and profitability willdepend upon our ability to attract and retain skilled managerial, marketing,and technical personnel. Competition for qualified personnel in the bankingindustry is intense, and there can be no assurance that we will be successfulin attracting and retaining such personnel.

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

We have entered intochange in control agreements with nine of our officers. These agreementsprovide for a payment to each officer of a multiple (ranging from 1 to 2.99) ofhis or her salary and bonus upon the occurrence of either a change in controlthat results 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 

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ourBoard of Directors into three classes; directors of each class serve forstaggered three year periods. The Articles also provide for supermajorityvoting provisions for the approval of certain business combinations. Althoughthese provisions do not preclude a takeover, they may have the effect ofdiscouraging a future takeover attempt which would not be approved by our Boardof Directors, but pursuant to which stockholders might receive a substantialpremium for their shares over then-current market prices. As a result,stockholders who might desire to participate in such a transaction might nothave the opportunity to do so. Such provisions will also render the removal ofour Board of Directors and of management more difficult and, therefore, mayserve to perpetuate current management. Further, such provisions couldpotentially adversely affect the market price of the common stock.

**ITEM 1B**          UNRESOLVEDSTAFF COMMENTS

There were no unresolvedcomments from the staff of the Securities and Exchange Commission at December 31,2006.

**ITEM 2**                   PROPERTIES

We lease our executive offices located at 1501 SouthClinton Street, Baltimore, Maryland. This location also houses a headquarterssatellite branch office. We occupy approximately 75,500 square feet at thislocation, which is adjacent to the former headquarters building.

We own our headquarters branch office located at 3301Boston Street, Baltimore, Maryland. This location also houses drive-up bankingand customer parking facilities.

During 2006, we leased an operations facility at 1516Baylis Street, Baltimore, Maryland. We occupied approximately 34,500 squarefeet of office space. Rent paid during 2006 was approximately $209,000 for theoffice space. We vacated a substantial majority of this space before the end of2006, moving our operational divisions into the new executive office tower onSouth Clinton Street and into our old executive office building on BostonStreet.

20

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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(1)**                          | ** ** | **Odenton(1)**                     |
| 3301 Boston Street                     | ** ** | 1600  Annapolis Road               |
| Baltimore, MD 21224-4974               | ** ** | Odenton,  MD 21113-1002            |
| **Canton  Tower/Headquarters(2)(4)**   | ** ** | **Owings Mills(3)**                |
| 1501 S. Clinton Street                 | ** ** | 4800  Painters Mill Road           |
| Baltimore, MD   21224-4974        | ** ** | Owings  Mills, MD  21117-3604 |
| **Carroll  Island(2)**                 | ** ** | **Perry Hall (1)**                 |
| 176 Carroll Island Road                | ** ** | 8843  Bel Air Road                 |
| Baltimore, MD 21220-2208               | ** ** | Perry  Hall, MD 21236-2403         |
| **Cockeysville(3)**                    | ** ** | **Pikesville(1)**                  |
| 9840 York Road                         | ** ** | 1013  Reisterstown Road            |
| Cockeysville, MD 21030-4914            | ** ** | Baltimore,  MD  21208-4207    |
| **Columbia(2)**                        | ** ** | **Pikesville Drive-Thru(2)(4)**    |
| 8835 Centre Park Drive, Suite 100 | ** ** | 1100  Reisterstown Road            |
| Columbia, MD   21045-2114         | ** ** | Baltimore,  MD  21208-4207    |
| **Crofton(3)**                         | ** ** | **Randallstown(1)**                |
| 1049 MD Route 3                        | ** ** | 9833  Liberty Road                 |
| Gambrills, MD 21054-1722               | ** ** | Randallstown, MD  21133-2034       |
| **Downtown  Baltimore(2)**             | ** ** | **Severna Park(2)**                |
| 300 N. Charles Street                  | ** ** | 366A  Gov Ritchie Highway          |
| Baltimore, MD 21201-4300               | ** ** | Severna  Park, MD 21146-2911       |
| **Dundalk(2)**                         | ** ** | **Shrewsbury(2)**                  |
| 7860 Wise Avenue                       | ** ** | Market  Square Shopping Center     |
| Baltimore, MD 21222-3338               | ** ** | 549  S. Main Street                |
| **Easton(2)**                          | ** ** | Shrewsbury,  PA  17361-1718   |
| 8662 Alica Drive                       | ** ** | **Towson(1)**                      |
| Easton, MD 21601-7184                  | ** ** | 115  East Joppa Road               |
| **Ellicott  City(3)**                  | ** ** | Baltimore,  MD 21286-3113          |
| 10065 Baltimore National Pike          | ** ** | **White Marsh(1)**                 |
| Ellicott City, MD 21042-3611           | ** ** | 10101  Philadelphia Road           |
| **Glen  Burnie(2)**                    | ** ** | Baltimore,  MD 21237-3411          |
| 305 South Crain Highway                | ** ** | **Woodlawn(3)**                    |
| Glen Burnie, MD 21061-3110             |       | 7007  Security Boulevard           |
| ** **                             |       | 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)          Companyowns branch, but leases related land

(4)          Officeis a satellite branch

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For more information on our lease commitments andcosts see Note 7 of the Notes to Consolidated Financial Statements, includedin Item 8—“Financial Statements and Supplementary Data.”

We operate mortgageoffices 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)**                            | ** ** | **Salisbury(2)**                     |
| 2086 Generals  Highway, 2nd Floor           |       | 309 E. Main Street, Suite 100   |
| Annapolis, MD  21401                        |       | Salisbury, MD 21801                  |
| **Canton/Headquarters(1)**                  | ** ** | **Waldorf(2)**                       |
| 3301 Boston  Street                         |       | 3200 Crain Highway, Suite 102   |
| Baltimore, MD  21224                        |       | Waldorf, MD 20603                    |
| **Crofton(3)**                              | ** ** | **White Marsh(1)**                   |
| 1049 MD Route 3,  2nd floor            |       | 10101 Philadelphia Road              |
| Gambrills, MD  21054                        |       | White Marsh, MD 21237                |
| **Ellicott  City(3)**                       | ** ** | **Wilmington(2)**                    |
| 10065 Baltimore  National Pike              |       | 3301 Lancaster Pike, Suite 5B   |
| Ellicott City, MD  21042                    |       | Wilmington, DE 19805                 |
| **Fairfax  Wholesale(2)**                   | ** ** | **Concord, North Carolina(2)**       |
| 3975 Fair Ridge  Dr., Ste 300               |       | 1036 Brandview Drive                 |
| North Tower  Fairfax, VA 22033              |       | Concord, NC 28024                    |

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(1)          Companyowns office

(2)          Companyleases office

(3)          Companyowns office, but leases related land

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We operate consumer finance offices at the followinglocations which are leased by Finance Maryland:

| **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                   |
| **Cumberland**                       |       | **Salisbury**                            |
| 1050 West Industrial  Blvd. Unit 7   |       | 319 B Civic Avenue                       |
| Cumberland, MD 21502                 |       | Salisbury, MD 21804                      |
| **Dundalk**                          | ** ** | **Waldorf**                              |
| 1770 Merritt Blvd.                   | ** ** | 2084 Crain Highway                       |
| Baltimore, MD 21222                  | ** ** | Waldorf, MD 20610                        |
| **Easton**                           | ** ** | **Westminster**                          |
| 8223-17 Elliott  Road                |       | 625 Baltimore Blvd.                      |
| Easton, MD 21601                     |       | Westminster, MD 21157                    |
| **Essex**                            | ** ** | **Woodlawn**                             |
| 511A Eastern Blvd.                   |       | 6666 Security Blvd., Suite 16       |
| Essex, MD 21221                      |       | Baltimore, MD 21207                      |
| **Frederick**                        | ** ** | **Canton/Headquarters/Central Approval** |
| 454 Prospect Blvd                    |       | 3301 Boston Street                       |
| Frederick, MD 21702                  |       | Baltimore, MD 21224                      |
| **Glen Burnie**                      | ** ** | **Bear, Delaware**                       |
| 7400 Ritchie Highway,  Suite E  |       | 1831 Pulaski Highway                     |
| Glen Burnie, MD 21061                |       | Bear, DE 19701                           |
| **Hagerstown**                       | ** ** | **Dover, Delaware**                      |
| 1423 Dual Hwy                        |       | 222 S. Dupont Hwy, Ste 101               |
| Hagerstown, MD 21740                 |       | Dover, DE 19901                          |
| **Laurel**                           | ** ** | **Milford, Delaware**                    |
| 3421 Fort Meade Rd                   |       | 975A Dupont Blvd                         |
| Laurel, MD 20707                     |       | Milford, DE 19963                        |
| **North East**                       | ** ** | **Seaford, Delaware**                    |
| 113 North East Plaza                 |       | 1026 West Stein Highway                  |
| North East, MD 21901                 |       | Seaford, DE 19973                        |

 

Our bank branches range intotal size from 2,000 to 4,000 square feet, mortgage offices generally rangefrom 1,200 to 2,000 square feet and our Finance Maryland offices from 800 to1,600 square feet. All of our locations are suitable and adequate to conductbusiness and support growth in customer and transaction volume.

**ITEM 3**                   LEGALPROCEEDINGS

We are party to legalactions that are routine and incidental to our business. In management’sopinion, the outcome of these matters, individually or in the aggregate, willnot have a material effect on our results of operations or financial position.

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

There was no submission ofmatters to a vote of securities holders during the fourth quarter of the yearended December 31, 2006.

**ITEM 4A**           EXECUTIVEOFFICERS OF THE REGISTRANT

Edwin F. Hale, Sr. (age 60) has beenChairman and Chief Executive Officer of First Mariner and of the Bank since1995. Joseph A. Cicero (age 62) has been the President of First Marinerand Chief Operating Officer of the Bank since 1996. George H. Mantakos (age64) has been Executive Vice President of First Mariner, and the Presidentof the Bank since 1995. Mark A. Keidel (age 45) has been Senior VicePresident and Chief Financial Officer of First Mariner 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 CommonStock**

Our common stock trades on The NASDAQ National Marketunder the symbol “FMAR.” The table below sets forth for the periods indicatedthe low and high market prices of our common stock as reported on The NasdaqNational Market. These over-the-counter market quotations reflect inter-dealerprices and do not include retail mark-up, mark-down or commissions, and theymay not necessarily represent actual transactions. We currently haveapproximately 2,700 stockholders, and we did not pay a cash dividend in 2006 or2005.

| ** **          | ** ** | **Low** | ** ** | **High** | ** ** |
|---------------------|------------|---------|------------|----------|------------|
| 2006 Quarter ended: |       |    |       |     |       |
| Fourth quarter      |       | $       | 18.36      |     | $          | 20.45 |   |
| Third quarter       |       | 18.51   |       | 19.50    |       |
| Second quarter      |       | 18.30   |       | 19.60    |       |
| First quarter       |       | 17.26   |       | 19.34    |       |
| 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    |       |

 

**Equity CompensationPlan Information**

Thefollowing table sets forth the securities authorized for issuance under theCompany’s equity compensation plans as of December 31, 2006:

| **Plan category**                                      | ** ** | ** ** | ** **     | **(A)  Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **(B)  Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **(C)  Number of securities  remaining available for future  issuance under equity  compensation plans  (excluding securities reflected  in column (A))** | ** ** |
|-------------------------------------------------------------|------------|------------|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       |       | 793,022        |                                                                                                                                                      |       |                                                                                                                 | $          | 12.84                                                                                                                                                                                                                 |       |   |   | 238,243 |   |   |
| Equity compensation  plans not approved by security holders |       |       |  

— |                                                                                                                                                      |       |                                                                                                                 | —     |                                                                                                                                                                                                                  |       |   | — |   |   |
| Total                                                       |       |       | 793,022        |                                                                                                                                                      |       |                                                                                                                 | $          | 12.84                                                                                                                                                                                                                 |       |   |   | 238,243 |   |   |

                                                                                         

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**Issuer Purchases of Equity Securities(1)**

The following table setsforth the Company’s purchases of its Common Stock for the most recent fiscalquarter:

| ** **         | ** ** | **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 2006  |       |                                         | —     |                                         |       |                                                                             | —     |                                                           |       |   | 132,425 |   |   |   | 167,575 |   |   |
| November 2006 |       |                                         | 5,000      |                                         |       |                                                                             | $          | 18.75                                                          |       |   |   | 137,425 |   |   |   | 162,575 |   |   |
| December 2006 |       |                                         | 25,900     |                                         |       |                                                                             | $          | 18.87                                                          |       |   |   | 163,325 |   |   |   | 136,675 |   |   |

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(1)          OnJuly 18, 2006, the Company announced that its Board of Directors approvedan extension to its share repurchase program, originally approved on July 20,2004, of up to 300,000 shares (approximately 5%) of our outstanding commonstock, which provides for open market or private purchases of stock over thenext 24 months.  During the year ended December 31,2006, the Company repurchased a total of 30,900 shares of our common stock atan approximate cost of $582,000.

**Performance Graph**

The following graphcompares the performance of the Company’s Common Stock, with the performance ofa broad market index and a nationally-recognized industry standard assuming ineach case both an initial $100 investment on December 31, 2001 andreinvestment of dividends as of the end of the Company’s fiscal years. TheCompany has selected the Nasdaq Market Index as the relevant broad market indexbecause prices for the Company’s Common Stock are quoted on Nasdaq NationalMarket. Additionally, the Company has selected the Nasdaq Bank Index as therelevant industry standard because such index consists of financial institutionswhich the Company believes generally possess assets, liabilities and operationsmore similar to the Company than other publicly-available indices. However,given the short history of the Company’s operations and its rapid growth, theCompany believes no truly appropriate comparative index exists.

| ** **            | ** ** | **Period Ending** | ** ** |           |
|-----------------------|------------|------------------------|------------|----------------|
| ** **            | ** ** | **12/31/2001**         | ** ** | **12/31/2002** | ** ** | **12/31/2003** | ** ** | **12/31/2004** | ** ** | **12/31/2005** | ** ** | **12/31/2006** | ** ** |   |
| First Mariner Bancorp |       |                   | 100        |           |   |   | 120.2 |   |   |   | 203.06 |   |   |   | 191.7 |   |   |   | 191.05 |   |   |   | 202.51 |   |   |
| NASDAQ Bank Index     |       |                   | 100        |           |   |   | 104.52 |   |   |   | 135.8 |   |   |   | 150.73 |   |   |   | 144.2 |   |   |   | 160.07 |   |   |
| NASDAQ Market Index   |       |                   | 100        |           |   |   | 68.47 |   |   |   | 102.72 |   |   |   | 111.54 |   |   |   | 113.07 |   |   |   | 123.84 |   |   |

 

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**ITEM6**                   SELECTEDFINANCIAL DATA

| ** **                                                      | ** ** | **2006**                                                                          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ***(dollars in thousands, except per share data)*** | ** ** |
| **Consolidated  Income Statement Data:**                        | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net interest  income                                            |       | $                                                                                 | 49,266     |       | $          | 47,723     |       | $          | 42,441     |       | $          | 34,411 |   | $ | 30,988 |   |
| Provision for loan  losses                                      |       | 2,315                                                                             |       | 3,287      |       | 2,243      |       | 2,536      |       | 2,175      |       |
| Noninterest income                                              |       | 23,767                                                                            |       | 23,015     |       | 19,190     |       | 21,086     |       | 14,994     |       |
| Noninterest  expense                                            |       | 69,159                                                                            |       | 56,340     |       | 50,926     |       | 45,883     |       | 37,973     |       |
| Income tax  (benefit) expense                                   |       | (365                                                                              | )          | 3,289      |       | 2,361      |       | 1,771      |       | 1,930      |       |
| Net income                                                      |       | 1,924                                                                             |       | 7,822      |       | 6,101      |       | 5,307      |       | 3,904      |       |
| **Consolidated  Balance Sheet Data:**                           |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Total assets                                                    |       | $                                                                                 | 1,263,290  |       | $          | 1,362,478  |       | $          | 1,250,531  |       | $          | 1,057,853 |   | $ | 871,152 |   |
| Loans receivable,  net                                          |       | 854,060                                                                           |       | 839,843    |       | 736,566    |       | 601,155    |       | 526,777    |       |
| Deposits                                                        |       | 924,938                                                                           |       | 876,010    |       | 825,417    |       | 747,733    |       | 668,169    |       |
| Long-term  borrowings                                           |       | 132,557                                                                           |       | 131,000    |       | 134,369    |       | 110,000    |       | 85,000     |       |
| Stockholders’  equity                                      |       | 78,629                                                                            |       | 72,375     |       | 64,314     |       | 58,434     |       | 51,126     |       |
| **Per  Share Data:**                                            |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Number of shares  of common stock outstanding at year end       |       | 6,427,725                                                                         |       | 6,262,442  |       | 5,826,011  |       | 5,693,637  |       | 5,394,586  |       |
| Net income per common  share:                                   |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Basic                                                           |       | $                                                                                 | 0.30       |       | $          | 1.28       |       | $          | 1.06       |       | $          | 0.97 |   | $ | 0.73 |   |
| Diluted                                                         |       | 0.29                                                                              |       | 1.20       |       | 0.96       |       | 0.88       |       | 0.69       |       |
| Cash dividends  declared                                        |       | —                                                                            |       | —     |       | —     |       | —     |       | —     |       |
| **Performance  and Capital Ratios:**                            |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Return on average  assets                                       |       | 0.14                                                                              | %          | 0.59       | %          | 0.54       | %          | 0.57       | %          | 0.49       | %          |
| Return on average  equity                                       |       | 2.53                                                                              | %          | 11.44      | %          | 10.11      | %          | 9.76       | %          | 8.20       | %          |
| Net interest  margin                                            |       | 3.96                                                                              | %          | 3.88       | %          | 4.06       | %          | 3.99       | %          | 4.17       | %          |
| Average equity to  average assets                               |       | 5.59                                                                              | %          | 5.13       | %          | 5.36       | %          | 5.83       | %          | 5.99       | %          |
| Year-end Tier 1  leverage ratio                                 |       | 8                                                                                 | %          | 7          | %          | 7          | %          | 8          | %          | 8          | %          |
| Tier 1 capital to  risk-weighted assets                         |       | 10                                                                                | %          | 10         | %          | 9          | %          | 10         | %          | 10         | %          |
| Total capital to  risk-weighted assets                          |       | 16                                                                                | %          | 15         | %          | 14         | %          | 15         | %          | 13         | %          |
| **Asset  Quality Ratios:**                                      |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Nonperforming  assets to total assets                           |       | 0.52                                                                              | %          | 0.29       | %          | 0.38       | %          | 0.48       | %          | 0.40       | %          |
| Allowance for loan losses  at year-end to:                      |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Total loans, net of unearned income                             |       | 1.43                                                                              | %          | 1.38       | %          | 1.28       | %          | 1.43       | %          | 1.35       | %          |
| Nonperforming assets and 90 day past-due loans                  |       | 36.61                                                                             | %          | 244.14     | %          | 150.84     | %          | 118.61     | %          | 55.85      | %          |
| Net charge-offs to  average total loans, net of unearned income |       | 0.19                                                                              | %          | 0.14       | %          | 0.21       | %          | 0.19       | %          | 0.10       | %          |

 

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

**Forward-LookingStatements**

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 $1.157 billion as of December 31, 2006. 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 both a regional and national basis. First Mariner Bank is an independentcommunity bank, and its deposits are insured by the FDIC. The Bank is engagedin the general commercial banking business, with particular attention andemphasis on the needs of individuals and small to mid-sized businesses, anddelivers a wide range of financial products and services that are offered bymany larger competitors. Products and services include traditional depositproducts, a variety of consumer and commercial loans, residential andcommercial mortgage and construction loans, wire transfer services, non-depositinvestment products, and Internet banking and similar services. Mostimportantly, the Bank 

28

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provides customers withaccess to 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 engages in traditional consumerfinance activities, making small direct cash loans to individuals, the purchaseof installment loan sales contracts from local merchants and retail dealers ofconsumer goods, and loans to individuals via direct mail solicitations. FinanceMaryland currently operates 17 branches and a central approval office in thestate of Maryland and four branches in the state of Delaware, which operateunder the trade name “Finance Delaware.” Finance Maryland had total assets of$65.911 million as of December 31, 2006.

FM Appraisals is aresidential real estate appraisal preparation and management company that isheadquartered in Baltimore City. FM Appraisals offers appraisal services forresidential real estate lenders, including appraisal preparation, thecompliance oversight of sub-contracted appraisers, appraisal ordering andadministration, and appraisal review services. FM Appraisals provides theseservices to First Mariner Mortgage.

**Critical AccountingPolicies**

The Company’s financialstatements are prepared in accordance with generally accepted accounting principles(“GAAP”) in the United States of America and follow general practices withinthe industry in which it operates. Application of these principles requiresmanagement to make estimates, assumptions, and judgments that affect theamounts reported in the financial statements and accompanying notes. Theseestimates, assumptions, and judgments are based on information available as ofthe date of the financial statements; accordingly, as this information changes,the financial statements could reflect different estimates, assumptions, andjudgments. Certain policies inherently have a greater reliance on the use ofestimates, assumptions, and judgments and, as such, have a greater possibilityof producing results that could be materially different than originallyreported. Estimates, assumptions, and judgments are necessary when assets andliabilities are required to be recorded at fair value, when a decline in thevalue of an asset not carried on the financial statements at fair valuewarrants an impairment write-down or valuation reserve to be established, orwhen an asset or liability needs to be recorded contingent upon a future event.Carrying assets and liabilities at fair value inherently results in morefinancial statement volatility. When applying accounting policies in such areasthat are subjective in nature, management must use its best judgment to arriveat the carrying value of certain assets and liabilities. Below is a discussionof our critical accounting policies.

***Allowance for loan losses***

A variety of estimates impact the carrying value ofthe loan portfolio including the calculation of the allowance for loan losses,valuation of underlying collateral and the timing of loan charge-offs.

The allowance isestablished and maintained at a level that management believes is adequate tocover losses resulting from the inability of borrowers to make requiredpayments on loans. Estimates for loan losses are arrived at by analyzing risksassociated with specific loans and the loan portfolio. Current trends indelinquencies and charge-offs, the views of the Bank’s regulators, changes inthe size and composition of the loan portfolio and peer comparisons are alsofactors. The analysis also requires consideration of the economic climate anddirection and change in the interest rate environment, which may impact aborrower’s ability to pay, legislation impacting the banking industry andenvironmental and economic conditions specific to the Bank’s service areas. Becausethe calculation of the allowance for loan losses relies on estimates andjudgments relating to inherently uncertain events, results may differ from ourestimates.

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***Investment securities***

Securities are evaluatedperiodically to determine whether a decline in their value is other thantemporary. The term “other than temporary” is not intended to indicate apermanent decline in value. Rather, it means that the prospects for near termrecovery of value are not necessarily favorable, or that there is a lack ofevidence to support fair values equal to, or greater than, the carrying valueof the investment. Management reviews criteria such as the magnitude andduration of the decline, as well as the reasons for the decline, to predictwhether the loss in value is other than temporary. Once a decline in value isdetermined to be other than temporary, the value of the security is reduced anda corresponding charge to earnings is recognized.

***Deferred income taxes***

Under the liabilitymethod, deferred tax assets and liabilities are determined based on the differencebetween the financial statement and tax bases of assets and liabilities.Deferred tax assets are subject to management’s judgment based upon availableevidence that future realization is more likely than not.

***Loan income recognition***

Interest income on loansis accrued at the contractual rate based on the principal outstanding. Loanorigination fees and certain direct loan origination costs are deferred andamortized as a yield adjustment over the contractual loan terms. Accrual ofinterest is discontinued when its receipt is in doubt, in accordance withFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 114, *Accountingby Creditors for Impairment of a Loan*. Any interest accrued toincome in the year when interest accruals are discontinued is reversed.Management may elect to continue the accrual of interest when a loan is in theprocess of collection and the estimated fair value of the collateral issufficient to satisfy the principal balance and accrued interest. Loans arereturned to accrual status once the doubt concerning collectibility has beenremoved and the borrower has demonstrated the ability to pay and remaincurrent. Payments on nonaccrual loans are generally applied to principal.

***Derivative Loan Commitments and Hedging Activities***

In connection with ourmortgage-banking activities, we enter into commitments to fund residentialmortgage loans at specified times in the future. We enter into thesecommitments through retail and broker channels and also purchase loancommitments from correspondent lenders. A mortgage loan commitment binds theCompany to lend funds to a potential borrower at a specified interest rate andwithin a specified period of time, generally up to 90 days after inception of therate lock commitment. Such a commitment is referred to as a derivative loancommitment if the loan that will result from exercise of the commitment will beheld for sale upon funding under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended by SFAS No. 149, *Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*.As such, loan commitments that are derivatives must be recognized at fair valueon the consolidated balance sheets with changes in their fair values recordedas part of income from mortgage-banking operations. For accounting purposes, wevalue this commitment to zero at inception, consistent with the conceptsembodied in EITF 02-3, *Issues Involvedin Accounting for Derivative Contracts Held for Trading Purposes and ContractsInvolved in Energy Trading and Risk Management Activities*.Subsequent to inception, we estimate the fair value of the commitment, takinginto consideration the probability of funding of the loan, and compare it tothe fair value calculated at inception to measure the change in value, which isrecorded through current period earnings with a corresponding asset for anincrease in value or a liability for a decrease in value.

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***Loan Repurchases***

Our sales agreements withinvestors who buy our loans generally contain covenants which may require us torepurchase loans under certain provisions, including delinquencies, or returnpremiums paid by those investors should the loan be paid off early. Thesecovenants are usual and customary within the mortgage-banking industry andgenerally apply for the first 90 days after the loan has been purchased by theinvestor. We maintain a reserve (included in other liabilities) for potentiallosses relating to these sales covenants, including estimates for thedevaluation of loans as a result of their delinquency status.

**RESULTS OFOPERATIONS AND FINANCIAL CONDITION**

The following discussioncompares our financial condition at December 31, 2006 to the financialcondition at December 31, 2005 and results of operations for the yearsended December 31, 2006, 2005, and 2004. 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 recorded net income of $1.924 million for 2006compared to $7.822 million for 2005, a decrease of 75.4%. Diluted earningsper share totaled $0.29 per share for 2006, a decrease of 75.8% from $1.20 perdiluted share in 2005. The decline in net income and earnings per shareresulted due to the fact that our gross revenue (net interest income andnoninterest income) increased $2.295 million or 3.2%, while ournoninterest expenses, the provision for loan losses, and income tax expenseincreased by $8.193 million or 13.0%.

Net income for 2006 was impacted significantly by abalance sheet restructuring and negative trends in our mortgage-bankingoperations. In December of 2006, we elected to sell approximately $100.000million of securities held in our investment portfolio (yield, 3.85%) and repayan equal amount of short-term borrowings (cost, 5.45%). In conjunction with therestructuring, we realized losses on the sales of securities of $3.063 million.The restructure is expected to have a positive impact in future periods as theyields on securities sold was significantly lower than borrowings repaid.

During the second half of 2006, our results werenegatively impacted by higher delinquency and default levels in loansoriginated by the Bank in our mortgage-banking division. The higherdelinquencies and defaults resulted in the repurchase of loans sold as well asan increase in the volume of loans originated for sale which could not be sold.Loans repurchased or deemed unsalable must be marked to market at the time ofrepurchase or transfer into the Bank’s portfolio. The Bank recorded valuationallowances related to these loans repurchased and expected to be repurchased of$4.450 million, which reduced reported profits in the third and fourth quartersof 2006.

The impact of both the balance sheet restructuring andthe valuation allowance totaled $7.513 million ($4.959 million after taxes) andwere the primary factors in the significant decline in net income.

Our largest category of revenue, net interest income,grew $1.543 million or 3.2% due to increased volume of average earningassets from $1.230 billion in 2005 to $1.243 billion in 2006 and an increase inour net interest margin from 3.88% in 2005 to 3.96% in 2006. Noninterest incomeincreased $752,000 or 3.3% due to higher levels of mortgage banking revenue of$3.199 million. (The increase in noninterest income excluding the loss oninvestment securities from the balance sheet restructuring was $3.789 million).We experienced higher income from most major sources of noninterest income.

Our increase in total expenses resulted from highernoninterest expenses (by $12.819 million), offset by a decrease in ourincome tax expense of $3.654 million and a decrease in our provision for loanlosses of $972,000. Noninterest expense growth was primarily the result ofhigher salaries and benefit costs, higher occupancy costs, as well as $4.450million in valuation allowances and secondary marketing reserves for 

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repurchases andanticipated repurchases of loans previously sold on the secondary market. Thedecrease in income tax expense was primarily due to lower pretax income andremoval of the valuation allowance on the net operating loss carryforward ofthe Holding Company. The decrease in our provision for loan losses is largely afunction of our slower loan growth in 2006 as compared to 2005. The provisionrecorded resulted in an increase in the allowance for loan losses to 1.43% oftotal loans as of December 31, 2006 from 1.38% as of December 31,2005.

The return on average assets was 0.14% for 2006compared to 0.59% for 2005. The return on average equity for 2006 was 2.53%compared to 11.44% for 2005. Average equity to average assets was 5.59% for2006 compared to 5.13% for 2005. The decline in both the return on averageassets and the return on average equity is primarily a result of recognizingsecurity sales losses and the provision for the valuation allowance andsecondary marketing reserve.

Our total assets decreased by $99.188 million or7.3%, reflecting the balance sheet restructuring at the end of 2006. Weexperienced an increase in loans and loans held for sale, which were funded byincreases in deposits. Loans outstanding increased by $14.873 million or1.7%, and loans held for sale increased by $2.020 million or 2.2%, while ourdeposits grew by $48.928 million or 5.6%. Stockholders’ equity increased$6.254 million or 8.6% reflecting the retention of 2006’s earnings, andshares sold and issued upon the exercise of options and warrants and inconnection with our employee stock purchase plan. In addition, we experiencedan increase in other comprehensive income due to the increase in the marketvalue of securities classified as available for sale, which resulted from thesale of securities with significant losses in market value. These items wereoffset somewhat by the shares repurchased under our stock repurchase plan.

During 2006, our asset quality deteriorated and weincreased our allowance for loan losses to $12.399 million, which totaled187.9% of nonperforming assets as of December 31, 2006, compared to 297.3%as of December 31, 2005. Our ratio of net chargeoffs to average totalloans was 0.19% in 2006, compared to 0.14% in 2005. Our ratio of nonperformingassets to total assets increased to 0.52% at December 31, 2006 from 0.29%at December 31, 2005. Our level of loans 90 days delinquent and stillaccruing interest increased to $27.274 million from $860,000 in 2005.

Capital adequacy levelsremained strong, exceeding the levels we are required to maintain for “well-capitalized”status as defined by banking regulation. December 31, 2006 ratios for ourcapital leverage, Tier 1 capital to risk weighted assets, and total capital torisk weighted assets were 7.8%, 10.0%, and 15.6%, respectively, compared to7.4%, 9.5%, and 14.9%, respectively, at December 31, 2005. Our regulatorycapital levels increased as the growth rate of regulatory capital exceededgrowth rates in total and risk-adjusted assets.

**Results ofOperations**

***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 2006 totaled $49.266 million, an increase of 3.2% over$47.723 million for 2005. The improvement in net interest income during2006 was due in large part to an increase in our average earning assets, fromthe 2005 level of $1.230 billion to the 2006 level of $1.243 billion. Our yieldon earning assets also increased, from 6.67% for 2005 to 7.70% for 2006. Thesebenefits, plus an increase in average noninterest-bearing deposits, more thanoffset the higher rates paid on interest-bearing deposits 

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and borrowings, whichincreased from 3.16% for 2005 to 4.24% for 2006. As a result, the net interestmargin (net interest income divided by average earning assets) increased to3.96% for 2006, as compared to 3.88% for the comparable period in 2005. 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.

During 2006, we sold approximately $100.000 million offixed rate investment securities yielding approximately 3.85% in order toextinguish approximately $100.000 million in short-term debt costing 5.45%. Therestructuring is anticipated to increase net interest income in 2007.

*Interestincome.*   Total interest income increased by$13.688 million primarily due to the increase in the yield on average earningassets. Yields on earning assets for the period increased to 7.70% from 6.67%due to the higher mix of loans and loans held for sale (which carry higheryields than investments and other earning assets) and increases in marketinterest rates. The yield on total loans increased from 7.70% to 8.69% andreflected increases in the rates for most loan categories. The yield on loansheld for sale increased from 6.05% to 7.73%.

Average loans outstanding increased by $50.488million, with increases in almost every loan category. Average investmentsecurities decreased $36.741 million due to the sale of securities during 2006to restructure the balance sheet, and regular principal reductions onmortgage-backed securities.

*Interestexpense.*   Interest expense increased by $12.145million, due primarily to an increase in the average rate paid oninterest-bearing liabilities, which increased from 3.16% for the year ended December 31,2005 to 4.24% for the year ended December 31, 2006. We also experienced anincrease in average interest-bearing liabilities of $11.622 million, which wasdriven by an increase in money market accounts, offset by decreases in NOW,savings, and time deposits, as well as borrowings. The decrease in averageborrowings of $11.997 million was due to repayment of short-term advances fromthe FHLB in conjunction with our balance sheet restructuring and the decreasein overall average investment securities. The increase in the average rate paidon interest-bearing liabilities was a result of the higher interest rateenvironment in 2006 and consumer preferences for higher yielding money marketproducts.

The table below sets forth the average balances, netinterest income and expense and average yields and rates for ourinterest-earning assets and interest-bearing liabilities for 2006, 2005, and2004.

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**ComparativeAverage Balances Yields and Rates**

| ** **                                      | ** ** | **2006**             | ** ** | **2005**              | ** ** | **2004**         | ** ** |
|-------------------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|
| ***(dollars in thousands)***          | ** ** | **Average  Balance** | ** ** | **Interest (1)** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest (1)** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Interest (1)** | ** ** | **Yield/  Rate** | ** ** |
| ASSETS                                          |       |                 |       |                  |       | ** **       |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Loans (2):                                      |       |                 |       |                  |       | ** **       |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |
| Commercial loans and lines of credit            |       | $                    | 70,238     |                  |       | $                | 4,803      | ** ** |   | 6.84% |   | $ | 68,035 |   |   | $ | 3,791 | ** ** |   | 5.57% |   | $ | 76,370 |   |   | $ | 4,474 | ** ** |   | 5.86% |   |
| Residential construction - commercial           |       | 123,188              |       |                  | 10,968     | ** **       |       | 8.90% |   | 88,634 |   |   | 6,987 | ** ** |   | 7.88% |   | 49,328 |   |   | 3,698 | ** ** |   | 7.50% |   |
| Commercial mortgages                            |       | 335,584              |       |                  | 24,557     | ** **       |       | 7.32% |   | 331,975 |   |   | 22,899 | ** ** |   | 6.90% |   | 256,960 |   |   | 17,908 | ** ** |   | 6.97% |   |
| Residential construction - consumer             |       | 113,053              |       |                  | 8,977      | ** **       |       | 7.94% |   | 130,535 |   |   | 9,245 | ** ** |   | 7.08% |   | 123,759 |   |   | 8,882 | ** ** |   | 7.18% |   |
| Residential mortgages                           |       | 46,308               |       |                  | 2,733      | ** **       |       | 5.90% |   | 41,798 |   |   | 2,499 | ** ** |   | 5.98% |   | 40,880 |   |   | 2,692 | ** ** |   | 6.59% |   |
| Consumer                                        |       | 166,836              |       |                  | 22,239     | ** **       |       | 13.33% |   | 143,742 |   |   | 16,520 | ** ** |   | 11.49% |   | 105,209 |   |   | 11,431 | ** ** |   | 10.87% |   |
| Total loans                                     |       | 855,207              |       |                  | 74,277     | ** **       |       | 8.69% |   | 804,719 |   |   | 61,941 | ** ** |   | 7.70% |   | 652,506 |   |   | 49,085 | ** ** |   | 7.52% |   |
| Loans held for sale                             |       | 101,841              |       |                  | 7,877      | ** **       |       | 7.73% |   | 102,321 |   |   | 6,195 | ** ** |   | 6.05% |   | 48,791 |   |   | 2,464 | ** ** |   | 5.05% |   |
| Securities available for sale, at fair value    |       | 262,968              |       |                  | 12,365     | ** **       |       | 4.70% |   | 299,709 |   |   | 13,066 | ** ** |   | 4.36% |   | 316,878 |   |   | 13,219 | ** ** |   | 4.17% |   |
| Interest-bearing deposits                       |       | 10,970               |       |                  | 529        | ** **       |       | 4.82% |   | 9,428 |   |   | 284 | ** ** |   | 3.01% |   | 19,546 |   |   | 235 | ** ** |   | 1.20% |   |
| Restricted stock investments, at cost           |       | 12,317               |       |                  | 700        | ** **       |       | 5.68% |   | 13,997 |   |   | 574 | ** ** |   | 4.10% |   | 7,507 |   |   | 267 | ** ** |   | 3.56% |   |
| Total earning assets                            |       | 1,243,303            |       |                  | 95,748     | ** **       |       | 7.70% |   | 1,230,174 |   |   | 82,060 | ** ** |   | 6.67% |   | 1,045,228 |   |   | 65,270 | ** ** |   | 6.24% |   |
| Allowance for loan losses                       |       | (12,000              | )          |                  |       | ** **       |       |   |   | (10,470 | ) |   |   | ** ** |   |   |   | (8,995 | ) |   |   | ** ** |   |   |   |
| Cash and other nonearning assets                |       | 129,867              |       |                  |       | ** **       |       |   |   | 113,118 |   |   |   | ** ** |   |   |   | 89,415 |   |   |   | ** ** |   |   |   |
| Total assets                                    |       | $1,361,170           |       |                  | 95,748     | ** **       |       |   |   | $ | 1,332,822 |   |   | 82,060 | ** ** |   |   |   | $ | 1,125,648 |   |   | 65,270 | ** ** |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY      |       |                 |       |                  |       | ** **       |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |
| Interest-bearing  deposits:                     |       |                 |       |                  |       | ** **       |       |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |
| NOW deposits                                    |       | $                    | 10,945     |                  |       | 24               | ** ** |   | 0.22% |   | $ | 13,065 |   |   | 26 | ** ** |   | 0.20% |   | $ | 55,488 |   |   | 191 | ** ** |   | 0.34% |   |
| Savings deposits                                |       | 67,164               |       |                  | 205        | ** **       |       | 0.31% |   | 71,789 |   |   | 218 | ** ** |   | 0.30% |   | 67,009 |   |   | 235 | ** ** |   | 0.35% |   |
| Money market deposits                           |       | 241,039              |       |                  | 7,855      | ** **       |       | 3.26% |   | 203,222 |   |   | 3,215 | ** ** |   | 1.58% |   | 158,802 |   |   | 1,341 | ** ** |   | 0.84% |   |
| Time deposits                                   |       | 388,192              |       |                  | 15,836     | ** **       |       | 4.08% |   | 395,645 |   |   | 13,270 | ** ** |   | 3.35% |   | 367,847 |   |   | 11,041 | ** ** |   | 3.00% |   |
| Total interest-bearing deposits                 |       | 707,340              |       |                  | 23,920     | ** **       |       | 3.38% |   | 683,721 |   |   | 16,729 | ** ** |   | 2.45% |   | 649,146 |   |   | 12,808 | ** ** |   | 1.97% |   |
| Borrowings                                      |       | 389,533              |       |                  | 22,562     | ** **       |       | 5.79% |   | 401,530 |   |   | 17,608 | ** ** |   | 4.39% |   | 268,249 |   |   | 10,021 | ** ** |   | 3.74% |   |
| Total interest-bearing liabilities              |       | 1,096,873            |       |                  | 46,482     | ** **       |       | 4.24% |   | 1,085,251 |   |   | 34,337 | ** ** |   | 3.16% |   | 917,395 |   |   | 22,829 | ** ** |   | 2.49% |   |
| Noninterest-bearing demand deposits             |       | 179,210              |       |                  |       | ** **       |       |   |   | 174,115 |   |   |   | ** ** |   |   |   | 143,706 |   |   |   | ** ** |   |   |   |
| Other noninterest-bearing liabilities           |       | 9,008                |       |                  |       | ** **       |       |   |   | 5,091 |   |   |   | ** ** |   |   |   | 4,204 |   |   |   | ** ** |   |   |   |
| Stockholders’ equity                       |       | 76,079               |       |                  |       | ** **       |       |   |   | 68,365 |   |   |   | ** ** |   |   |   | 60,343 |   |   |   | ** ** |   |   |   |
| Total liabilities and stockholders’ equity |       | $                    | 1,361,170  |                  |       | 46,482           | ** ** |   |   |   | $ | 1,332,822 |   |   | 34,337 | ** ** |   |   |   | $ | 1,125,648 |   |   | 22,829 | ** ** |   |   |   |
| Net interest income/net interest spread         |       |                 |       |                  | $          | 49,266           | ** ** |   | 3.46% |   |   |   |   | $ | 47,723 | ** ** |   | 3.51% |   |   |   |   | $ | 42,441 | ** ** |   | 3.75% |   |
| Net interest  margin (3)                        |       |                 |       |                  |       | ** **       |       | 3.96% |   |   |   |   |   | ** ** |   | 3.88% |   |   |   |   |   | ** ** |   | 4.06% |   |

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(1)             There are no tax equivalency adjustments

(2)             The average balances of non-accrual loansfor the years ended December 31, 2006, 2005, and 2004 are included in theaverage loan balances

(3)             Net interest margin is calculated as netinterest income divided by average earning assets

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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**

| ** **                                   | ** ** | **2006 Compared to 2005**          | ** ** | **2005 Compared to 2004**          | ** ** |
|----------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **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         |       | $                                                 | 886        |                                              | $          | 126 |   | $ | 1,012 |   | $ | (211 | ) | $ | (472 | ) | $ | (683 | ) |
| Residential construction - commercial        |       | 993                                               |       | 2,988                                             |       | 3,981 |   | 200 |   | 3,089 |   | 3,289 |   |
| Commercial mortgages                         |       | 1,407                                             |       | 251                                               |       | 1,658 |   | (186 | ) | 5,177 |   | 4,991 |   |
| Residential construction - consumer          |       | 1,049                                             |       | (1,317                                            | )          | (268 | ) | (118 | ) | 481 |   | 363 |   |
| Residential mortgages                        |       | (33                                               | )          | 267                                               |       | 234 |   | (252 | ) | 59 |   | (193 | ) |
| Consumer                                     |       | 2,853                                             |       | 2,866                                             |       | 5,719 |   | 693 |   | 4,396 |   | 5,089 |   |
| Total loans                                  |       | 7,155                                             |       | 5,181                                             |       | 12,336 |   | 126 |   | 12,730 |   | 12,856 |   |
| Loans held for sale                          |       | 1,711                                             |       | (29                                               | )          | 1,682 |   | 574 |   | 3,157 |   | 3,731 |   |
| Securities available for sale, at fair value |       | 977                                               |       | (1,678                                            | )          | (701 | ) | 583 |   | (736 | ) | (153 | ) |
| Interest-bearing deposits                    |       | 193                                               |       | 52                                                |       | 245 |   | 217 |   | (168 | ) | 49 |   |
| Restricted stock investments, at cost        |       | 201                                               |       | (75                                               | )          | 126 |   | 45 |   | 262 |   | 307 |   |
| Total interest income                        |       | 10,237                                            |       | 3,451                                             |       | 13,688 |   | 1,545 |   | 15,245 |   | 16,790 |   |
| INTEREST EXPENSE                             |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits:                  |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| NOW deposits                                 |       | 2                                                 |       | (4                                                | )          | (2 | ) | (58 | ) | (107 | ) | (165 | ) |
| Savings deposits                             |       | 1                                                 |       | (14                                               | )          | (13 | ) | (32 | ) | 15 |   | (17 | ) |
| Money market deposits                        |       | 3,947                                             |       | 693                                               |       | 4,640 |   | 1,419 |   | 455 |   | 1,874 |   |
| Time deposits                                |       | 2,820                                             |       | (254                                              | )          | 2,566 |   | 1,355 |   | 874 |   | 2,229 |   |
| Total interest-bearing deposits              |       | 6,770                                             |       | 421                                               |       | 7,191 |   | 2,684 |   | 1,237 |   | 3,921 |   |
| Borrowings                                   |       | 5,494                                             |       | (540                                              | )          | 4,954 |   | 1,966 |   | 5,621 |   | 7,587 |   |
| Total interest expense                       |       | 12,264                                            |       | (119                                              | )          | 12,145 |   | 4,650 |   | 6,858 |   | 11,508 |   |
| Net interest  income                         |       | $                                                 | (2,027     | )                                                 | $          | 3,570 |   | $ | 1,543 |   | $ | (3,105 | ) | $ | 8,387 |   | $ | 5,282 |   |

 

***Noninterest Income***

We derivenoninterest income principally from mortgage-banking activities, service feeson our deposit accounts, ATM fees, commissions we earn on sales of insuranceproducts and income from bank-owned life insurance. Our noninterest income forthe year ended December 31, 2006 totaled $23.767 million, as comparedto $23.015 million for the year ended December 31, 2005, an increase of$752,000 or 3.3%. Noninterest income, excluding investment security lossesincreased $3.789 or 16.5%.

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Higher revenue from our mortgage-banking activitieswas the primary cause of the increase in noninterest income. Beginning in January 2006,management expanded its secondary marketing activities for selling mortgageloans to include selling loans in bulk, on a mandatory delivery basis. Prior tothat time, all loans originated for sale were sold into the secondary marketindividually, on a best efforts basis (see discussion in Note 1 to theConsolidated Financial Statements, included in Item 8—“Financial Statements andSupplementary Data,” under the heading “Derivative Loan Commitments HedgingActivities”). Since the inception of the bulk sale strategy, approximately 28%of loans sold have been sold on a bulk-delivery basis. Thus far, we haveexperienced significantly wider profit margins on loans sold in bulk, comparedto the profit margins previously experienced under the best efforts approach. Approximately$2.067 million of the increase in gains on sales of mortgage loans isattributable to this strategy. This estimate includes gains realized whilehedging our interest rate risk during the period in which loans are in theapplication and approval process (pipeline), and loans settled and awaitingsale (warehouse). Profit margins experienced during the first six months of2006 were significantly higher than we anticipated, as prices paid wereinflated by higher demand and diminished supply for certain mortgage productswe originate. The profit margins normalized during the second half of 2006 andmay continue to shrink or to expand moving forward as demand changes or overallsupplies fluctuate, which would affect the price we receive on sold loans. Alower profit margin could reduce our noninterest income growth as, conversely,a higher profit margin could increase its growth. Gains on sales of loans,which are derived from both the volume of loans sold and the pricing at whichthey are sold, increased by $2.596 million or 51.7% compared to the yearended December 31, 2005. Valuation allowances and costs associated withmortgage loans sold are included in noninterest expenses and are not reflectedas reductions to gains on sales of loans.

Service fees on our deposit accounts decreased by$298,000 or 4.1% due to lower levels of overdraft income. Income frombank-owned life insurance increased by $86,000 in 2006 due to a $5.000 millionpurchase of additional policies. Commissions earned on the sale of nondepositinvestment products (primarily fixed annuities) increased $107,000 due highersales volumes. Commissions from the sale of other insurance products (primarilyinsurance products offered through Finance Maryland) increased $159,000 due toexpansion of Finance Maryland’s locations and increased loan originationactivity. Our other noninterest income not detailed in the table belowincreased $510,000 or 38.8% and includes $627,000 in rental income from othertenants in our former headquarters building which we purchased in 2005.

We realized net losses from the sale of investmentsecurities of $3.037 million in 2006, compared to no gains or losses for 2005. We sold the securities in 2006 in order torestructure our balance sheet to enhance future financial performance byreducing the level of lower yielding securities and decreasing the level ofhigher cost wholesale funding.

Thefollowing table shows the breakout of noninterest income:

| ** **                                              | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Gain on sale of  mortgage loans                         |       | $                                           | 7,614      |   | $ | 5,018 |   | $ | 3,349 |   |
| Other mortgage-banking  revenue                         |       | 2,892                                       |       | 2,289 |   | 1,567 |   |
| ATM fees                                                |       | 3,161                                       |       | 3,135 |   | 2,836 |   |
| Service fees on  deposits                               |       | 6,887                                       |       | 7,185 |   | 6,899 |   |
| (Loss) gain on  sales of investment securities, net     |       | (3,037                                      | )          | — |   | 440 |   |
| Commissions on  sales of nondeposit investment products |       | 638                                         |       | 531 |   | 649 |   |
| Income from  bank-owned life insurance                  |       | 1,117                                       |       | 1,031 |   | 1,072 |   |
| Commissions on  sales of other insurance products       |       | 2,671                                       |       | 2,512 |   | 1,519 |   |
| Other                                                   |       | 1,824                                       |       | 1,314 |   | 859 |   |
|                                                    |       | $                                           | 23,767     |   | $ | 23,015 |   | $ | 19,190 |   |

 

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***Noninterest Expense***

Our noninterest expensetotaled $69.159 million for the year ended December 31, 2006,compared to $56.340 million for 2005, an increase of $12.819 millionor 22.8%.

We paid higher salaries and benefits costs in 2006 of$4.081 million or 13.2% compared to 2005, primarily due to additional personnelcosts for new positions supporting the increase in the number of loans anddeposits, staffing hired to support the expansion of the consumer financecompany and wholesale mortgage activities, and increased cost of employerprovided health care, slightly offset by lower performance-based incentivecosts. Our occupancy costs for 2006 increased $1.908 or 31.3% compared to 2005,reflecting an increase in lease expense due to additional space occupied forthe new executive and administrative offices, increased amortization ofproperty improvements and the expansion of consumer finance operations.

We experienced higher service and maintenance expensesof $369,000 or 20.1% due to an increase in our locations. Loan collection expensesincreased by $230,000 or 48.8% due to increased loan delinquencies. During2006, we provided $4.450 million for a valuation allowance and a secondarymarketing reserve for repurchases and potential repurchases of loans previouslysold on the secondary market. These are in addition to our loan loss allowanceof $12.399 million. The valuation allowance is for loans already repurchasedand the reserve is for loans that may be required to be repurchased in thefuture. Our other noninterest expenses not detailed in the table belowincreased $939,000 or 32.2%.

Thefollowing table shows the breakout of noninterest expense:

| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Salaries and  employee benefits                   |       | $                                           | 34,990     |   | $ | 30,909 |   | $ | 26,523 |   |
| Net occupancy                                     |       | 8,012                                       |       | 6,104 |   | 6,255 |   |
| Furniture,  fixtures, and equipment               |       | 3,162                                       |       | 3,057 |   | 3,005 |   |
| Professional  services                            |       | 958                                         |       | 1,021 |   | 756 |   |
| Advertising                                       |       | 1,341                                       |       | 1,352 |   | 1,455 |   |
| Data processing                                   |       | 1,811                                       |       | 2,006 |   | 2,079 |   |
| Service and  maintenance                          |       | 2,202                                       |       | 1,833 |   | 1,485 |   |
| Office supplies                                   |       | 747                                         |       | 680 |   | 697 |   |
| ATM servicing  expenses                           |       | 962                                         |       | 1,146 |   | 1,112 |   |
| Printing                                          |       | 602                                         |       | 543 |   | 712 |   |
| Corporate  insurance                              |       | 517                                         |       | 401 |   | 378 |   |
| Real estate  acquired through foreclosure expense |       | 224                                         |       | 28 |   | (73 | ) |
| FDIC premiums                                     |       | 109                                         |       | 113 |   | 115 |   |
| Consulting fees                                   |       | 850                                         |       | 734 |   | 385 |   |
| Marketing/promotion                               |       | 1,059                                       |       | 866 |   | 722 |   |
| Postage                                           |       | 906                                         |       | 764 |   | 982 |   |
| Overnight  delivery/courier                       |       | 908                                         |       | 809 |   | 736 |   |
| Security                                          |       | 233                                         |       | 151 |   | 310 |   |
| Dues and  subscriptions                           |       | 562                                         |       | 438 |   | 341 |   |
| Loan collection  expenses                         |       | 701                                         |       | 471 |   | 332 |   |
| Secondary  marketing valuation                    |       | 4,450                                       |       | — |   | — |   |
| Other                                             |       | 3,853                                       |       | 2,914 |   | 2,619 |   |
|                                              |       | $                                           | 69,159     |   | $ | 56,340 |   | $ | 50,926 |   |

 

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***Income Tax Expense***

We recorded an income taxbenefit of $365,000 in 2006 for an effective tax rate of (23.4)% compared toincome tax expense of $3.289 million and an effective tax rate of 29.6%for 2005. The income tax expense decrease is due to lower pretax income for2006 of $1.559 million compared to $11.111 million in 2005. The effective taxrate decreased due to higher levels of tax-exempt income relative to pre-taxincome in 2006 as compared to 2005. In addition, the income tax benefitincludes a one-time credit to eliminate the remaining portion of the valuationallowance we had previously established to reflect the uncertainty of certainstate income tax operating loss carry-forwards. There were no changes in thestatutory income tax rates in 2006.

In September of 2003,we announced that the Bank had earned significant state tax incentives throughits participation in the One Maryland Economic Development (“One Maryland”) andJob Creation Tax Credit programs. The tax incentives we earned 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. We expect the Bank to fully realize the fullvalue of the credits before their expiration.

We have utilized all priornet operating loss carryforwards for federal income tax purposes at December 31,2006. Our net operating loss carryforwards for state income tax purposesapproximated $6.325 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.

**Financial Condition**

At December 31, 2006,our total assets were $1.263 billion as compared to $1.362 billion atDecember 31, 2005, a decrease of 7.3%. Earning assets decreased $119.397million or 9.6% to $1.121 billion from $1.240 billion. The decline in assetswas primarily due to a restructuring of the balance sheet at the end of 2006,which was accomplished through the sale of investment securities and repaymentof borrowings.  In addition, weexperienced growth in loans outstanding (+$14.873 million) and higher levels ofloans held for sale (+$2.020 million) and a decrease in cash and due from banks(-$3.423 million). Premises and equipment increased $8.660 million primarilydue to leasehold improvements related to our new headquarters and operationsbuilding, as well as costs related to new bank and consumer finance branches. Thegrowth in loans and loans held for sale was funded by an increased level ofcustomer deposits of $48.928 million. We continued to achieve growth throughthe development 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. However, growth rates were lower in 2006 due to the slowing ofthe regional real estate markets which softened loan demand and increaseddeposit competition.

***Investmentsecurities available for sale***

Our investment portfolioat December 31, 2006, is comprised of highly marketable securities, withover 62% secured by the U.S. Government or U.S. Government agencies. Thematurity structure of our investment portfolio is significantly influenced bythe level of prepayment activity on mortgage-backed investments. At December 31,2006, the average duration of our investment portfolio was 3.80 years,longer than the average duration of 3.32 years at December 31, 2005. Thisis largely the result of an increase in interest rates, which has extended theexpected maturity of mortgage-backed investment securities. In addition, during2006, we sold some of our shorter-term securities.

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We utilize the investment portfolio as part of ouroverall asset/liability management practices to minimize structural interestrate and market valuation risks associated with changes in interest rates. Wecontinually monitor the credit risk associated with corporate investments anddiversity the risk in the corporate portfolio.

Total investment securities declined $129.649 millionprimarily due to the sale of $97.387 million in securities during 2006.Investment purchases totaled $6.284 million in 2006. At December 31, 2006,our net unrealized loss on securities classified as available for sale totaled$1.505 million, compared to $5.402 million at December 31, 2005. 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 $39.402 million asof December 31, 2006 compared to $42.120 million as of December 31,2005.

Ourinvestment portfolio composition is as follows as of December 31:

| ***(dollars in thousands)***           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Mortgage-backed  securities                      |       | $        | 62,281     |     | $          | 161,112  |       | $        | 200,708    |     | $          | 149,763 |   | $ | 73,842 |   |
| Trust preferred  securities                      |       | 33,028   |       | 34,087   |       | 31,507   |       | 22,987   |       | 26,399   |       |
| U.S. government  agency notes                    |       | 39,894   |       | 68,271   |       | 78,949   |       | 107,314  |       | 12,159   |       |
| U.S. Treasury  securities                        |       | 998      |       | 986      |       | 1,000    |       | 1,001    |       | 1,015    |       |
| Obligations of  state and municipal subdivisions |       | 2,965    |       | 2,969    |       | 2,973    |       | —   |       | —   |       |
| Corporate  obligations                           |       | 1,988    |       | 1,777    |       | —   |       | —   |       | 5,921    |       |
| Equity securities                                |       | 1,395    |       | 1,310    |       | 1,531    |       | 1,274    |       | 2,824    |       |
| Foreign  government bonds                        |       | 1,750    |       | 1,481    |       | 1,400    |       | 1,250    |       | 850      |       |
| Other investment  securities                     |       | 2,991    |       | 4,946    |       | 4,897    |       | 4,848    |       | 4,800    |       |
|                                             |       | $        | 147,290    |     | $          | 276,939  |       | $        | 322,965    |     | $          | 288,437 |   | $ | 127,810 |   |

 

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Theamortized cost, estimated fair values, and weighted average yields of debtsecurities at December 31, 2006, by contractual maturity, are shown below.Actual maturities may differ from contractual maturities 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                             |       | $             | 115        |           |       | $             | 1          |                |       | $             | —     |   | $ | 116 |   |   | 5.50% |   |   |
| Due after ten years                               |       | 63,993        |       |           | 172        |          |       | 2,000               |       | 62,165        |       |   | 4.85% |   |   |
| Trust preferred  securities:                      |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due after ten years                               |       | 33,056        |       |           | 129        |          |       | 157                 |       | 33,028        |       |   | 7.93% |   |   |
| U.S. Treasury securities:                         |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due within one year                               |       | 1,000         |       |           | —     |          |       | 2                   |       | 998           |       |   | 3.13% |   |   |
| U.S. government agency  notes:                    |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due within one year                               |       | 40,000        |       |           | —     |          |       | 106                 |       | 39,894        |       |   | 3.81% |   |   |
| Obligations of  state and municipal subdivisions: |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due after ten years                               |       | 2,937         |       |           | 28         |          |       | —              |       | 2,965         |       |   | 4.59% |   |   |
| Corporate  obligations:                           |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due one to five years                             |       | 1,907         |       |           | 81         |          |       | —              |       | 1,988         |       |   | 6.17% |   |   |
| Foreign  government bonds:                        |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due within one year                               |       | 250           |       |           | —     |          |       | —              |       | 250           |       |   | 5.60% |   |   |
| Due one to five years                             |       | 1,500         |       |           | —     |          |       | —              |       | 1,500         |       |   | 5.91% |   |   |
| Other investment  securities:                     |       |          |       |           |       |          |       |                |       |          |       |   |   |   |   |
| Due within one year                               |       | 2,991         |       |           | —     |          |       | —              |       | 2,991         |       |   | 3.86% |   |   |
|                                              |       | $             | 147,749    |           |       | $             | 411        |                |       | $             | 2,265      |   | $ | 145,895 |   |   | 5.25% |   |   |

 

Weighted yields are based on amortized cost. Mortgage-backedsecurities are assigned to maturity categories based on their final maturity.

See Note 3 of the Notes toConsolidated Financial Statements, included in Item 8—“Financial Statements andSupplementary Data,” for further details about our securities available forsale.

***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)*** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Commercial loans  and lines of credit  |       | $        | 79,016     |     | $          | 67,759   |       | $        | 60,496     |     | $          | 65,934 |   | $ | 56,760 |   |
| Residential  construction - commercial |       | 137,155  |       | 112,383  |       | 63,847   |       | 51,225   |       | 31,878   |       |
| Commercial  mortgages                  |       | 317,848  |       | 349,430  |       | 315,676  |       | 244,316  |       | 202,994  |       |
| Residential  construction - consumer   |       | 98,066   |       | 126,708  |       | 135,841  |       | 119,973  |       | 135,189  |       |
| Residential  mortgages                 |       | 56,221   |       | 40,817   |       | 41,589   |       | 40,122   |       | 46,065   |       |
| Consumer                               |       | 178,153  |       | 154,489  |       | 128,697  |       | 88,277   |       | 61,079   |       |
| Total loans                            |       | $        | 866,459    |     | $          | 851,586  |       | $        | 746,146    |     | $          | 609,847 |   | $ | 533,965 |   |

 

Total loans increased $14.873 million during 2006,while the underlying economic strength in our core market, affordable interestrates, and continued emphasis on business development all contributed to the 

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continued loan originationactivity. Loan growth did soften from historical growth rates. Real estate developmentactivity slowed and we elected to reduce our exposure to certain types oflending and in certain geographic areas during 2006. The largest increase inour loan portfolio occurred in the residential construction - commercialcategory, which increased by $24.772 million. This was primarily due tothe funding of construction loans made prior to 2006. In addition, weexperienced increases in the commercial loan category (+$11.257 million).Growth in these types of our commercial loans reflected successful marketingand sales efforts of the Bank’s commercial lending unit and the continuation ofa favorable interest rate environment. Our consumer loans increased by$23.664 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. Commercial mortgages decreased$31.582 million and residential construction loans to consumers decreased$28.642 million as our origination activity in these product linesdecreased due to increased competition and slower development activity.

Our residential real estate loans, which consistprimarily of 3- and 5-year adjustable-rate mortgages, increased by$15.404 million, partially due to our repurchase of mortgage loans originallysold on the secondary market. During 2006, we repurchased $13.458 million indelinquent mortgage loans from investors in accordance with a covenant in oursales agreement. Most of the loans are at least 90 days past due. Due to thedelinquency of the loans, the higher loan to value ratios, and recent softnessin regional and national housing prices, we have established a total of $4.090million in valuation allowances (for loans already repurchased) and secondarymarket reserves (for loans expected to be repurchased - included in otherliabilities) against these and estimated future loan repurchases.

Approximately 38.7% of our loans have adjustable ratesas of December 31, 2006 compared to approximately 35.2% at December 31,2005, 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.

Thefollowing table sets forth the maturity distribution for our loan portfolio at December 31,2006. 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  |       | $                                           | 26,315     |                                            | $          | 34,746 |   | $ | 12,024 |   | $ | 4,823 |   | $ | 704 |   | $ | 404 |   | $ | 79,016 |   |
| Residential  construction -commercial  |       | 32,068                                      |       | 60,814                                          |       | 10,173 |   | 21,930 |   | 19 |   | 12,151 |   | 137,155 |   |
| Commercial  mortgages                  |       | 121,373                                     |       | 21,492                                          |       | 101,368 |   | 38,366 |   | 4,362 |   | 30,887 |   | 317,848 |   |
| Residential  construction -consumer    |       | 96,241                                      |       | —                                          |       | 910 |   | — |   | 915 |   | — |   | 98,066 |   |
| Residential  mortgages                 |       | 3,791                                       |       | 561                                             |       | 2,002 |   | 2,602 |   | 12,480 |   | 34,785 |   | 56,221 |   |
| Consumer                               |       | 35,019                                      |       | 8,011                                           |       | 47,260 |   | 32,763 |   | 24,528 |   | 30,572 |   | 178,153 |   |
| Total loans                            |       | $                                           | 314,807    |                                            | $          | 125,624 |   | $ | 173,737 |   | $ | 100,484 |   | $ | 43,008 |   | $ | 108,799 |   | $ | 866,459 |   |

 

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***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 policiesare designed to minimize our risk, management recognizes that loan losses willoccur and the amount of these losses will fluctuate depending on the riskcharacteristics of our loan portfolio, as well as general and regional economicconditions.

Our allowance for loan losses represents an estimated reservefor existing 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, judgmentallyadjusted for 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.

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

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

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estate portfolios, as wellas other loans in the portfolios identified as having the potential for furtherdeterioration, are analyzed individually to confirm the appropriate riskgrading and accrual status, and to determine 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 management practicesdesigned to ensure timely identification of changes in loan risk profiles;however, undetected losses may exist inherently within the loan portfolios. Thejudgmental aspects involved in applying the risk grading criteria, analyzingthe quality of individual loans and assessing collateral values can alsocontribute to undetected, but probable, losses.

Valuation allowances established in relationship torepurchased loans originated for sale or transfer of loans from loans held forsale to the loan portfolio are in addition to the allowance for loan losses. Thevaluation allowance was established for loans already repurchased and in theportfolio and the secondary marketing reserve is for loans that may be requiredto be repurchased in the future. The valuation allowance and secondarymarketing reserve are not part of our allowance for loan losses of $12.399million, but are in addition to it.

In establishing the valuation allowance and secondarymarketing reserve, management needed to make significant assumptions concerningthe ultimate collectibility of loans currently delinquent, and those expectedto be repurchased in the future. Additionally, a portion of these reserves arebased upon projected volume of repurchases. While these projections were madewith the most current data available to management, actual realized lossescould differ due to the changes in the borrowers’ willingness or ability toresolve the delinquency status, changes in the actual volume of futurerepurchases, or changes in market values of those loans which are liquidated. Managementwill update these assumptions continually as greater experience becomesavailable.

In response to the trends experienced in our secondarymarketing business, management has taken steps to modify underwritingguidelines and strengthen borrower qualification terms. Additionally,management has dramatically reduced its offering of second mortgage productsthrough broker channels and has limited its mortgage lending to investorborrowers.

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 2006 primarily due to increases in allocated reservesfor commercial and residential construction loans. Our allowance for loanlosses to our total loans was 1.43% as of December 31, 2006, up from 1.38%as of December 31, 2005. Our provision for loan losses totaled$2.315 million for the year ended December 31, 2006, as compared to$3.287 million for the year ended December 31, 2005.

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Our allowance for loan losses at December 31,2006 totaled $12.399 million, as compared with the December 31, 2005balance of $11.743 million, an increase of $656,000 or 5.59%. Werecognized net charge-offs of $1.659 million and $1.124 million for 2006 and2005, respectively. Our net charge-offs as a percentage of our average loanswere 0.19% for 2006 compared to 0.14% in 2005. Our net charge-off levels forthe Bank were $298,000 in 2006 compared to $13,000 in 2005, reflecting highercharge-offs associated with residential mortgage and consumer residentialconstruction loans. Finance Maryland net charge-offs totaled $1.361 million(2.43% of average consumer finance loans) in 2006 compared to $1.111 million(2.76% of average consumer finance loans) in 2005. We consider the allowance tobe sufficient to address the credit losses inherent in the current loanportfolio.

The following tablesummarizes the activities in our allowance for loan losses:

| ** **                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Allowance for  loan losses, beginning of year              |       | $                                           | 11,743     |   | $ | 9,580 |   | $ | 8,692 |   | $ | 7,188 |   | $ | 5,524 |   |
| Loans charged  off:                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                                 |       | —                                      |       | (15 | ) | — |   | — |   | — |   |
| Residential construction - commercial                      |       | —                                      |       | — |   | (4 | ) | — |   | (65 | ) |
| Commercial mortgages                                       |       | —                                      |       | — |   | — |   | — |   | — |   |
| Residential construction - consumer                        |       | (186                                        | )          | — |   | (251 | ) | (244 | ) | (200 | ) |
| Residential mortgages                                      |       | (99                                         | )          | — |   | — |   | (19 | ) | — |   |
| Consumer                                                   |       | (1,740                                      | )          | (1,492 | ) | (1,318 | ) | (1,003 | ) | (288 | ) |
| Total loans charged off                                    |       | (2,025                                      | )          | (1,507 | ) | (1,573 | ) | (1,266 | ) | (553 | ) |
| Recoveries:                                                |       |                                        |       |   |   |   |   |   |   |   |   |
| Commercial                                                 |       | —                                      |       | — |   | — |   | 17 |   | — |   |
| Residential construction - commercial                      |       | —                                      |       | — |   | — |   | 65 |   | — |   |
| Commercial mortgages                                       |       | —                                      |       | — |   | — |   | — |   | — |   |
| Residential construction - consumer                        |       | 22                                          |       | 89 |   | 11 |   | — |   | — |   |
| Residential mortgages                                      |       | —                                      |       | — |   | — |   | 1 |   | 9 |   |
| Consumer                                                   |       | 344                                         |       | 294 |   | 207 |   | 151 |   | 33 |   |
| Total recoveries                                           |       | 366                                         |       | 383 |   | 218 |   | 234 |   | 42 |   |
| Net charge-offs                                            |       | (1,659                                      | )          | (1,124 | ) | (1,355 | ) | (1,032 | ) | (511 | ) |
| Provision for  loan losses                                 |       | 2,315                                       |       | 3,287 |   | 2,243 |   | 2,536 |   | 2,175 |   |
| Allowance for  loan losses, end of period                  |       | $                                           | 12,399     |   | $ | 11,743 |   | $ | 9,580 |   | $ | 8,692 |   | $ | 7,188 |   |
| Loans (net of  premiums and discounts):                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Period-end balance                                         |       | $                                           | 866,459    |   | $ | 851,586 |   | $ | 746,146 |   | $ | 609,847 |   | $ | 533,965 |   |
| Average balance during period                              |       | 855,207                                     |       | 804,719 |   | 652,506 |   | 552,528 |   | 496,486 |   |
| Allowance as a  percentage of period-end loan balance |       | 1.43                                        | %          | 1.38 | % | 1.28 | % | 1.43 | % | 1.35 | % |
| Percent of  average loans:                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Provision for loan losses                                  |       | 0.27                                        | %          | 0.41 | % | 0.34 | % | 0.46 | % | 0.44 | % |
| Net charge-offs                                            |       | 0.19                                        | %          | 0.14 | % | 0.21 | % | 0.19 | % | 0.10 | % |

 

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

| ** **                             | ** ** | **2006**   | ** ** | **2005**                   | ** ** | **2004**                                         | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------------------------|------------|
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent  of Loans  to Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent  of Loans  to Total  Loans** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent  of Loans  to Total  Loans** | ** ** |
| Commercial                             |       | $          | 926        |                       | 7.5%       |                                             |       | 9.1% |   |   | $ | 1,302 |   | 11.1% |   |   | 8.0% |   |   |   | $ | 1,819 |   |   | 19.0% |   |   | 8.1% |   |   |
| Residential construction -  commercial |       | 2,749      |       | 22.2%                      |       |                                             | 15.8%      |   |   | 1,031 |   | 8.8% |   |   | 13.2% |   |   |   | 508 |   |   | 5.3% |   |   | 8.6% |   |   |
| Commercial mortgages                   |       | 3,073      |       | 24.8%                      |       |                                             | 36.7%      |   |   | 2,908 |   | 24.8% |   |   | 41.0% |   |   |   | 2,804 |   |   | 29.3% |   |   | 42.3% |   |   |
| Residential construction -  consumer   |       | 1,068      |       | 8.6%                       |       |                                             | 11.3%      |   |   | 1,461 |   | 12.4% |   |   | 14.9% |   |   |   | 1,523 |   |   | 15.9% |   |   | 18.2% |   |   |
| Residential mortgages                  |       | 28         |       | 0.2%                       |       |                                             | 6.5%       |   |   | 18 |   | 0.1% |   |   | 4.8% |   |   |   | 20 |   |   | 0.2% |   |   | 5.6% |   |   |
| Consumer                               |       | 2,928      |       | 23.6%                      |       |                                             | 20.6%      |   |   | 2,242 |   | 19.1% |   |   | 18.1% |   |   |   | 1,653 |   |   | 17.2% |   |   | 17.2% |   |   |
| Unallocated                            |       | 1,627      |       | 13.1%                      |       |                                             | —     |   |   | 2,781 |   | 23.7% |   |   | — |   |   |   | 1,253 |   |   | 13.1% |   |   | — |   |   |
| Total                                  |       | $          | 12,399     |                       | 100.0%     |                                             |       | 100.0% |   |   | $ | 11,743 |   | 100.0% |   |   | 100.0% |   |   |   | $ | 9,580 |   |   | 100.0% |   |   | 100.0% |   |   |

 

| ** **                              | ** ** | **2003**   | ** ** | **2002**                   | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------|------------|
| ***(dollars in thousands)***  | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent  of Loans  to Total   Loans** | ** ** | **Amount** | ** ** | **Percent  of Total** | ** ** | **Percent  of Loans  to Total  Loans** | ** ** |
| Commercial                              |       |       | $          | 978                        |       |   |   | 11.3 | % |   |   | 10.8 | % |   |   | $ | 826 |   |   |   | 11.5 | % |   |   | 10.6 | % |   |
| Residential construction -   commercial |       |       | 303        |                       |       |   | 3.5 | % |   |   | 8.4 | % |   |   | 254 |   |   |   | 3.5 | % |   |   | 6.0 | % |   |
| Commercial mortgages                    |       |       | 2,481      |                       |       |   | 28.5 | % |   |   | 40.0 | % |   |   | 1,632 |   |   |   | 22.7 | % |   |   | 38.0 | % |   |
| Residential construction -   consumer   |       |       | 1,853      |                       |       |   | 21.3 | % |   |   | 19.7 | % |   |   | 2,128 |   |   |   | 29.6 | % |   |   | 25.3 | % |   |
| Residential mortgages                   |       |       | 46         |                       |       |   | 0.5 | % |   |   | 6.6 | % |   |   | 23 |   |   |   | 0.3 | % |   |   | 8.6 | % |   |
| Consumer                                |       |       | 1,139      |                       |       |   | 13.1 | % |   |   | 14.5 | % |   |   | 640 |   |   |   | 8.9 | % |   |   | 11.5 | % |   |
| Unallocated                             |       |       | 1,892      |                       |       |   | 21.8 | % |   |   | — |   |   |   | 1,685 |   |   |   | 23.5 | % |   |   | — |   |   |
| Total                                   |       |       | $          | 8,692                      |       |   |   | 100.0 | % |   |   | 100.0 | % |   |   | $ | 7,188 |   |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

Management applies SFAS No. 114, *Accounting by Creditors for Impairment of a Loan*,to determine accrual status for larger loans. Under SFAS No. 114, when itis probable that we will be unable to collect all payments due, includinginterest, we place the loan on nonaccrual. Management may grant a waiver fromnonaccrual status for a 90-day past-due loan that is both well securedand in the process of collection. A loan remains in nonaccrual status until theloan is current as to payment of both principal and interest and the borrowerdemonstrates the ability to pay and remain current. As a result of our ongoingreview of the loan portfolio, we may classify loans as nonaccrual even thoughthe presence of collateral or the borrowers financial strength may besufficient to provide for ultimate repayment. We recognize interest onnonaccrual loans only when it is received.

The following table provides information concerningnonperforming assets and past-due loans:

| ***(dollars in thousands)***       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Nonaccruing loans                            |       | $        | 4,158      |     | $          | 3,019    |       | $        | 4,628      |     | $          | 4,774 |   | $ | 1,278 |   |
| Real estate  acquired through foreclosure    |       | 2,440    |       | 931      |       | 65       |       | 296      |       | 2,247    |       |
| Total  nonperforming assets                  |       | $        | 6,598      |     | $          | 3,950    |       | $        | 4,693      |     | $          | 5,070 |   | $ | 3,525 |   |
| Loans past-due 90 days  or more and accruing |       | $        | 27,274     |     | $          | 860      |       | $        | 1,658      |     | $          | 2,258 |   | $ | 9,346 |   |

 

During 2006, our asset quality deteriorated due to thesofter economic environment, particularly the residential real estate market,in our lending area. As of December 31, 2006, we had $4.158 millionin nonaccrual loans, as compared with $3.019 million at December 31,2005. We held other real estate owned of $2.440 million at December 31,2006, compared to $931,000 at December 31, 2005. Our nonperforming 

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assets, the total ofnonaccrual loans and other real estate owned, increased to 0.52% of our totalassets at December 31, 2006 from 0.29% of our total assets at December 31,2005, reflecting the increase in our total level of nonperforming assets and adecrease in total assets.

Our allowance for loan losses represented 187.9% ofnonperforming assets as of December 31, 2006 compared to 297.3% as of December 31,2005. Our loans past-due 90 days or more and accruing increasedsignificantly, ending 2006 at $27.274 million, compared to $860,000 at the endof 2005. This increase in 90-day delinquent loans is attributable toincreases in both residential and commercial loans past due. Of the total,$16,278 million (9 loans) are well-secured commercial and commercial realestate loans, $9.845 million are first-lien residential real estate loans, and$1.044 million are residential construction loans. The past-due loans includeseveral large commercial real estate loans. All loans in this category aredeemed well-collateralized and in the process of collection.

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 2006, loans of this type that are not included in the above table ofnonperforming and past-due loans amounted to approximately $41.901 million. Twentyof the loans (83% 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 remainingfifteen loans (17% 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 $1.216 million and thelargest relationship was $9.899 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 tocollect all amounts due according to the contractual terms of the loanagreement. A loan is not considered impaired during a period of delay inpayment if we expect to collect all amounts due, including past-due interest.We generally consider a period of delay in payment to include delinquency up to90 days, but often extend this period if the loan is collateralized byresidential or commercial real estate with a low loan-to-value ratio, and wherecollection and repayment efforts are progressing. We place all loans consideredimpaired on nonaccrual status.

In accordance with SFAS No. 114, *Accounting by Creditors for Impairment of a Loan*,we measure impaired loans; (i) at the present value of expected futurecash flows discounted at the loan’s effective interest rate; (ii) at theobservable market price; or (iii) at the fair value of the collateral ifthe loan is collateral dependent.  If themeasure of the impaired loan is less than the recorded investment in the loan,an impairment is recognized through a valuation allowance and correspondingprovision for credit losses. SFAS No. 114 does not apply to larger groupsof smaller-balance homogeneous loans such as consumer installment, residentialfirst and second mortgage loans, and credit card loans. These loans arecollectively evaluated for impairment.

Loans we consider impairedat December 31, 2006 totaled $1.771 million compared to$1.702 million at December 31, 2005. At December 31, 2006 and2005, $706,000 and $687,000, respectively, of total impaired loans were realestate collateral dependent. Real estate collateral dependent loans aremeasured based on the fair value of the collateral. The valuation allowance forimpaired loans was approximately $536,000 at December 31, 2006 and$851,000 at December 31, 2005. An impaired loan is charged off when theloan, or a portion thereof, is considered uncollectible.

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***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 $924.938 million as of December 31, 2006, increasing $48.928million or 5.6% from the December 31, 2005 balance of $876.010 million. Theincrease in deposits is attributable to management’s growth strategy, whichincludes significant marketing, promotion, and cross selling of existingcustomers into additional products, as well as branch expansion. Continuedsuccessful marketing campaigns have maintained a strong mix of noninterestchecking accounts, NOW, and money market accounts. The following table detailsthe average amount and the average rate paid for each category of deposits asof December 31:

| ** **                             | ** ** | **2006**             | ** ** | **2005**          | ** ** | **2004**             | ** ** |
|----------------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|
| ***(dollars in thousands)*** | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** |
| NOW accounts                           |       | $                    | 10,945     |              |       | 0.22                 | %          |   | $ | 13,065 |   |   | 0.20 | % |   | $ | 55,488 |   |   | 0.34 | % |   |
| Money market  accounts                 |       | 241,039              |       |              | 3.26       | %                    |       | 203,222 |   |   | 1.58 | % |   | 158,802 |   |   | 0.84 | % |   |
| Savings accounts                       |       | 67,164               |       |              | 0.31       | %                    |       | 71,789 |   |   | 0.30 | % |   | 67,009 |   |   | 0.35 | % |   |
| Certificates of  deposit               |       | 388,192              |       |              | 4.08       | %                    |       | 395,645 |   |   | 3.35 | % |   | 367,847 |   |   | 3.00 | % |   |
| Total  interest-bearing deposits       |       | 707,340              |       |              | 3.38       | %                    |       | 683,721 |   |   | 2.45 | % |   | 649,146 |   |   | 1.97 | % |   |
| Noninterest-bearing  demand deposits   |       | 179,210              |       |              |       |                 |       | 174,115 |   |   |   |   |   | 143,706 |   |   |   |   |   |
| Total deposits                         |       | $                    | 886,550    |              |       | 2.70                 | %          |   | $ | 857,836 |   |   | 1.95 | % |   | $ | 792,852 |   |   | 1.62 | % |   |

 

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

| ***(dollars in thousands)*** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Maturing in:                           |       |     |       |     |       |     |       |
| 3 months or less                       |       | $        | 11,175     |     | $          | 7,038    |       | $ | 3,636 |   |
| Over 3 months through 6 months         |       | 21,886   |       | 6,899    |       | 5,411    |       |
| Over 6 months through 12 months        |       | 26,343   |       | 14,282   |       | 11,654   |       |
| Over 12 months                         |       | 94,343   |       | 132,239  |       | 124,378  |       |
|                                   |       | $        | 153,747    |     | $          | 160,458  |       | $ | 145,079 |   |

 

Core deposits representdeposits which we believe will not be affected by changes in interest rates,and therefore, will be retained regardless of the movement of interest rates. Weconsider our core deposits to be all noninterest-bearing, NOW, money marketaccounts less than $100,000, and saving deposits, as well as all time depositsless than $100,000 that mature in greater than one year. As of December 31,2006, our core deposits were $534.260 million. The remainder of our depositscould be susceptible to attrition 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 

47

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have maturities for oneyear or less and can be paid without penalty. Long-term borrowings through theFHLB have original maturities up to 14 years and generally contain prepaymentpenalties.

Long-term borrowings, which totaled $132.557 millionand $131.000 million at December 31, 2006 and December 31, 2005,respectively, consist of long-term advances from the FHLB, a mortgage loan onour former headquarters building, and a line of credit used to fund consumerfinances receivables,. As of December 31, 2006, total borrowings under theline of credit were $38.000 million, up from $36.290 million at December 31,2005. FHLB advances totaled $85,000 million at December 31, 2006, unchangedfrom December 31, 2005. In March of 2005, we purchased our formerheadquarters building and assumed the existing mortgage loan on the property. Asof December 31, 2006, the balance on the loan was $9.557 million comparedto $9.710 million as of December 31, 2005.

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 decreased$158.492 million, from $199.376 million at December 31, 2005 to $40.884million at December 31, 2006, due to the pay-off of our short-term FHLBborrowings from the proceeds of the investment security sales.

Our repurchase agreements may be short-term orlong-term, are priced at origination, and cannot be prepaid without penalty.

See Note 9 of the Notes toConsolidated Financial Statements, included in Item 8—“Financial Statements andSupplementary Data,” for further details about our borrowings and additionalborrowing capacity.

***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, 2006 and December 31, 2005.

See Note 10 of the Notesto Consolidated Financial Statements, included in Item 8—“Financial Statementsand Supplementary Data,” for more information concerning our juniorsubordinated deferrable trust debentures.

**Capital Resources**

Stockholders’ equity increased $6.254 million in 2006to $78.629 million as of December 31, 2006 from $72.375 million as of December 31,2005. Accumulated other comprehensive loss improved by $2.392 million dueprimarily to the sale of $97.387 million in securities which had net unrealizedlosses. Retained earnings grew by the retention of net income of $1.924 millionfor 2006. Common stock and additional paid-in-capital increased by $1.938million due to the sale of stock through the exercise of options ($1.519million), shares issued through the employee stock purchase plan ($365,000),and stock compensation awards ($51,000), offset by stock repurchases by theCompany of $582,000. In addition, $585,000 for the tax effect of non-qualifiedstock options was recorded in additional paid-in capital.

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.

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To date, we have provided for our capital requirementsmainly through the funds we received from stock offerings and issuances oftrust preferred securities. In the future, we may consider raising capital fromtime to time through an offering of common stock or other securities. Asreflected in the table below, both the Company and the Bank have exceeded theircapital adequacy requirements as of December 31, 2006 and 2005 and met therequirement for “well capitalized” status under Federal Banking Regulation. Wecontinually monitor our capital adequacy ratios to ensure that we exceedregulatory capital requirements.

We have a total of $71.500 million in trust preferredsecurities which are eligible as capital for regulatory purposes. As of December 31,2006, $26.518 million in trust preferred securities was included in Tier 1capital and the remaining $44.982 million was included in Total Capital. SeeNote 10 of the Notes to Consolidated Financial Statements, included inItem 8—“Financial Statements and Supplementary Data,” for more informationconcerning our 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:

| ** **                              | ** ** | **December 31,** | ** ** | **Minimum  Requirements  for Capital  Adequacy** | ** ** | **To be Well  Capitalized Under  Prompt Corrective** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2005**                                              | ** ** | **2004**                                                                 | ** ** | **Purposes** | ** ** | **Action Provision** | ** ** |
| Regulatory  capital ratios:             |       |                  |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Leverage:                               |       |                  |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Consolidated                            |       | 7.8                   | %          | 7.4                                                   | %          | 7.1                                                                      | %          |   | 4.0 | % |   |   | 5.0 | % |   |
| Bank                                    |       | 7.3                   | %          | 6.8                                                   | %          | 6.5                                                                      | %          |   | 4.0 | % |   |   | 5.0 | % |   |
| Tier 1 capital to risk-weighted assets: |       |                  |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Consolidated                            |       | 10.0                  | %          | 9.5                                                   | %          | 9.3                                                                      | %          |   | 4.0 | % |   |   | 6.0 | % |   |
| Bank                                    |       | 9.6                   | %          | 9.0                                                   | %          | 8.7                                                                      | %          |   | 4.0 | % |   |   | 6.0 | % |   |
| Total capital to risk-weighted assets:  |       |                  |       |                                                  |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Consolidated                            |       | 15.6                  | %          | 14.9                                                  | %          | 14.1                                                                     | %          |   | 8.0 | % |   |   | 10.0 | % |   |
| Bank                                    |       | 11.7                  | %          | 10.7                                                  | %          | 10.2                                                                     | %          |   | 8.0 | % |   |   | 10.0 | % |   |

 

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**Liquidity**

Liquidity describes our ability to meet financialobligations, including lending commitments and contingencies, that arise duringthe normal course of business. Liquidity is primarily needed to meet theborrowing and deposit withdrawal requirements of our customers, as well as tomeet current and planned expenditures. These cash requirements are met on adaily basis through the inflow of deposit funds, and the maintenance ofshort-term overnight investments, maturities and calls in our investment portfolio,and available lines of credit with the FHLB, which requires pledged collateral.Fluctuations in deposit and short-term borrowing balances may be influenced bythe interest rates paid, general consumer confidence and the overall economicenvironment. There can be no assurances that deposit withdrawals and loanfundings will not exceed all available sources of liquidity on a short-termbasis. Such a situation would have an adverse effect on our ability tooriginate new loans and maintain reasonable loan and deposit interest rates,which would negatively impact earnings.

The borrowing requirements of customers includecommitments to extend credit and the unused portion of lines of credit(collectively “commitments”) and totaled $294.227 million at December 31,2006. Historically, many of the commitments expire without being fully drawn;therefore, the total commitment amounts do not necessarily represent futurecash requirements. Commitments for real estate development and construction,which totaled $118.490 million, or 40.3% of the $294.227 million, are generallyshort-term in nature, satisfying cash requirements with principal repayments asconstruction properties financed are generally repaid with permanent financing.Available credit lines represent the unused portion of credit previouslyextended and available to the customer as long as there is no violation ofmaterial contractual conditions. Commitments to extend credit for residentialmortgage loans of $57.333 million, or 19.5% of the $294.227 million at December 31,2006, generally expire within 60 days. Commercial commitments to extend creditand unused lines of credit of $24.062 million, or 8.2% of the $294.227 millionat December 31, 2006, generally do not extend for more than 12 months. Consumercommitments to extend credit and unused lines of credit of $15.575 million, or5.3% of the $294.227 million at December 31, 2006, are generally openended. At December 31, 2006, available home equity lines totaled $78.767million, 26.7% of total commitments. Home equity credit lines generally extendfor a period of 10 years.

Capital expenditures for various branch locations andequipment can be a significant use of liquidity.  As of December 31, 2006, we plan onexpending approximately $6.000 million in the next 12 months on our premisesand equipment.

Customer withdrawals are also a principal use ofliquidity, but are generally mitigated by growth in customer funding sources,such as deposits and short-term borrowings. While balances may fluctuate up anddown in any given period, historically we have experienced a steady increase intotal customer funding sources.

The Bank’s principal sources of liquidity are cash andcash equivalents (which are cash on hand or amounts due from financialinstitutions, federal funds sold, money market mutual funds, and interestbearing deposits), available for sale securities, loans held for sale, depositaccounts, and borrowings. The levels of such sources are dependent on the Bank’soperating, financing, and investing activities at any given time. We continueto primarily rely on core deposits from customers to provide stable andcost-effective sources of funding to support our loan growth. We also seek toaugment such deposits with longer term and higher yielding certificates ofdeposit. Cash and cash equivalents, which totaled $42.969 million at December 31,2006, have immediate availability to meet our short-term funding needs. Ourentire investment portfolio is classified as available for sale, is highlymarketable, and available to meet our liquidity needs. Loans held for sale,which totaled $94.371 million at December 31, 2006, are committed tobe sold into the secondary market and generally are funded within 60 days.Our residential real estate portfolio includes loans that are underwritten tosecondary market criteria and provide us an additional 

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source of liquidity.Additionally, our residential construction loan portfolio provides a source ofliquidity as construction periods generally range from 9-12 months,and these loans are subsequently financed with permanent first mortgages andsold into the secondary market. Our loan to deposit ratio stood at 93.7% as of December 31,2006 and 97.2% at December 31, 2005.

We also have the ability to utilize established creditas an additional source of liquidity. To use the vast majority of our creditlines, we must pledge certain loans and/or investment securities beforeadvances can be obtained. As of December 31, 2006, we maintained lines ofcredit totaling $524.019 million, with available borrowing capacity of $254.102million based upon loans and investments available for pledging.

We are not aware of anyknown trends, demands, commitments, or uncertainties that are reasonably likelyto result in material changes in our liquidity.

**Interest RateSensitivity**

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

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

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

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

Our interest rate sensitivity position as of December 31,2006 is presented in the following table. Our assets and liabilities arescheduled based on maturity or repricing data except for mortgage loans andmortgage-backed securities that are based on prevailing prepaymentsassumptions, and core deposits which are based on core deposit studies done forbanks in the Mid-Atlantic region. The difference between our rate-sensitiveassets and rate-sensitive liabilities or the interest rate sensitivity gap, isshown at the bottom of the table. As of December 31, 2006, our interestsensitive assets exceeded our interest sensitive 

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liabilities within a oneyear period by $206.053 million or 16.3% of total assets. As of December 31,2005, our interest rate sensitive assets exceeded our interest-sensitiveliabilities by $167.664 million or 12.3% of total assets. The change inour interest rate sensitivity gap occurred primarily due to the sale oflonger-term securities during 2006. 

| ***(dollars in thousands)***                          | ** ** | **180 days  or less** | ** ** | **181 days-  one year** | ** ** | **One-five  years** | ** ** | **> 5  years  or non-  sensitive** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|---------------------|------------|-------------------------------------------------|------------|-----------|------------|
| Interest-earning  assets:                                       |       |                            |       |                              |       |                |       |                                            |       |      |       |
| Interest-bearing deposits                                       |       | $                               | 6,235      |                              | $          | —              |       | $                                               | —     |      | $          | — |   | $ | 6,235 |   |
| Securities available for sale                                   |       | 62,437                          |       | 7,907                             |       | 36,656              |       | 40,290                                          |       | 147,290   |       |
| Restricted stock investments                                    |       | 6,449                           |       | —                            |       | —              |       | —                                          |       | 6,449     |       |
| Loans held for sale                                             |       | 94,371                          |       | —                            |       | —              |       | —                                          |       | 94,371    |       |
| Loans                                                           |       | 487,530                         |       | 107,732                           |       | 239,078             |       | 32,119                                          |       | 866,459   |       |
| Total  interest-earning assets                                  |       | $                               | 657,022    |                              | $          | 115,639             |       | $                                               | 275,734    |      | $          | 72,409 |   | $ | 1,120,804 |   |
| Interest-bearing  liabilities:                                  |       |                            |       |                              |       |                |       |                                            |       |      |       |
| Savings accounts                                                |       | $                               | 3,325      |                              | $          | 2,859               |       | $                                               | 23,023     |      | $          | 29,170 |   | $ | 58,377 |   |
| NOW accounts                                                    |       | 1,291                           |       | 1,293                             |       | 10,414              |       | 13,195                                          |       | 26,193    |       |
| Money market accounts                                           |       | 223,415                         |       | 1,727                             |       | 13,911              |       | 17,625                                          |       | 256,678   |       |
| Certificates of deposit                                         |       | 50,699                          |       | 104,649                           |       | 241,622             |       | —                                          |       | 396,970   |       |
| Borrowings and junior subordinated debentures                   |       | 177,350                         |       | —                            |       | 60,259              |       | 9,556                                           |       | 247,165   |       |
| Total  interest-bearing liabilities                             |       | $                               | 456,080    |                              | $          | 110,528             |       | $                                               | 349,229    |      | $          | 69,546 |   | $ | 985,383 |   |
| Interest rate  sensitive gap position:                          |       |                            |       |                              |       |                |       |                                            |       |      |       |
| Period                                                          |       | $                               | 200,942    |                              | $          | 5,111               |       | $                                               | (73,495    | )         | $          | 2,863 |   |   |   |
| % of assets                                                     |       | 15.91                           | %          | 0.40                              | %          | (5.82               | )%         | 0.23                                            | %          |      |       |
| Cumulative                                                      |       | $                               | 200,942    |                              | $          | 206,053             |       | $                                               | 132,558    |      | $          | 135,421 |   |   |   |
| % of assets                                                     |       | 15.91                           | %          | 16.31                             | %          | 10.49               | %          | 10.72                                           | %          |      |       |
| Cumulative risk  sensitive assets to risk sensitive liabilities |       | 144.06                          | %          | 136.37                            | %          | 114.47              | %          | 113.74                                          | %          |      |       |

 

While we monitor interest rate sensitivity reports, weprimarily test our interest rate sensitivity through the deployment ofsimulation analysis. We use earnings simulation models to estimate what effectspecific interest rate changes would have on our net interest income and netincome. Simulation analysis provides us with a more rigorous and dynamicmeasure of interest sensitivity. Derivative financial instruments, such asinterest rate caps, are included in the analysis. Changes in prepayments havebeen included where changes in behavior patterns are assumed to be significantto the simulation, particularly mortgage related assets. Call features oncertain securities and borrowings are based on their call probability in viewof the projected rate change, and pricing features such as interest rate floorsare incorporated. Our fee income produced by mortgage-banking operations mayalso be impacted by changes in rates. As long-term rates increase, the volumeof fixed rate mortgage loans originated for sale in the secondary market maydecline and reduce our revenues generated by this line of business. We attemptto structure our asset and liability management strategies to mitigate theimpact on net interest income by changes in market interest rates. However,there can be no assurance that we will be able to manage interest rate risk soas to avoid significant adverse effects on net interest income. At December 31,2006, the simulation model provided the following profile of our interest rate riskmeasured over a one-year time horizon, assuming a parallel shift in a yieldcurve based off the U.S. dollar forward swap curve adjusted for certain pricingassumptions: 

| ** **          | ** ** | **Immediate Rate Change** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **+200BP**                          | ** ** | **-200BP** | ** ** |
| Net interest income |       |                                | 1.86       | % |   | -1.84% |   |
|                     |            |                                     |            |  |  |  |  |

 

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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 not affectall earning assets and interest-bearing liabilities equally or simultaneously. Inaddition, gap reports depict the existing structure, excluding exposure arisingfrom new business. While the simulation process is a powerful tool in analyzinginterest rate sensitivity, many of the assumptions used in the process arehighly qualitative and subjective, and are subject to the risk that pasthistorical activity may not generate accurate predictions of the future. Themodel also assumes parallel movements in interest rates, which means bothshort-term and long-term rates will change equally. Nonparallel changes ininterest rates (short-term rates changing differently from long-term rates)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.

**Off-Balance SheetArrangements**

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.

Outstanding loan commitments, unused lines of credit,and letters of credit were as follows at December 31, 2006:

| ***(dollars in thousands)*** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| Commitments to  extend credit          |       | $          | 175,823    |   |
| Unused lines of  credit                |       | 118,404    |       |
| Letters of credit                      |       | 4,677      |       |
|                                   |       | $          | 298,904    |   |

 

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 31,2006, the aggregate contractual obligations and commitments are:

| ** **                                             | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ***(dollars in thousands)***                 | ** ** | **Total**                                 | ** ** | **Less than  one year** | ** ** | **1-3  Years** | ** ** | **3-5  years** | ** ** | **After  5 years** | ** ** |
| Certificates of  deposit                               |       | $                                         | 396,970    |   | $ | 166,398 |   | $ | 186,085 |   | $ | 44,487 |   | $ | — |   |
| Borrowings and  junior subordinated debentures         |       | 247,165                                   |       | 40,884 |   | 38,000 |   | 60,000 |   | 108,281 |   |
| Annual rental  commitments under non-cancelable leases |       | 32,655                                    |       | 4,284 |   | 7,637 |   | 5,409 |   | 15,325 |   |
|                                                   |       | $                                         | 676,790    |   | $ | 211,566 |   | $ | 231,722 |   | $ | 109,896 |   | $ | 123,606 |   |

* *

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*Rate Lock Commitments andForward Sales of Securities.*   We enter into ratelock commitments, under which we, through the mortgage-banking segment,originate residential mortgage loans with interest rates determined prior tofunding. Rate lock commitments on mortgage loans that we intend to sell in thesecondary market are considered derivatives. The period of time betweenissuance of a loan commitment and closing and sale of the loan generally rangesfrom 14 days to 60 days. For these rate lock commitments, we protect theCompany from changes in interest rates through the use of best efforts forwarddelivery commitments and, in the case of mandatory delivery commitments,through forward sales of MBS and Eurodollar contracts.

Under best efforts forwarddelivery commitments, we protect the Company from changes in interest rates byentering in to agreements whereby we commit to sell a loan at the time theborrower commits to an interest rate with the intent that the buyer has assumedinterest rate risk on the loan. As a result, we are not exposed to losses norwill we realize gains related to our rate lock commitments due to changes ininterest rates unless there would be a failure to honor the rate lockcommitment by the counterparty. We mitigate counterparty risk by entering intoforward delivery commitments with proven counterparties with whom we havesignificant previous experience and have performed significant due diligence.

Under mandatory deliverycommitments, we are exposed to price risk from the time a rate lock commitmentis made to a mortgage applicant until the time the mortgage loan is sold. Tomanage this risk we use forward sales of agency mortgage-backed securities andEurodollar contracts. Additionally, under mandatory delivery commitments, weremain exposed to basis risk in that the changes in value of our hedges may notequal or completely offset the changes in value of the rate commitments beinghedged. This can result due to changes in the market demand for our mortgageloans brought about by supply and demand considerations and perceptions about creditrisk relative to the agency securities. We also mitigate counterparty risk byentering into mandatory delivery commitments with proven counterparties andforward sales of mortgage-backed securities and Eurodollar contracts withpre-approved financial intermediaries.

At December 31, 2006,we had $49.353 million in total rate lock commitments of which $31.032 millionconsisted of best efforts forward delivery commitments and $18.321 million ofmandatory delivery commitments.

*Notional Amount ofDerivatives.**  *TheBank, through First Mariner Mortgage, enters into interest rate lockcommitments, which are commitments to originate loans whereby the interest rateon the loan is determined prior to funding and the customers have locked intothat interest rate. The Bank also has corresponding forward sales commitmentsrelated to these interest rate lock commitments, both on an individual loanbasis (“best efforts”) and in bulk (“mandatory delivery”). The market value ofrate lock commitments and best efforts contracts is not readily ascertainablewith precision because rate lock commitments and best efforts contracts are notactively traded in stand-alone markets. The Bank determines the fair value ofrate lock commitments and best efforts contracts by measuring the change in thevalue of the underlying asset, while taking into consideration the probabilitythat the rate lock commitments will close. Fair value for mandatory deliverycontracts is more ascertainable.

Information pertaining tothe notional amounts of our derivative financial instruments follows as of December 31,2006.  The fair values of thesederivative financial instruments are recorded in our consolidated balance sheetin accordance with SFAS No. 133.

| ***(dollars in thousands)***                                | ** ** | **Notional  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| Interest rate  lock commitments                                       |       | $                    | 49,353     |                           |       | $ | 49,282 |   |   |
| Open hedge  positions:                                                |       |                 |       |                           |       |   |   |
| Forward sales  commitments on loan pipeline and funded loans          |       | $                    | 99,555     |                           |       | $ | 99,572 |   |   |
| Forward contracts to  sell mortgage-backed securities and Eurodollars |       | $                    | 59,500     |                           |       | $ | 59,512 |   |   |

 

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The net effect on our income statement from marking tomarket the forward contracts, the interest rate lock commitments and mortgageloans held for sale are not considered material to the overall operations ofthe consolidated company.

Changes in interest ratescould materially affect the fair value of derivative loan commitments on ourconsolidated financial statements. In reality, one would not expect all otherassumptions to remain constant. Changes in one factor may result in changes inanother (for example, changes in interest rates could result in changes in thefallout factor), which might magnify or counteract the sensitivities. This isbecause the impact of an interest rate shift on the fallout ratio isnon-symmetrical and non-linear.

**Impact of Inflationand 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 adversely affectour results of operations unless the fees we charge could be increasedcorrespondingly.

Our consolidated financialstatements and notes thereto included in Item 8—“Financial Statements andSupplementary Data,” have been prepared in accordance with generally acceptedaccounting principles, which require the measurement of financial position andoperating results in terms of historical dollars without considering the changein the relative purchasing power of money over time and due to inflation. The impactof inflation is reflected in the increased cost of our operations. Unlike mostindustrial companies, nearly all of our assets are monetary in nature. As aresult, interest rates have a greater impact on our performance than do theeffects of general levels of inflation. Interest rates do not necessarily movein the same direction or to the same extent as the price of goods and services.We believe that the impact of inflation was not material for 2006 or 2005.

**Recent AccountingPronouncements**

See Note 21 of the Notesto Consolidated Financial Statements, included in Item 8—“Financial Statementsand Supplementary Data,” for discussion of recent accounting pronouncements.

**Financial Review2005/2004**

For the year ended December 31, 2005, we recordednet income of $7.822 million or $1.20 per diluted share, an increase of28.2% from net income of $6.101 million income or $0.96 per diluted sharein 2004. Our gross revenue (net interest income and noninterest income)increased $9.107 million while our noninterest expenses, the provision forcredit losses and income taxes increased by $7.386 million.

Our net interest income for 2005 increased$5.282 million or 12.4% from 2004, due to growth in average earning assetsof 17.7% over the prior year. Our net interest margin decreased 18 basis pointsto 3.88% in 2005 compared to 4.06% in 2004. The increase in our net interestincome resulted primarily due to the increase in average interest earningassets and in the yield on earning assets from 6.24% in 2004 to 6.67% in 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% in 2004 to 3.16% in 2005.

Our provision for loan losses increased to$3.287 million in 2005 from $2.243 million in 2004. Our allowance forloan losses at December 31, 2005 represented 1.38% of loans outstanding,an increase from December 31, 2004 of 1.28% of loans outstanding. Werecognized net chargeoffs of $1.124 million in 2005 compared to $1.355 millionin 2004.

Our total noninterest income increased 19.9% to$23.015 million, which included a significant decrease in gains on salesof investment securities. Securities gains in 2005 totaled $0 compared to$440,000 for 2004. Excluding gains on sales of securities, our noninterestincome increased $4.265 million 

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or 22.7%. The increase wasmostly due to an increase in our revenue from mortgage-banking activities thatincreased by $2.391 million or 48.6%, driven by higher levels of loansoriginated and sold into the secondary market, somewhat offset by modestlytighter pricing margins and increases in forfeited revenue for earlyprepayments and defaults. Our service fees on deposits increased $286,000 or4.1% as a result of increased demand deposit account volume. ATM fees increased$299,000 due to higher volumes of ATM. Sales of other insurance products fromFinance Maryland increased $993,000.

We incurred noninterest expense growth of 10.6% to$56.340 million in 2005. Our salaries and benefits increased 16.5% to$30.909 million primarily due to additional personnel costs for new positionssupporting the increase in the number of loans and deposits, staffing hired tosupport the expansion of the consumer finance company and wholesale mortgageactivities, increased costs of employer provided health care, and higherperformance-based incentive costs. Our occupancy costs decreased by 2.4% or$151,000, reflecting a decrease in lease expense due to the purchase of our(former) headquarters building in March of 2005. Our professional servicesincreased by $265,000 or 35.1% due to higher service and maintenance expensesfor our increased number of locations. The increase in our other expenses isprimarily due to increases in consulting, postage, and charitablecontributions.

We recorded income taxexpense of $3.289 million in 2005, compared to $2.361 millionrecorded in 2004. Our effective income tax rate for 2005 was 29.6% compared to27.9% for 2004. The increase in our effective tax rate was due to higherpre-tax income for 2005 of $11.111 million compared to $8.462 million in 2004. Theeffective tax rate increased due to lower levels of tax-exempt income relativeto pre-tax income in 2005 as compared to 2004.

**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 ofIndependent Registered Public Accounting Firm**

Board of Directors and StockholdersFirst Mariner BancorpBaltimore, Maryland

We have audited the accompanying consolidatedstatements of financial condition of First Mariner Bancorp and Subsidiaries(the “Company”) as of December 31, 2006 and 2005 and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2006.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, 2006 and2005, and the results of their operations and cash flows for each of the threeyears in the period ended December 31, 2006, in conformity with accountingprinciples generally accepted in the United States of America.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31,2006, based on the criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated March 3,2007 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 3,  2007  |   |                            |

 

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**FIRST MARINER BANCORP AND SUBSIDIARIESConsolidated Statements of Financial Condition**

| ** **                                                                                                                       | ** **   | **December 31,**                  | ** **   | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------|--------------|-----------------------|------------|
| ** **                                                                                                                       | ** **   | **2006**                               | ** **   | **2005**              | ** ** |
| ** **                                                                                                                       | *** *** | ***(dollars in thousands)*** | *** *** |
| **ASSETS**                                                                                                                       |         |                                   |         |                  |       |   |   |   |   |
| Cash and due from  banks                                                                                                         |         |                                   | $            | 36,734                |       |   |   | $ | 40,157 |   |   |
| Federal funds  sold and interest-bearing deposits                                                                                |         |                                   | 6,235        |                  |       |   | 5,678 |   |   |
| Securities  available for sale, at fair value                                                                                    |         |                                   | 147,290      |                  |       |   | 276,939 |   |   |
| Loans held for  sale                                                                                                             |         |                                   | 94,371       |                  |       |   | 92,351 |   |   |
| Loans receivable                                                                                                                 |         |                                   | 866,459      |                  |       |   | 851,586 |   |   |
| Allowance for  loan losses                                                                                                       |         |                                   | (12,399      | )                     |       |   | (11,743 | ) |   |
| Loans, net                                                                                                                       |         |                                   | 854,060      |                  |       |   | 839,843 |   |   |
| Real estate  acquired through foreclosure                                                                                        |         |                                   | 2,440        |                  |       |   | 931 |   |   |
| Restricted stock  investments                                                                                                    |         |                                   | 6,449        |                  |       |   | 13,647 |   |   |
| Premises and  equipment, net                                                                                                     |         |                                   | 49,062       |                  |       |   | 40,402 |   |   |
| Accrued interest  receivable                                                                                                     |         |                                   | 10,579       |                  |       |   | 8,037 |   |   |
| Deferred income  taxes                                                                                                           |         |                                   | 6,806        |                  |       |   | 5,940 |   |   |
| Bank-owned life  insurance                                                                                                       |         |                                   | 33,492       |                  |       |   | 27,375 |   |   |
| Prepaid expenses  and other assets                                                                                               |         |                                   | 15,772       |                  |       |   | 11,178 |   |   |
| Total assets                                                                                                                     |         |                                   | $            | 1,263,290             |       |   |   | $ | 1,362,478 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                   | ** **   |                                   |         |                  |       |   |   |   |   |
| Liabilities:                                                                                                                     |         |                                   |         |                  |       |   |   |   |   |
| Deposits:                                                                                                                        |         |                                   |         |                  |       |   |   |   |   |
| Noninterest-bearing                                                                                                              |         |                                   | $            | 186,720               |       |   |   | $ | 182,049 |   |   |
| Interest-bearing                                                                                                                 |         |                                   | 738,218      |                  |       |   | 693,961 |   |   |
| Total deposits                                                                                                                   |         |                                   | 924,938      |                  |       |   | 876,010 |   |   |
| Short-term borrowings                                                                                                            |         |                                   | 40,884       |                  |       |   | 199,376 |   |   |
| Long-term borrowings                                                                                                             |         |                                   | 132,557      |                  |       |   | 131,000 |   |   |
| Junior subordinated deferrable interest debentures                                                                               |         |                                   | 73,724       |                  |       |   | 73,724 |   |   |
| Accrued expenses and other liabilities                                                                                           |         |                                   | 12,558       |                  |       |   | 9,993 |   |   |
| Total liabilities                                                                                                                |         |                                   | 1,184,661    |                  |       |   | 1,290,103 |   |   |
| Stockholders’  equity:                                                                                                      |         |                                   |         |                  |       |   |   |   |   |
| Common stock, $.05 par value; 20,000,000 shares authorized;  6,427,725 and 6,262,442 shares issued and outstanding, respectively |         |                                   | 321          |                  |       |   | 313 |   |   |
| Additional paid-in capital                                                                                                       |         |                                   | 57,123       |                  |       |   | 55,193 |   |   |
| Retained earnings                                                                                                                |         |                                   | 22,109       |                  |       |   | 20,185 |   |   |
| Accumulated other comprehensive loss                                                                                             |         |                                   | (924         | )                     |       |   | (3,316 | ) |   |
| Total stockholders’ equity                                                                                                  |         |                                   | 78,629       |                  |       |   | 72,375 |   |   |
| Total liabilities  and stockholders’ equity                                                                                 |         |                                   | $            | 1,263,290             |       |   |   | $ | 1,362,478 |   |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRST MARINER BANCORP AND SUBSIDIARIESConsolidated Statements of Operations**

| ** **                                              | ** **   | **For the Years Ended December 31,**                 | ** **   |
|---------------------------------------------------------|--------------|-------------------------------------------------------------------------------|--------------|
| ** **                                              | ** **   | **2006**                                                                      | ** **   | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | *** *** | ***(dollars in thousands,  except per share data)*** | *** *** |
| Interest income:                                   |         |                                                                          |         |   |   |   |   |
| Loans                                                   |         | $                                                                             | 82,154       |   | $ | 68,136 |   | $ | 51,549 |   |
| Investments and other  earning assets                   |         | 13,594                                                                        |         | 13,924 |   | 13,721 |   |
| Total interest income                                   |         | 95,748                                                                        |         | 82,060 |   | 65,270 |   |
| Interest expense:                                       |         |                                                                          |         |   |   |   |   |
| Deposits                                                |         | 23,920                                                                        |         | 16,729 |   | 12,808 |   |
| Short-term borrowings                                   |         | 9,299                                                                         |         | 6,596 |   | 1,259 |   |
| Long-term borrowings                                    |         | 13,263                                                                        |         | 11,012 |   | 8,762 |   |
| Total interest expense                                  |         | 46,482                                                                        |         | 34,337 |   | 22,829 |   |
| Net interest income                                     |         | 49,266                                                                        |         | 47,723 |   | 42,441 |   |
| Provision for loan  losses                              |         | 2,315                                                                         |         | 3,287 |   | 2,243 |   |
| Net interest income  after provision for loan losses    |         | 46,951                                                                        |         | 44,436 |   | 40,198 |   |
| Noninterest income:                                     |         |                                                                          |         |   |   |   |   |
| Gain on sale of mortgage  loans                         |         | 7,614                                                                         |         | 5,018 |   | 3,349 |   |
| Other mortgage-banking  revenue                         |         | 2,892                                                                         |         | 2,289 |   | 1,567 |   |
| ATM fees                                                |         | 3,161                                                                         |         | 3,135 |   | 2,836 |   |
| Service fees on deposits                                |         | 6,887                                                                         |         | 7,185 |   | 6,899 |   |
| (Loss) gain on sales of  investment securities, net     |         | (3,037                                                                        | )            | — |   | 440 |   |
| Commissions on sales of  nondeposit investment products |         | 638                                                                           |         | 531 |   | 649 |   |
| Income from bank-owned  life insurance                  |         | 1,117                                                                         |         | 1,031 |   | 1,072 |   |
| Commissions on sales of  other insurance products       |         | 2,671                                                                         |         | 2,512 |   | 1,519 |   |
| Other                                                   |         | 1,824                                                                         |         | 1,314 |   | 859 |   |
| Total noninterest income                                |         | 23,767                                                                        |         | 23,015 |   | 19,190 |   |
| Noninterest expenses:                                   |         |                                                                          |         |   |   |   |   |
| Salaries and employee  benefits                         |         | 34,990                                                                        |         | 30,909 |   | 26,523 |   |
| Net occupancy                                           |         | 8,012                                                                         |         | 6,104 |   | 6,255 |   |
| Furniture, fixtures, and  equipment                     |         | 3,162                                                                         |         | 3,057 |   | 3,005 |   |
| Professional services                                   |         | 958                                                                           |         | 1,021 |   | 756 |   |
| Advertising                                             |         | 1,341                                                                         |         | 1,352 |   | 1,455 |   |
| Data processing                                         |         | 1,811                                                                         |         | 2,006 |   | 2,079 |   |
| ATM expenses                                            |         | 962                                                                           |         | 1,146 |   | 1,112 |   |
| Service and maintenance                                 |         | 2,202                                                                         |         | 1,833 |   | 1,485 |   |
| Secondary marketing  valuation                          |         | 4,450                                                                         |         | — |   | — |   |
| Other                                                   |         | 11,271                                                                        |         | 8,912 |   | 8,256 |   |
| Total noninterest  expenses                             |         | 69,159                                                                        |         | 56,340 |   | 50,926 |   |
| Net income before income  taxes                         |         | 1,559                                                                         |         | 11,111 |   | 8,462 |   |
| Income tax (benefit)  expense                           |         | (365                                                                          | )            | 3,289 |   | 2,361 |   |
| Net income                                              |         | $                                                                             | 1,924        |   | $ | 7,822 |   | $ | 6,101 |   |
| Net income per common share:                            |         |                                                                          |         |   |   |   |   |
| Basic                                                   |         | $                                                                             | 0.30         |   | $ | 1.28 |   | $ | 1.06 |   |
| Diluted                                                 |         | $                                                                             | 0.29         |   | $ | 1.20 |   | $ | 0.96 |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRST MARINER BANCORP AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders’ Equity**

| ** **                                     | ** ** | **For the Years Ended December 31, 2006, 2005, and 2004** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **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, 2004                |       |                                                                                                   | 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 |   |   |
| Net income                                     |       |                                                                                                   | —     |   |   |   | — |   |   |   | — |   |   |   | 1,924 |   |   |   | — |   |   |   | 1,924 |   |   |
| Common stock issued, net of costs of  issuance |       |                                                                                                   | 196,183    |   |   |   | 9 |   |   |   | 1,875 |   |   |   | — |   |   |   | — |   |   |   | 1,884 |   |   |
| Common stock repurchased, net of costs         |       |                                                                                                   | (30,900    | ) |   |   | (1 | ) |   |   | (581 | ) |   |   | — |   |   |   | — |   |   |   | (582 | ) |   |
| Stock-based compensation expense               |       |                                                                                                   | —     |   |   |   | — |   |   |   | 51 |   |   |   | — |   |   |   | — |   |   |   | 51 |   |   |
| Tax effect of options                          |       |                                                                                                   | —     |   |   |   | — |   |   |   | 585 |   |   |   | — |   |   |   | — |   |   |   | 585 |   |   |
| Other comprehensive income                     |       |                                                                                                   | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,392 |   |   |   | 2,392 |   |   |
| Balance at  December 31, 2006             |       |                                                                                                   | 6,427,725  |   |   |   | $ | 321 |   |   |   | $ | 57,123 |   |   |   | $ | 22,109 |   |   |   | $ | (924 | ) |   |   | $ | 78,629 |   |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRST MARINER BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows**

| ** **                                                                               | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | ***(dollars in thousands)***                        | ** ** |
| Cash flows from operating  activities:                                                   | * *   | * *                                                      | * *   | * * | * * | * * | * * |
| Net income                                                                               |       | $                                                             | 1,924      |   | $ | 7,822 |   | $ | 6,101 |   |
| Adjustments to reconcile  net income to net cash from operating activities:              |       |                                                          |       |   |   |   |   |
| Stock-based compensation                                                                 |       | 51                                                            |       | — |   | — |   |
| Depreciation and amortization                                                            |       | 4,744                                                         |       | 3,872 |   | 3,323 |   |
| Amortization of unearned loan fees and costs, net                                        |       | (1,022                                                        | )          | (923 | ) | (1,078 | ) |
| Amortization of premiums and discounts on loans, net                                     |       | (690                                                          | )          | (724 | ) | (914 | ) |
| Amortization of premiums and discounts on  mortgage-backed securities, net               |       | 218                                                           |       | 267 |   | 563 |   |
| Gain on sale of mortgage loans                                                           |       | (7,614                                                        | )          | (5,018 | ) | (3,349 | ) |
| Loss (gain) on sale of securities available for sale                                     |       | 3,037                                                         |       | — |   | (440 | ) |
| Gain on real estate acquired through foreclosure                                         |       | (14                                                           | )          | — |   | (62 | ) |
| Valuation allowance on real estate acquired through  foreclosure                         |       | 297                                                           |       | — |   | — |   |
| Secondary marketing reserve and valuation allowance  on repurchased loans                |       | 4,450                                                         |       | — |   | — |   |
| Increase in accrued interest receivable                                                  |       | (2,542                                                        | )          | (1,620 | ) | (1,462 | ) |
| Provision for loan losses                                                                |       | 2,315                                                         |       | 3,287 |   | 2,243 |   |
| Increase in cash surrender value of bank-owned life  insurance                           |       | (1,117                                                        | )          | (1,031 | ) | (1,072 | ) |
| Originations of mortgage loans held for sale                                             |       | (1,191,676                                                    | )          | (1,199,017 | ) | (674,984 | ) |
| Proceeds from mortgage loans held for sale                                               |       | 1,197,271                                                     |       | 1,191,639 |   | 654,084 |   |
| Excess tax benefit on stock-based compensation                                           |       | (585                                                          | )          | — |   | — |   |
| Deferred taxes                                                                           |       | (2,372                                                        | )          | (961 | ) | 390 |   |
| Net (decrease) increase in accrued expenses and other  liabilities                       |       | (1,884                                                        | )          | 4,103 |   | 1,027 |   |
| Net (increase) decrease in prepaids and other assets                                     |       | (4,014                                                        | )          | (715 | ) | 3,654 |   |
| Net cash provided by (used in) operating activities                                      |       | 777                                                           |       | 981 |   | (11,976 | ) |
| Cash flows from investing  activities:                                                   |       |                                                          |       |   |   |   |   |
| Loan disbursements, net of principal repayments                                          |       | (17,493                                                       | )          | (105,782 | ) | (132,424 | ) |
| Purchases of premises and equipment                                                      |       | (13,444                                                       | )          | (27,067 | ) | (2,767 | ) |
| Proceeds from disposals of premises and equipment                                        |       | 40                                                            |       | 239 |   | — |   |
| Sales (purchases) of restricted stock investments,  net                                  |       | 7,198                                                         |       | (1,761 | ) | (4,621 | ) |
| Activity  in securities available for sale:                                              |       |                                                          |       |   |   |   |   |
| Sales                                                                                    |       | 97,387                                                        |       | — |   | 18,674 |   |
| Maturities/calls/repayments                                                              |       | 39,190                                                        |       | 50,939 |   | 153,175 |   |
| Purchases                                                                                |       | (6,284                                                        | )          | (10,367 | ) | (208,549 | ) |
| Proceeds from sales of real estate acquired through  foreclosure                         |       | 881                                                           |       | — |   | 404 |   |
| Purchase of bank-owned life insurance                                                    |       | (5,000                                                        | )          | — |   | (10,000 | ) |
| Net cash provided by (used in) investing activities                                      |       | 102,475                                                       |       | (93,799 | ) | (186,108 | ) |
| Cash flows from financing  activities:                                                   |       |                                                          |       |   |   |   |   |
| Net increase in deposits                                                                 |       | 48,929                                                        |       | 50,593 |   | 77,684 |   |
| Net (decrease) increase in other borrowed funds and  junior subordinated debentures |       | (156,934                                                      | )          | 74,190 |   | 108,087 |   |
| Repayment of repurchase agreements                                                       |       | —                                                        |       | (25,000 | ) | — |   |
| Excess tax benefit on stock-based compensation                                           |       | 585                                                           |       | — |   | — |   |
| Proceeds from stock issuance, net of costs                                               |       | 1,884                                                         |       | 5,001 |   | 1,690 |   |
| Repurchase of common stock, net of costs                                                 |       | (582                                                          | )          | (1,578 | ) | (609 | ) |
| Net cash (used in) provided by financing activities                                      |       | (106,118                                                      | )          | 103,206 |   | 186,852 |   |
| Net (decrease) increase in cash and cash equivalents                                     |       | (2,866                                                        | )          | 10,388 |   | (11,232 | ) |
| Cash and cash equivalents at beginning of period                                         |       | 45,835                                                        |       | 35,447 |   | 46,679 |   |
| Cash and cash equivalents at end of period                                               |       | $                                                             | 42,969     |   | $ | 45,835 |   | $ | 35,447 |   |
| Supplemental  information:                                                               |       |                                                          |       |   |   |   |   |
| Interest paid on deposits and borrowed funds                                             |       | $                                                             | 46,038     |   | $ | 33,769 |   | $ | 22,494 |   |
| Income taxes paid                                                                        |       | 2,925                                                         |       | 3,509 |   | 2,064 |   |
| Real estate  acquired through foreclosure                                                |       | 2,673                                                         |       | 866 |   | 115 |   |

 

*See accompanying notes to Consolidated Financial Statements*

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**FIRSTMARINER BANCORP AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements**

**For the Years EndedDecember 31, 2006, 2005, and 2004**

**(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 2006.

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***

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 as tradingsecurities if bought and held principally for the purpose of selling them inthe near term. Trading securities are reported at estimated fair value, withunrealized 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 

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reported at estimated fairvalue, with unrealized gains and losses reported as a separate component ofstockholders’ equity, net of tax effects, in accumulated other comprehensiveincome. As of December 31, 2006 and 2005, all of our investment securitieswere classified as available for sale.

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

***Loans Held for Sale***

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

***Derivative Loan Commitments HedgingActivities***

In connection with ourmortgage-banking activities, we enter into commitments to fund residentialmortgage loans at specified times in the future. We enter into thesecommitments through retail and broker channels and also purchase loancommitments from correspondent lenders. A mortgage loan commitment binds theCompany to lend funds to a potential borrower at a specified interest rate andwithin a specified period of time, generally up to 90 days after inception ofthe rate lock commitment. Such a commitment is referred to as a derivative loancommitment if the loan that will result from exercise of the commitment will beheld for sale upon funding under Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities*, as amended by SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*. As such, loan commitments that arederivatives must be recognized at fair value on the consolidated statements offinancial condition with changes in their fair values recorded as part ofincome from mortgage-banking operations. The fair value of derivative loancommitments is considered the value that would be generated when the loanarising from exercise of the loan commitment is sold in the secondary mortgagemarket. For accounting purposes, we value this commitment to zero at inception,consistent with the concepts embodied in EITF 02-3, *Issues Involved in Accounting for DerivativeContracts Held for Trading Purposes and Contracts Involved in Energy Tradingand Risk Management Activities*. Subsequent to inception, we estimatethe fair value of the commitment, taking into consideration the probability offunding of the loan, and compare it to the fair value calculated at inceptionto measure the change in value, which is recorded through current periodearnings with a corresponding asset for an increase in value or a liability fora decrease in value.

***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. For smaller loans, we place loans in nonaccrual status when theyare contractually past due 90 days as to either principal or interest,unless the loan is well secured and in the process of collection or earlier,when, in the opinion of management, the collection of principal and interest isin doubt. For larger loans, Management applies SFAS No. 114, *Accounting by Creditors for Impairment of a Loan*,to determine accrual status. Under SFAS No. 114, when it is probable thatwe will be unable to collect all payments due, including interest, we place theloan on nonaccrual. Management may grant a waiver from nonaccrual 

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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 and the borrower demonstrates the ability to payand remain current. As a result of our ongoing review of the loan portfolio, wemay classify loans as nonaccrual even though the presence of collateral or theborrowers financial strength may be sufficient to provide for ultimaterepayment. We recognize interest on nonaccrual loans only when it is received.Loans are charged-off when a loan or a portion thereof is considereduncollectible.

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

We determine a loan to be impaired when, based oncurrent information and events, it is probable that we will be unable tocollect all amounts due according to the contractual terms of the loanagreement. We do not consider a loan impaired during a period of delay inpayment if we expect to collect all amounts due, including interest past-due.Generally we consider a period of delay in payment to include delinquency up to90 days, but often extend this period if the loan is collateralized byresidential or commercial real estate with a low loan-to-value ratio, and wherecollection and repayment efforts are progressing. We place all loans consideredimpaired on nonaccrual status.

When the ultimatecollectibility of an impaired loan’s principal is in doubt, wholly orpartially, all cash receipts are applied to principal. Once the recordedprincipal balance has been reduced to zero, future cash receipts are applied tointerest income, to the extent any interest has been foregone, and then theyare recorded as recoveries of any amounts previously charged off. When thisdoubt no longer exists, cash receipts are applied under the contractual terms ofthe loan agreements. Origination and commitment fees and direct originationcosts on loans held for investment generally are deferred and amortized toincome over the contractual lives of the related loans using the interestmethod. Under certain circumstances, commitment fees are recognized over thecommitment period or upon expiration of the commitment. Fees to extend loansthree months or less are recognized in income upon receipt. Unamortized loanfees are recognized in income when the related loans are sold or prepaid.

***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 SFAS No. 5, *Accounting forContingencies,* or SFAS No. 114, *Accounting by Creditors for Impairment of a Loan.* Theadequacy of the allowance for loan losses is determined through careful andcontinuous review and evaluation of the loan portfolio and involves thebalancing of factors as outlined below to establish a prudent level. Loansdeemed uncollectible are charged against, while recoveries are credited to, theallowance. Management adjusts the level of the allowance through the provisionfor loan losses, which is recorded as a current period operating expense. Ourmethodology for assessing the appropriateness of the allowance consists ofseveral key elements, which include the formula allowance, specific allowanceand the unallocated allowance.

The formula allowance is calculated by applying lossfactors to corresponding categories of outstanding homogenous loans. Lossfactors are based on our historical loss experience, or for newer 

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classes of loans,management’s estimate of probable losses. The use of these loss factors isintended to reduce the difference between estimated losses inherent in theportfolio and observed losses.

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

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

***Real Estate Acquired Through Foreclosure***

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 

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maintenanceare expensed when incurred. The cost and accumulated depreciation oramortization is eliminated from the accounts when an asset is sold or retiredand the resultant gain or loss is credited or charged to income. Premises andequipment have estimated useful lives ranging from 3 to 39 years. Wecapitalize the cost of imputed interest we incur for significant real estateconstruction and development and charge the amount of capitalized interest todepreciation expense on a straight-line basis over the useful life of theasset. Capitalized interest is computed and capitalized based on the averageinvested amount in the development project over the construction period at therate of the company’s incremental 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.

***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.

***Net Income Per Share***

Our basic income per shareis computed by dividing net income available to common stockholders 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***

In January 2006, we adopted SFAS No. 123R,  Share-Based Payment (Revised 2004), for ourstockholder-approved Long-Term Incentive Plan, which permits the grant of shareoptions and shares to our directors and key employees. We made the transitionto fair value-based compensation using the 

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modified version of theprospective application, which means the fair value-based method prescribedunder SFAS 123R applies to new awards, modification of previous awards,repurchases and cancellations after January 1, 2006 and to any awards thatretain service requirements after January 1, 2006.

Prior to January 1,2006, we applied the intrinsic value method to account for stock-basedemployee compensation plans. Under this method, compensation cost is recognizedfor awards of shares of common stock to employees only if the quoted marketprice of the stock at the grant date (or other measurement date, if later) isgreater than the amount the employee must pay to acquire the stock.

***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 $1.341 million, $1.352 million, and$1.455 million for the years ended December 31, 2006, 2005, and 2004,respectively.

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

TheBank is required by the Federal Reserve System (“FRB”) to maintain certain cashreserve balances based principally on deposit liabilities. At both December 31,2006 and 2005, the required reserve balance was $1.000 million.

**(3)  SecuritiesAvailable for Sale**

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

| ** **                                       | ** ** | **2006**            | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| ***(dollars in thousands)***           | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Mortgage-backed  securities                      |       | $                   | 64,108     |   |   | $ | 173 |   |   |   | $ | 2,000 |   |   | $ | 62,281 |   |
| Trust preferred  securities                      |       | 33,056              |       |   | 129 |   |   |   | 157 |   |   | 33,028 |   |
| Equity securities                                |       | 1,046               |       |   | 349 |   |   |   | — |   |   | 1,395 |   |
| U.S. Treasury  securities                        |       | 1,000               |       |   | — |   |   |   | 2 |   |   | 998 |   |
| Obligations of  state and municipal subdivisions |       | 2,937               |       |   | 28 |   |   |   | — |   |   | 2,965 |   |
| U.S. government  agency notes                    |       | 40,000              |       |   | — |   |   |   | 106 |   |   | 39,894 |   |
| Corporate  obligations                           |       | 1,907               |       |   | 81 |   |   |   | — |   |   | 1,988 |   |
| Foreign government  bonds                        |       | 1,750               |       |   | — |   |   |   | — |   |   | 1,750 |   |
| Other bonds and  annuities                       |       | 2,991               |       |   | — |   |   |   | — |   |   | 2,991 |   |
|                                             |       | $                   | 148,795    |   |   | $ | 760 |   |   |   | $ | 2,265 |   |   | $ | 147,290 |   |

 

| ** **                                       | ** ** | **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 |   |

 

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Contractualmaturities of debt securities at December 31, 2006 are shown below. Actualmaturities may differ from contractual maturities because borrowers have theright to call or prepay obligations with or without call or prepaymentpenalties.

| ***(dollars in thousands)*** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| Due in one year  or less               |       | $                   | 44,241     |                           | $          | 44,133 |   |
| Due after one  year through five years |       | 3,407               |       | 3,488                          |       |
| Due after ten  years                   |       | 35,993              |       | 35,993                         |       |
| Mortgage-backed  securities            |       | 64,108              |       | 62,281                         |       |
|                                   |       | $                   | 147,749    |                           | $          | 145,895 |   |

 

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            |       |                                   | $          | —                               |       |                           |       | $ | — |   |   | $ | 55,861 |   |   | $ | 2,000 |   |   | $ | 55,861 |   |   | $ | 2,000 |   |   |
| Trust preferred  securities            |       |                                   | 7,777      |                                 |       |                           | 112        |   |   | 5,663 |   |   | 45 |   |   | 13,440 |   |   | 157 |   |   |
| U.S. Treasury  securities              |       |                                   | —     |                                 |       |                           | —     |   |   | 998 |   |   | 2 |   |   | 998 |   |   | 2 |   |   |
| U.S. government  agency notes          |       |                                   | —     |                                 |       |                           | —     |   |   | 39,894 |   |   | 106 |   |   | 39,894 |   |   | 106 |   |   |
|                                   |       |                                   | $          | 7,777                                |       |                           |       | $ | 112 |   |   | $ | 102,416 |   |   | $ | 2,153 |   |   | $ | 110,193 |   |   | $ | 2,265 |   |   |

 

Gross unrealized losses totaled $2.265 million as of December 31,2006 and equaled 2.06% of the fair value of securities with unrealized lossesas of this date. A total of 35 securities were in an unrealized loss positionas of December 31, 2006, with the largest single unrealized loss in anyone security totaling $303,000. Twenty-seven 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 todeclines in fair values resulting from increases in interest rates compared tothe time they were purchased. None of these securities have exhibited a declinein value due to changes in credit risk. Furthermore, we have the ability tohold these securities to maturity and do not expect to realize losses on any ofthese holdings. As such, management does not consider the impairments to beother than temporary.

Trust preferred securities considered temporarilyimpaired are issues of other banks and bank holding companies we currently holdin our portfolio. There are eleven issues that are considered impaired, threeof which have 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 have 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 have the ability to hold these securities totheir maturity. Management does not consider the impairment of these securitiesto be other than temporary.

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At December 31, 2006, 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 2006, 2005, and 2004, we recognized grosslosses on the sale of securities of $3.063 million, $0, and $0, respectively.During 2006, 2005, and 2004, we recognized gross gains on sale of securities of$26,000, $0, and $440,000, respectively.

AtDecember 31, 2006, we held available for sale securities with an aggregatecarrying value (fair value) of approximately $100.041 million that we havepledged as collateral for FHLB advances and other borrowings.

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

Approximately 87% 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 aregenerally dependent on the operations of the related properties or thefinancial condition of its borrower or guarantor. Accordingly, repayment ofsuch loans can be more susceptible to adverse conditions in the real estatemarket and the regional economy.

Loansreceivable are summarized as follows at December 31:

| ***(dollars in thousands)***            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Loans secured by first mortgages on real estate:  |       |     |       |     |       |
| Residential                                       |       | $        | 56,724     |     | $          | 40,928 |   |
| Commercial                                        |       | 318,236  |       | 350,228  |       |
| Consumer residential  construction                |       | 98,006   |       | 126,492  |       |
| Construction, net of  undisbursed principal       |       | 137,769  |       | 113,395  |       |
|                                              |       | 610,735  |       | 631,043  |       |
| Commercial                                        |       | 79,001   |       | 67,818   |       |
| Loans secured by second  mortgages on real estate |       | 102,367  |       | 96,746   |       |
| Consumer                                          |       | 73,190   |       | 55,619   |       |
| Loans secured by  deposits and other              |       | 1,957    |       | 1,093    |       |
| Total loans                                       |       | 867,250  |       | 852,319  |       |
| Unamortized loan  discounts, net                  |       | (220     | )          | (121     | )          |
| Unearned loan fees, net                           |       | (571     | )          | (612     | )          |
|                                              |       | $        | 866,459    |     | $          | 851,586 |   |

                                                                                                                                                      

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Included in consumer loantotals in the above table are overdrawn commercial and retail checking accountstotaling $417,000 and $435,000 as of December 31, 2006 and 2005, respectively.Included in net unearned loan fees and costs in the above table is unearnedincome on installment loans of $1.281 million and $501,000 as of December 31,2006 and 2005, respectively.

The following tableprovides information concerning nonperforming assets and past-due loans:

| ***(dollars in thousands)***       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Nonaccruing loans                            |       | $        | 4,158      |     | $          | 3,019 |   |
| Real estate acquired  through foreclosure    |       | 2,440    |       | 931      |       |
| Total nonperforming  assets                  |       | $        | 6,598      |     | $          | 3,950 |   |
| Loans past-due 90 days  or more and accruing |       | $        | 27,274     |     | $          | 860 |   |

 

The interest income which would have been recorded onnonaccrual loans if those loans had been handled in accordance with theircontractual terms was approximately $388,000, $395,000, and $440,000 in 2006,2005, and 2004, respectively. The actual interest income recorded on theseloans in 2006, 2005, and 2004 was approximately $159,000, $118,000, and$272,000, respectively.

Loans we consider impaired at December 31, 2006and 2005 totaled $1.771 million compared to $1.702 million, respectively.The valuation allowance for impaired loans was approximately $536,000 at December 31,2006 and $851,000 at December 31, 2005. The average recorded investment inour impaired loans was approximately $1.412 million, $2.035 million, and $1.601million for the years ended December 31, 2006, 2005, and 2004,respectively, and no income has been accrued or collected on these loans whilethey have been classified as impaired.

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

| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)*** | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at  beginning of year          |       | $                                           | 11,743     |   | $ | 9,580 |   | $ | 8,692 |   |
| Provision for  loan losses             |       | 2,315                                       |       | 3,287 |   | 2,243 |   |
| Charge-offs                            |       | (2,025                                      | )          | (1,507 | ) | (1,573 | ) |
| Recoveries                             |       | 366                                         |       | 383 |   | 218 |   |
| Balance at end of  year                |       | $                                           | 12,399     |   | $ | 11,743 |   | $ | 9,580 |   |

 

Fromtime to time, we retain servicing on certain loans we sell into the secondarymarket. At December 31, 2006, 2005, and 2004 our servicing portfoliototaled $1.436 million, $1.834 million, and $2.997 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.

**(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, 2006 and 2005, we had commitments tooriginate first mortgage loans on real estate of approximately $57.333 millionand $97.067 million, respectively, most of which were committed for sale in thesecondary market.

At December 31, 2006 and 2005, we also hadcommitments to loan funds under unused home equity lines of credit aggregatingapproximately $78.767 million and $73.486 million, respectively, andunused commercial lines of credit, retail checking lines of credit, as well asunfunded construction commitments 

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aggregating approximately$158.127 million and $204.391 million, respectively. Such commitmentsgenerally carry a fixed rate of interest, while home equity lines of credit aregenerally variable.

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

Substantially all outstanding commitments at December 31,2006 and 2005 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, 2006 and 2005, letters of credit totaled$4.677 million and $4.825 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, 2006,2005, and 2004, transactions in related party loans were as follows:

| ***(dollars in thousands)*** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                      |       | $        | 1,628      |     | $          | 1,882    |       | $ | 2,352 |   |
| Additions                              |       | 23       |       | 247      |       | 80       |       |
| Repayments                             |       | (957     | )          | (501     | )          | (550     | )          |
| Change in  officers/directors          |       | (671     | )          | —   |       | —   |       |
|                                   |       | $        | 23         |     | $          | 1,628    |       | $ | 1,882 |   |

 

Unused loan commitments to directors and policy makingofficers totaled $992,000 as of December 31, 2006 and $1.410 million as ofDecember 31, 2005. Letters of credit included in the totals in Note 5above issued on behalf of directors and policy making officers totaled $763,000for December 31, 2006 compared to $780,000 at December 31, 2005.

During 2006, we leased from Hale Properties, LLC, acompany owned by Edwin F. Hale, Sr., CEO of the Company, 34,500 squarefeet of general office space at 1516 Baylis Street, Baltimore, Maryland, whichhoused a significant portion of the Company’s servicing and operations units. Wepaid $209,000 in rent expense on this location in 2006. We vacated asubstantial majority of this space before the end of 2006, moving ouroperational divisions into the new executive office tower on South ClintonStreet and into our old executive office building on Boston Street.

We also leased 18,400 square feet of storage space anddisaster recovery facilities at two other locations owned by Mr. Hale. In2006, we paid $86,000 in rent for these facilities. During 2006 we vacated the storagefacility.

In June of 2006, we moved our executive officesand various operational departments into a new building owned by Mr. Hale.We currently lease 74,061 square feet of the building from Mr. Hale andpaid $1.091 million in rent on this location in 2006. This building is adjacentto the former headquarters building at 3301 Boston Street. The additional spacewill be utilized for growth.

The Company sponsors the activities of the BaltimoreBlast, a professional soccer team owned by Mr. Hale. The Company paidapproximately $176,000 for a sponsorship package which includes printedmaterial and Company banners displayed at Baltimore Blast games, prizegiveaways, free tickets, and 

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employee recognitionnights. We have a letter of credit with the Baltimore Blast in the amount of$400,000 that is secured by cash.

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. Wehave 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.

Allrelated party transactions are subject to review by management and the AuditCommittee and approved by the full Board of Directors. We believe that theterms for all related party transactions are at least as favorable as thosethat could be obtained from a third party.

**(7)  Premisesand Equipment**

We own property and equipment as follows at December 31:

| ***(dollars in thousands)***           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Land                                             |       | $        | 10,982     |     | $          | 9,078 |   |
| Buildings and  improvements                      |       | 23,714   |       | 21,818   |       |
| Leasehold  improvements                          |       | 9,572    |       | 6,428    |       |
| Furniture,  fixtures and equipment               |       | 24,441   |       | 21,519   |       |
| Total at cost                                    |       | 68,709   |       | 58,843   |       |
| Less: accumulated  depreciation and amortization |       | (19,647  | )          | (18,441  | )          |
| Total premises  and equipment                    |       | $        | 49,062     |     | $          | 40,402 |   |

 

Depreciation expense for the years ended December 31,2006, 2005, and 2004 was $4.744 million, $3.872 million, and$3.323 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 30 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 $3.666 million, $2.919million, and $3.576 million for 2006, 2005, and 2004, respectively.

Ourminimum lease payments due for each of the next five years are as follows:

| ***(dollars in thousands)*** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2007                                   |       | $          | 4,284      |   |
| 2008                                   |       | 3,978      |       |
| 2009                                   |       | 3,659      |       |
| 2010                                   |       | 2,923      |       |
| 2011                                   |       | 2,486      |       |
| Thereafter                             |       | 15,325     |       |
|                                   |       | $          | 32,655     |   |

 

During 2006, wecapitalized approximately $42,000 of interest related to the construction ofour various premises.

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**(8)  Deposits**

Depositsare summarized as follows at December 31:

| ** **                             | ** ** | **2006**   | ** ** | **2005**               | ** ** |
|----------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Weighted-**          | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average  Effective** | ** ** | ** ** | ** ** | **Average  Effective** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **Rate**               | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Noncertificate:                        |       |       |       |                   |       |   |   |   |   |   |   |   |   |
| Savings                                |       | $          | 58,377     |                   |       | 0.31 | % |   | $ | 69,647 |   |   | 0.30 | % |   |
| Interest-bearing demand                |       | 26,193     |       |                   | 0.22       | % |   | 23,658 |   |   | 0.20 | % |   |
| Money market accounts                  |       | 256,678    |       |                   | 3.26       | % |   | 195,036 |   |   | 1.58 | % |   |
| Noninterest-bearing  demand            |       | 186,720    |       |                   |       |   |   | 182,049 |   |   |   |   |   |
| Total noncertificate  deposits         |       | 527,968    |       |                   |       |   |   | 470,390 |   |   |   |   |   |
| Certificates of deposit:               |       |       |       |                   |       |   |   |   |   |   |   |   |   |
| Original maturities:                   |       |       |       |                   |       |   |   |   |   |   |   |   |   |
| Under 12 months                        |       | 15,686     |       |                   | 4.08       | % |   | 2,362 |   |   | 2.35 | % |   |
| 12 to 60 months                        |       | 337,163    |       |                   | 4.06       | % |   | 366,007 |   |   | 3.33 | % |   |
| IRA and KEOGH                          |       | 44,121     |       |                   | 4.27       | % |   | 37,251 |   |   | 3.69 | % |   |
| Total certificates of  deposit         |       | 396,970    |       |                   |       |   |   | 405,620 |   |   |   |   |   |
| Total deposits                         |       | $          | 924,938    |                   |       |   |   |   | $ | 876,010 |   |   |   |   |   |

                                                                                                                                                                                          

Timedeposits mature as follows:

| ** **                             | ** ** | **2006**   | ** ** | **2005**      | ** ** |
|----------------------------------------|------------|------------|------------|---------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ***(dollars in thousands)*** | ** ** | **Amount** | ** ** | **Total**     | ** ** | **Amount** | ** ** | **Total** | ** ** |
| Within 6 months                        |       | $          | 94,799     |          | 23.88      | % | $ | 46,453 |   | 11.45 | % |
| Over 6 months - 12  months             |       | 71,599     |       | 18.04         | %          | 45,095 |   | 11.12 | % |
| Over 12 months - 24  months            |       | 150,831    |       | 37.99         | %          | 136,324 |   | 33.61 | % |
| Over 24 months - 36  months            |       | 35,254     |       | 8.88          | %          | 117,959 |   | 29.08 | % |
| Over 36 months - 48  months            |       | 40,684     |       | 10.25         | %          | 39,675 |   | 9.78 | % |
| Over 48 months                         |       | 3,803      |       | 0.96          | %          | 20,114 |   | 4.96 | % |
|                                   |       | $          | 396,970    |          | 100.00     | % | $ | 405,620 |   | 100.00 | % |

 

The Bank offers certaincertificate products that provide customers a “one-time” withdrawal option thatthe customer may exercise at any time without penalty. As of December 31,2006, certificates that permitted early withdrawal totaled$73.750 million.

Certificates of deposit of$100,000 or more totaled approximately $153,747 million and$160.458 million at December 31, 2006 and 2005, respectively.

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**(9)  Borrowings and Repurchase Agreements**

Our borrowings consist ofshort-term and long-term advances from the FHLB, short-term promissory notes, awarehouse line of credit, long-term repurchase agreements with callableoptions, a mortgage loan, and a long-term line of credit. The FHLB advances areavailable under a specific collateral pledge and security agreement, whichcurrently allows us to borrow up to 30% of the Bank’s total assets and requiresthat we maintain collateral for all of our borrowings in the form of overnightinvestments equal to 100% of advances, specific first and second mortgage loansor commercial mortgages, 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. We maintain a $75.000 million mortgage warehouse line of credit toassist in the funding of our mortgage-banking business that is secured by thepledging of loans from the Company’s loans held for sale portfolio. Long-termrepurchase agreements are fixed-rate obligations and require the company topledge Government National Mortgage Association (“GNMA”) securities or cash.The long-term line of credit represents borrowings by Finance Maryland and is along-term line of credit maintained with a commercial bank which permitsFinance Maryland to borrow up to $50.000 million ($60.000 million as ofJanuary 1, 2007) 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.The carrying value of the property securing the loan was approximately $19.499 millionas of December 31, 2006.

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Certain informationregarding our borrowings and repurchase agreements are as follows as ofDecember 31:

| ***(dollars in thousands)***          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Amount outstanding at year-end:                 |       |     |       |     |       |     |       |
| FHLB short-term advances                        |       | $        | —     |     | $          | 163,500  |       | $ | 132,000 |   |
| FRB short-term  borrowings                      |       | —   |       | —   |       | —   |       |
| Short-term promissory  notes                    |       | 40,298   |       | 32,720   |       | 30,292   |       |
| Warehouse line of credit                        |       | 586      |       | 3,156    |       | —   |       |
| FHLB long-term advances                         |       | 85,000   |       | 85,000   |       | 85,000   |       |
| Long-term repurchase  agreements                |       | —   |       | —   |       | 25,000   |       |
| Long-term line of credit                        |       | 38,000   |       | 36,290   |       | 24,369   |       |
| Mortgage loan                                   |       | 9,557    |       | 9,710    |       | —   |       |
| Weighted-average interest rate at year-end:     |       |     |       |     |       |     |       |
| FHLB short-term advances                        |       | —   |       | 4.44     | %          | 2.44 %   |       |
| FRB short-term  borrowings                      |       | —   |       | —   |       | —   |       |
| Short-term promissory  notes                    |       | 3.50     | %          | 0.56     | %          | 0.61 %   |       |
| Warehouse line of credit                        |       | 6.07     | %          | 5.14     | %          | —   |       |
| FHLB long-term advances                         |       | 5.68     | %          | 5.99     | %          | 4.84 %   |       |
| Long-term repurchase  agreements                |       | —   |       | —   |       | 5.06 %   |       |
| Long-term line of credit                        |       | 8.41     | %          | 7.42     | %          | 5.62 %   |       |
| Mortgage loan                                   |       | 5.58     | %          | 5.58     | %          | —   |       |
| Maximum outstanding at any month-end:           |       |     |       |     |       |     |       |
| FHLB short-term advances                        |       | $        | 173,500    |     | $          | 225,500  |       | $ | 132,000 |   |
| FRB short-term  borrowings                      |       | —   |       | —   |       | —   |       |
| Short-term promissory  notes                    |       | 40,860   |       | 36,955   |       | 41,058   |       |
| Warehouse line of credit                        |       | 45,602   |       | 3,156    |       | —   |       |
| FHLB long-term advances                         |       | 85,000   |       | 85,000   |       | 85,000   |       |
| Long-term repurchase  agreements                |       | —   |       | 15,000   |       | 25,000   |       |
| Long-term line of credit                        |       | 38,000   |       | 36,290   |       | 24,369   |       |
| Mortgage loan                                   |       | 9,689    |       | 9,799    |       | —   |       |
| Average outstanding:                            |       |     |       |     |       |     |       |
| FHLB short-term advances                        |       | $        | 131,099    |     | $          | 173,510  |       | $ | 62,060 |   |
| FRB short-term  borrowings                      |       | 75       |       | 71       |       | —   |       |
| Short-term promissory  notes                    |       | 30,814   |       | 30,640   |       | 30,821   |       |
| Warehouse line of credit                        |       | 25,693   |       | 62       |       | —   |       |
| FHLB long-term advances                         |       | 85,000   |       | 85,000   |       | 85,000   |       |
| Long-term repurchase  agreements                |       | —   |       | 15,123   |       | 25,000   |       |
| Long-term line of credit                        |       | 33,505   |       | 30,213   |       | 16,360   |       |
| Mortgage loan                                   |       | 9,623    |       | 7,379    |       | —   |       |
| Weighted-average interest rate during the year: |       |     |       |     |       |     |       |
| FHLB short-term advances                        |       | 5.29     | %          | 3.59     | %          | 1.78 %   |       |
| FRB short-term  borrowings                      |       | 6.00     | %          | 4.36     | %          | —   |       |
| Short-term promissory  notes                    |       | 2.35     | %          | 1.20     | %          | 0.51 %   |       |
| Warehouse line of credit                        |       | 6.36     | %          | 4.07     | %          | —   |       |
| FHLB long-term advances                         |       | 5.56     | %          | 4.91     | %          | 4.93 %   |       |
| Long-term repurchase  agreements                |       | —   |       | 4.33     | %          | 5.17 %   |       |
| Long-term line of credit                        |       | 7.78     | %          | 6.64     | %          | 5.24 %   |       |
| Mortgage loan                                   |       | 5.66     | %          | 5.63     | %          | —   |       |

 

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Theprincipal maturities of long-term borrowings are as follows as of December 31,2006:

| ***(dollars in thousands)*** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2007                                   |       | $          | —     |   |
| 2008                                   |       | 38,000     |       |
| 2009                                   |       | —     |       |
| 2010                                   |       | 60,000     |       |
| 2011                                   |       | —     |       |
| After 2011                             |       | 34,557     |       |
|                                   |       | $          | 132,557    |   |

 

The maturities listed in the above table for 2010 arecallable immediately at the option of the issuer, while $25.000 millionmaturing after 2011 is callable beginning in 2010.

We have pledgedsecurities with a carrying value (fair value) of $100.041 million and loanswith a carrying value of $169.667 million as collateral for FHLB advances,the warehouse line of credit, and the long-term line of 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, 2006:

| **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   |       | $110,310,000                            |       | 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. TheFloating Rate Trust Preferred Securities issued by MCT IV accrue interest at avariable rate of interest equal to the 3-month LIBOR rate plus 305 basispoints. The Floating Rate Trust Preferred Securities issued by MCT V accrueinterest at a variable rate of interest equal to the 3-month LIBOR rate 

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

The interest expense (including amortization of thecost of issuance) on Trust Preferred Securities was $5.384 million in 2006,$3.762 million in 2005, and $2.426 million in 2004.

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

Underapplicable regulatory guidelines, a portion of the Trust Preferred Securitieswill qualify as Tier I capital, and the remaining portion will qualify as TierII capital. Under applicable regulatory guidelines, $26.518 million of theoutstanding Trust Preferred Securities qualify as Tier I capital and theremaining $44.982 million of the Trust Preferred Securities qualify asTier II capital at December 31, 2006.

**(11)  EmployeeBenefit Plans**

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

Weestablished a defined contribution plan in 1997, covering our employees meetingcertain age and service eligibility requirements. The Plan provides for cashdeferrals qualifying under Section 401(k). We make matching contributionsto the plan which totaled $530,000, $481,000, and $392,000 in 2006, 2005, and2004, 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, 2006, all outstandingoptions are fully vested. All of our options expire ten years after the date ofgrant. There have been no modifications to the existing plan.

Prior to January 1, 2006, we applied theintrinsic value method to account for stock-based employee compensationplans. Under this method, compensation cost is recognized for awards of sharesof common stock to employees only if the quoted market price of the stock atthe grant date (or other measurement date, if later) is greater than the amountthe employee must pay to acquire the stock.

In January 2006, we adopted SFAS No. 123R,  *Share-BasedPayment (Revised 2004),* for our stockholder-approved Long-TermIncentive Plan, which permits the grant of share options and shares to ourdirectors and key employees. We made the transition to fair value-basedcompensation using the modified version of the prospective application, whichmeans the fair value-based method prescribed under SFAS 123R applies to newawards, modification of previous awards, repurchases and cancellations after January 1,2006 and to any awards that retain service requirements after January 1,2006. The determination of compensation cost for awards granted prior to January 1,2006 is based on the same methods and on the same fair values previouslydetermined for the pro forma disclosures previously required. We recognizedcompensation cost of $50,579 for the year ended December 31, 2006. We hadno options as of January 1, 2006 for which requisite service remained aswe accelerated the vesting of all options in 2005.

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Informationwith respect to stock options is as follows for the years ended December 31:

| ** **                 | ** ** | **2006**           | ** ** | **2005**      | ** ** | **2004**           | ** ** |
|----------------------------|------------|--------------------|------------|---------------|------------|--------------------|------------|
| ** **                 | ** ** | ** **         | ** ** | **Weighted-** | ** ** | ** **         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                 | ** ** | ** **         | ** ** | **Average**   | ** ** | ** **         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                 | ** ** | **Number**         | ** ** | **Exercise**  | ** ** | **Number**         | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| ** **                 | ** ** | **of Shares** | ** ** | **Price**     | ** ** | **of Shares** | ** ** | **Price** | ** ** | **of Shares** | ** ** | **Price** | ** ** |
| Outstanding at  beginning  |       |               |       |          |       |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| of year                    |       | 981,934            |       |          | $          | 12.16              |       |   | 738,239 |   |   | $ | 10.05 |   |   | 701,888 |   |   | $ | 9.48 |   |   |
| Granted                    |       | 9,600              |       |          | 18.62      |               |       | 271,800 |   |   | 17.66 |   |   | 51,350 |   |   | 18.32 |   |   |
| Exercised                  |       | (188,279           | )          |          | 9.45       |               |       | (23,800 | ) |   | 9.95 |   |   | (12,165 | ) |   | 10.66 |   |   |
| Forfeited/Cancelled        |       | (10,233            | )          |          | 15.54      |               |       | (4,305 | ) |   | 10.69 |   |   | (2,834 | ) |   | 16.41 |   |   |
| Oustanding at end  of year |       | 793,022            |       |          | 12.84      |               |       | 981,934 |   |   | 12.16 |   |   | 738,239 |   |   | 10.05 |   |   |
|                            |            |                    |            |               |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theweighted average fair values of our option grants for the years ended December 31,2006, 2005, and 2004 were $5.71, $6.01, and $6.90, respectively, on the datesof grants. The fair values of our options granted were calculated using theBlack-Scholes-Merton option-pricing model with the followingweighted average assumptions for the years ended December 31:

| ** **               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield           |       | —   |       | —   |       | —   |       |
| Expected volatility      |       | 15.61    | %          | 15.74    | %          | 14.15    | %          |
| Risk-free  interest rate |       | 5.12     | %          | 4.25     | %          | 4.19     | %          |
| Expected lives           |       | 8 years  |       | 8 years  |       | 10 years |       |

 

For2005 and 2004, prior to adoption of SFAS 123R, the option price was equal tothe market price of the common stock at the date of grant for all of ouroptions and, accordingly, we did not record compensation expense related tooptions granted. If we had applied the fair value-based method to recognizecompensation cost for the options granted, our net income and net income per sharewould have been changed to the following pro forma amounts for the years ended December 31:

| ***(dollars in thousands, except per share data)***                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income, as  reported                                                                                                                          |       | $        | 7,822      |     | $          | 6,101 |   |
| 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     | )          |
| Pro forma net  income                                                                                                                             |       | $        | 6,351      |     | $          | 5,534 |   |
| Earnings per  share:                                                                                                                              |       |     |       |     |       |
| Basic—as reported                                                                                                                            |       | $        | 1.28       |     | $          | 1.06 |   |
| Basic—pro forma                                                                                                                              |       | $        | 1.04       |     | $          | 0.96 |   |
| Diluted—as reported                                                                                                                          |       | $        | 1.20       |     | $          | 0.96 |   |
| Diluted—pro forma                                                                                                                            |       | $        | 0.98       |     | $          | 0.87 |   |

 

The total intrinsic valueof options exercised and the related tax benefit during the year ended December 31,2006 amounted to $1.810 million and $585,000, respectively, and proceeds fromexercises of stock options amounted to $1.779 million for the year ended December 31,2006.

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Optionsoutstanding are summarized as follows at December 31, 2006:

| ** **                   | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | ** **      | ** ** |
|------------------------------|------------|------------|------------|---------------------------|------------|-----------------|------------|
| ** **                   | ** ** | ** ** | ** ** | **Remaining**             | ** ** | **Options**     | ** ** |
| ** **                   | ** ** | ** ** | ** ** | **Contractual Life** | ** ** | **Exercisable** | ** ** |
| **Exercise Price**      | ** ** | ** ** | ** ** | **Shares**                | ** ** | **(Years)**     | ** ** | **(Shares)** | ** ** |
| $  4.00            |       | 1,200      |       |                      | 4.0        |            |       |   | 1,200 |   |   |
|     5.50 |       | 93,650     |       |                      | 4.1        |            |       |   | 93,650 |   |   |
|     5.63 |       | 40,750     |       |                      | 3.2        |            |       |   | 40,750 |   |   |
|     6.25 |       | 3,000      |       |                      | 3.4        |            |       |   | 3,000 |   |   |
|     6.45 |       | 400        |       |                      | 4.5        |            |       |   | 400 |   |   |
|     7.10 |       | 3,500      |       |                      | 4.3        |            |       |   | 3,500 |   |   |
|     7.40 |       | 250        |       |                      | 4.7        |            |       |   | 250 |   |   |
|     8.69 |       | 10,000     |       |                      | 2.9        |            |       |   | 10,000 |   |   |
|     9.16 |       | 850        |       |                      | 5.0        |            |       |   | 850 |   |   |
|     9.86 |       | 1,350      |       |                      | 5.8        |            |       |   | 1,350 |   |   |
|   10.45            |       | 119,000    |       |                      | 5.0        |            |       |   | 119,000 |   |   |
|   10.50            |       | 3,000      |       |                      | 2.5        |            |       |   | 3,000 |   |   |
|   10.70            |       | 650        |       |                      | 5.2        |            |       |   | 650 |   |   |
|   11.68            |       | 168,334    |       |                      | 6.0        |            |       |   | 168,334 |   |   |
|   11.75            |       | 12,000     |       |                      | 2.1        |            |       |   | 12,000 |   |   |
|   11.95            |       | 700        |       |                      | 6.1        |            |       |   | 700 |   |   |
|   12.03            |       | 3,500      |       |                      | 5.3        |            |       |   | 3,500 |   |   |
|   12.10            |       | 6,000      |       |                      | 5.3        |            |       |   | 6,000 |   |   |
|   13.00            |       | 700        |       |                      | 6.3        |            |       |   | 700 |   |   |
|   13.52            |       | 4,500      |       |                      | 6.3        |            |       |   | 4,500 |   |   |
|   16.67            |       | 6,400      |       |                      | 8.3        |            |       |   | 6,400 |   |   |
|   16.70            |       | 1,800      |       |                      | 8.8        |            |       |   | 1,800 |   |   |
|   16.86            |       | 1,000      |       |                      | 7.5        |            |       |   | 1,000 |   |   |
|   16.95            |       | 2,400      |       |                      | 6.8        |            |       |   | 2,400 |   |   |
|   17.45            |       | 48,638     |       |                      | 9.0        |            |       |   | 48,638 |   |   |
|   17.77            |       | 207,700    |       |                      | 8.1        |            |       |   | 207,700 |   |   |
|   18.20            |       | 6,650      |       |                      | 7.3        |            |       |   | 6,650 |   |   |
|   18.38            |       | 36,500     |       |                      | 7.0        |            |       |   | 36,500 |   |   |
|   19.30            |       | 8,600      |       |                      | 9.3        |            |       |   | 8,600 |   |   |
|                         |       | 793,022    |       |                      |       |            |       |   | 793,022 |   |   |
|                              |            |            |            |                           |            |                 |            |  |  |  |  |  |  |

 

***(c) StockPurchase***

We currently offer an employee stock purchase planwhereby our employees can purchase our stock through payroll deductions. Whileour employee stock purchase plan provides for up to a 10% discount from marketvalue at issuance, we do not recognize compensation expense on the discountas:  substantially all employees thatmeet limited employment qualifications may participate in the plan on anequitable basis; the plan incorporates no option features, the purchase priceis based solely on the market price of the shares at the date of purchase, andemployees are permitted to cancel participation before the purchase date andobtain a refund of amounts previously paid and; the discount from the market price does not exceed the per-share amountof share issuance costs that would have been incurred to raise a significantamount of capital by a public offering.

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**(12)  IncomeTaxes**

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

| ***(dollars in thousands)*** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                                |       | $        | (2,737     | )        | $          | 2,328    |       | $ | 2,751 |   |
| Deferred                               |       | 2,372    |       | 961      |       | (390     | )          |
| Income tax  (benefit) expense          |       | $        | (365       | )        | $          | 3,289    |       | $ | 2,361 |   |

 

Incometax (benefit) 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:

| ** **                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| ***(dollars in thousands)***                 | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Tax at statutory  federal rate                         |       |       | $          | 530      |       |       | 34.0       | % |   | $ | 3,778 |   |   | 34.0 | % |   | $ | 2,877 |   |   | 34.0 | % |
| State income  taxes, net of federal income tax benefit |       |       | —     |     |       | —     |       |   | (1 | ) |   | — |   |   | 21 |   |   | 0.3 |   |
| Change in  valuation allowance                         |       |       | (321       | )        |       | (20.6      | )          |   | (25 | ) |   | (0.2 | ) |   | (10 | ) |   | (0.1 | ) |
| Bank-owned life  insurance                             |       |       | (380       | )        |       | (24.3      | )          |   | (351 | ) |   | (3.2 | ) |   | (365 | ) |   | (4.3 | ) |
| Federal income  tax credits                            |       |       | (168       | )        |       | (10.8      | )          |   | (168 | ) |   | (1.5 | ) |   | (166 | ) |   | (2.0 | ) |
| Other                                                  |       |       | (26        | )        |       | (1.7       | )          |   | 56 |   |   | 0.5 |   |   | 4 |   |   | — |   |
|                                                   |       |       | $          | (365     | )          |       | (23.4      | )% |   | $ | 3,289 |   |   | 29.6 | % |   | $ | 2,361 |   |   | 27.9 | % |

 

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)***                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                                 |       |     |       |     |       |
| Allowance for losses on loans                                         |       | $        | 4,789      |     | $          | 4,535 |   |
| Amortization of intangible assets                                     |       | 113      |       | 125      |       |
| Valuation allowance and secondary marketing reserve                   |       | 1,758    |       | —   |       |
| State net operating loss carryforward                                 |       | 292      |       | 321      |       |
| Other                                                                 |       | 20       |       | 73       |       |
| Total gross  deferred tax assets                                      |       | 6,972    |       | 5,054    |       |
| Less: valuation allowance                                             |       | —   |       | (321     | )          |
| Net deferred tax  assets                                              |       | 6,972    |       | 4,733    |       |
| Deferred tax  liabilities:                                            |       |     |       |     |       |
| Depreciation                                                          |       | 747      |       | 880      |       |
| Total deferred  tax liabilities                                       |       | 747      |       | 880      |       |
| Net deferred tax  asset attributable to operations                    |       | 6,225    |       | 3,853    |       |
| Unrealized gain  on investments charged to other comprehensive income |       | 581      |       | 2,087    |       |
| Net deferred tax asset                                                |       | $        | 6,806      |     | $          | 5,940 |   |

 

First Mariner has net operating loss carryforwards forstate income tax purposes of approximately $6.325 million that areavailable to offset future state taxable income of First Mariner Bancorp only. Theloss carryforwards will begin to expire in 2019. The recorded valueof the net deferred tax asset was previously reduced by a valuation allowanceto the amount then expected to be realized. During 2006, analysis determinedthat the entire amount of the net deferred tax asset was realizable and thevaluation allowance was reversed.

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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 31,2006 is $4.074 million. We expect the Bank to fully realize the full value ofthe credits before their expiration.

TheBank has invested in a partnership that owns and manages seven affordablehousing projects in the Mid-Atlantic area. Through its interest in thepartnership, the Bank receives tax incentives in the form of Federal taxcredits that can be used to offset current Federal income taxes. Tax creditsassociated with the limited partnership (assuming the 5% limited partnershipinterest currently owned by the Bank) is projected to total $1.599 millionand will be available to the limited partners from January 2003 through December 2012.The annual tax credits anticipated to be available approximate $168,000. TheBank invested $1.5 million to obtain its 5% interest in the partnership inJuly of 2003, and recognized $168,000 in tax credits in 2006, $168,000 in2005, and $166,000 in 2004. Total credits utilized to date through December 31,2006 amounted to $586,000.

**(13)  OtherExpenses**

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

| ** **                                        | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ***(dollars in thousands)***            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Office supplies                                   |       | $                                           | 747        |   | $ | 680 |   | $ | 697 |   |
| Printing                                          |       | 602                                         |       | 543 |   | 712 |   |
| Corporate  insurance                              |       | 517                                         |       | 401 |   | 378 |   |
| Real estate  acquired through foreclosure expense |       | 224                                         |       | 28 |   | (73 | ) |
| FDIC premiums                                     |       | 109                                         |       | 113 |   | 115 |   |
| Consulting fees                                   |       | 850                                         |       | 734 |   | 385 |   |
| Marketing/promotion                               |       | 1,059                                       |       | 866 |   | 722 |   |
| Postage                                           |       | 906                                         |       | 764 |   | 982 |   |
| Overnight  delivery/courier                       |       | 908                                         |       | 809 |   | 736 |   |
| Security                                          |       | 233                                         |       | 151 |   | 310 |   |
| Dues and  subscriptions                           |       | 562                                         |       | 438 |   | 341 |   |
| Loan collection  expenses                         |       | 701                                         |       | 471 |   | 332 |   |
| Other                                             |       | 3,853                                       |       | 2,914 |   | 2,619 |   |
|                                              |       | $                                           | 11,271     |   | $ | 8,912 |   | $ | 8,256 |   |

 

** (14)  Dividends and Earnings PerShare**

As a depository institution whose deposits are insuredby the FDIC, the Bank may not pay dividends or distribute any of its capitalassets while it remains in default on any assessment due the FDIC. The Bankcurrently is not in default under any of its obligations to the FDIC. As acommercial bank under the Maryland Financial Institution Law, the Bank may declarecash dividends from undivided profits or, with the prior approval of theCommissioner of Financial Regulation, out of surplus in excess of 100% of itsrequired 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)*** | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Net income—basic  and diluted                                                         |       | $         | 1,924      |      | $          | 7,822     |       | $ | 6,101 |   |
| Weighted-average  shares outstanding—basic                                            |       | 6,318,205 |       | 6,104,481 |       | 5,759,310 |       |
| Dilutive  securities—options and warrants                                             |       | 323,520   |       | 384,638   |       | 591,962   |       |
| Adjusted  weighted-average shares outstanding—dilutive                                |       | 6,641,725 |       | 6,489,119 |       | 6,351,272 |       |
| Earnings per  share—basic                                                             |       | $         | 0.30       |      | $          | 1.28      |       | $ | 1.06 |   |
| Earnings per  share—diluted                                                           |       | $         | 0.29       |      | $          | 1.20      |       | $ | 0.96 |   |

 

Forthe years ended December 31, 2006, 2005, and 2004, options to purchaseshares of common stock which were antidilutive and excluded from the abovecomputation were 8,600, 257,250, and 48,350, respectively.

**(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, 2006, that theBank meets all capital adequacy requirements to which it is subject. As of December 31,2006, 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, 2006 and 2005,were as follows:

| ** **                                 | ** ** | **Actual** | ** ** | ** ** | ** ** | **Minimum  Requirements  for Capital  Adequacy  Purposes** | ** ** | **To be Well  Capitalized Under  Prompt Corrective  Action Provision** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ***(dollars in thousands)***     | ** ** | **Amount** | ** ** | **Ratio**  | ** ** | **Amount**                                                      | ** ** | **Ratio**                                                                                       | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of December 31, 2006**           | ** ** | ** ** | ** ** |       | ** ** | ** **                                                      |       | ** **                                                                                      | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Total capital (to  risk-weighted assets):  |       |       |       |       |       |                                                            |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                               |       | $          | 164,263    |       |       | 15.6                                                            | %          |                                                                                            | $          | 84,329 |   |   | 8.0 | % |   | $ | 105,412 |   |   | 10.0 | % |   |
| Bank                                       |       | 111,372    |       |       | 11.7       | %                                                               |       | 76,253                                                                                          |       |   | 8.0 | % |   | 95,316 |   |   | 10.0 | % |   |
| Tier 1 capital (to  risk-weighted assets): |       |       |       |       |       |                                                            |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                               |       | 105,875    |       |       | 10.0       | %                                                               |       | 42,165                                                                                          |       |   | 4.0 | % |   | 63,247 |   |   | 6.0 | % |   |
| Bank                                       |       | 91,946     |       |       | 9.6        | %                                                               |       | 38,126                                                                                          |       |   | 4.0 | % |   | 57,190 |   |   | 6.0 | % |   |
| Tier 1 capital (to average  fourth quarter |       |       |       |       |       |                                                            |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| assets):                                   |       |       |       |       |       |                                                            |       |                                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Consolidated                               |       | 105,875    |       |       | 7.8        | %                                                               |       | 54,418                                                                                          |       |   | 4.0 | % |   | 68,022 |   |   | 5.0 | % |   |
| Bank                                       |       | 91,946     |       |       | 7.3        | %                                                               |       | 50,559                                                                                          |       |   | 4.0 | % |   | 63,198 |   |   | 5.0 | % |   |
| **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 | % |   |

 

The FDIC, throughthe Deposit Insurance Fund (“DIF”), insures deposits of accountholders up to$100,000. The Bank pays an annual premium to provide for this insurance. TheBank is a member of the Federal Home Loan Bank System and is required tomaintain an investment in the stock of the FHLB based on specific percentagesof outstanding mortgages, total assets or FHLB Advances. Purchases and sales ofstock are made directly with the Bank at par value.

We have agreed with theFederal Reserve Bank of Richmond (“FRB-Richmond”) to submit plans to improve ouroperating performance, reduce parent company leverage, enhance ourenterprise-wide risk management and enhance the effectiveness of our internalaudit program. *We have alsoagreed to give prior notice to the FRB-Richmond of any potential transactioninvolving a significant capital expenditure.*  Management believes it has takenactions to address these issues and these agreements do not restrict or impedeour ability to conduct normal business.

**(16)  Fair Value of FinancialInstruments**

Market or dealer quotes are available for many balancesheet items and derivatives; otherwise, pricing or valuation models are appliedusing current market information to estimate fair value. In some casesconsiderable judgment is required to interpret market data to develop the estimatesof fair value. Accordingly, the estimates presented herein are not necessarilyindicative of the amounts the Company could realize in a current marketexchange. The use of different market assumptions and/or estimation methods mayhave a material effect on the estimated fair value amounts.

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Thecarrying value and estimated fair value of financial instruments as of December 31,2006 and 2005 are summarized as follows:

| ** **                                                            | ** ** | **2006**                  | ** ** | **2005**                             | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|--------------------------------------|------------|
| ***(dollars in thousands***)                                | ** ** | **Carrying   Value** | ** ** | **Estimated   Fair Value** | ** ** | **Carrying   Value** | ** ** | **Estimated   Fair Value** | ** ** |
| Assets:                                                               |       |                      |       |                                 |       |   |   |   |   |
| Cash and cash equivalents                                             |       | $                         | 42,969     |                                 | $          | 42,969 |   | $ | 45,835 |   | $ | 45,835 |   |
| Securities available for sale                                         |       | 147,290                   |       | 147,290                              |       | 276,939 |   | 276,939 |   |
| Loans receivable                                                      |       | 866,459                   |       | 872,519                              |       | 851,586 |   | 859,234 |   |
| Loans held for sale                                                   |       | 94,371                    |       | 94,371                               |       | 92,351 |   | 92,351 |   |
| Restricted stock investments                                          |       | 6,449                     |       | 6,449                                |       | 13,647 |   | 13,647 |   |
| Liabilities:                                                          |       |                      |       |                                 |       |   |   |   |   |
| Deposits                                                              |       | 924,938                   |       | 921,769                              |       | 876,010 |   | 869,279 |   |
| Long- and short-term borrowings                                       |       | 173,441                   |       | 174,858                              |       | 330,376 |   | 334,084 |   |
| Junior subordinated deferrable interest debentures                    |       | 73,724                    |       | 79,652                               |       | 73,724 |   | 79,890 |   |
| Off-balance sheet items:                                              |       |                      |       |                                 |       |   |   |   |   |
| Interest rate lock commitments                                        |       | 49,353                    |       | 49,282                               |       | — |   | — |   |
| Open hedge  positions:                                                |       |                      |       |                                 |       |   |   |   |   |
| Forward sales commitments on loan pipeline and  funded loans          |       | 99,555                    |       | 99,572                               |       | — |   | — |   |
| Forward contracts  to sell mortgage-backed securities and Eurodollars |       | 59,500                    |       | 59,512                               |       | — |   | — |   |
|                                                                       |            |                           |            |                                      |            |  |  |  |  |  |  |  |  |

 

***Cash and CashEquivalents***

The carrying amount forcash and cash equivalents approximates fair value due to the short maturity ofthese instruments.

***InvestmentSecurities***

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 arecarried at the lower of cost or market, which may be indicated by the committedsales price for loans under contract to sell but are not yet funded or by thirdparty quoted market values for loans not yet committed to be sold. Due to theshort holding period of these loans, generally 14 to 60 days, the carryingamount of loans held for sale is a reasonable estimate of fair value.

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***Restricted StockInvestments***

The carrying value ofrestricted stock investments is a reasonable estimate of fair value as theseinvestments do not have a readily available market.

***Deposits***

The fair value of deposits with no stated maturity,such as noninterest-bearing deposits, interest-bearing NOW accounts, moneymarket, and statement savings accounts, is deemed to be equal to the carryingamounts. The fair value of certificates of deposit is based on the discountedvalue of contractual cash flows. The discount rate for certificates of depositwas estimated using the rate currently offered for deposits of similarremaining maturities.

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

Borrowings, repurchase agreements and juniorsubordinated notes were segmented into categories with similar financialcharacteristics. Carrying values were discounted using a cash flow approachbased on market rates as of December 31, 2006.

***Derivative Loan Commitments***

*Commitments to OriginateLoans.*   We engage an experienced third party toestimate the fair market value of our interest rate lock commitments (“IRLC”).At the time of issuance the estimated fair value of an IRLC is zero. Subsequentto issuance, the value of an IRLC can be either positive or negative dependingon the change in value of the underlying mortgage loan.

*Forward Sales Commitmentson Loan Pipeline and Funded Loans.*   Fair valuefor the commitments is determined by sales price for those loans under contractbut not yet funded and by third party quoted market values for those loans notyet under contract.

*Forward Sales of Mortgage-Backed Securities, and ShortEurodollar Futures Contracts.*   Fair value ofthese commitments is determined based upon the quoted market values of thesecurities.

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

The disclosure of fair value amounts does not includethe fair values of any intangibles, including core deposit intangibles. Coredeposit intangibles represent the value attributable to total deposits based onan expected duration of customer relationships.

***Limitations***

Fair value estimates aremade at a specific point in time, based on relevant market information andinformation about financial instruments. These estimates do not reflect anypremium or discount that could result from a one-time sale of our totalholdings of a particular financial instrument. Because no market exists for asignificant portion of our financial instruments, fair value estimates arebased on judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors. These estimates are subjective in nature and involve uncertainties andmatters of significant judgment and therefore cannot be determined withprecision. Changes in assumptions could significantly affect estimates.

**(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, 2006**

| ** **                                          | ** ** | **Commercial and**   | ** ** | **Consumer** | ** ** | **Mortgage-** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|--------------|------------|---------------|------------|------------|------------|
| ***(dollars in thousands)***              | ** ** | **Consumer Banking** | ** ** | **Finance**  | ** ** | **Banking**   | ** ** | **Total**  | ** ** |
| Interest income                                     |       |                      | $          | 73,808       |       |          |       | $          | 14,063     |   |   |   | $ | 7,877 |   |   | $ | 95,748 |   |
| Interest expense                                    |       |                      | 37,852     |         |       |          | 3,299      |       |       |   | 5,331 |   |   | 46,482 |   |
| Net interest income                                 |       |                      | 35,956     |         |       |          | 10,764     |       |       |   | 2,546 |   |   | 49,266 |   |
| Provision for  loan losses                          |       |                      | 150        |         |       |          | 2,165      |       |       |   | — |   |   | 2,315 |   |
| Net interest income after provision for loan losses |       |                      | 35,806     |         |       |          | 8,599      |       |       |   | 2,546 |   |   | 46,951 |   |
| Noninterest  income                                 |       |                      | 10,876     |         |       |          | 3,121      |       |       |   | 9,770 |   |   | 23,767 |   |
| Noninterest  expense                                |       |                      | 43,612     |         |       |          | 9,345      |       |       |   | 16,202 |   |   | 69,159 |   |
| Net intersegment  income                            |       |                      | 42         |         |       |          | —     |       |       |   | (42 | ) |   | — |   |
| Net income (loss)  before income taxes              |       |                      | $          | 3,112        |       |          |       | $          | 2,375      |   |   |   | $ | (3,928 | ) |   | $ | 1,559 |   |
| Total assets                                        |       |                      | $          | 1,103,008    |       |          |       | $          | 65,911     |   |   |   | $ | 94,371 |   |   | $ | 1,263,290 |   |

 

**For the year ended December 31,2005**

| ** **                                          | ** ** | **Commercial and**   | ** ** | **Consumer** | ** ** | **Mortgage-** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|--------------|------------|---------------|------------|------------|------------|
| ***(dollars in thousands)***              | ** ** | **Consumer Banking** | ** ** | **Finance**  | ** ** | **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**

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

 

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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)***                                                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                                                                                                           |       | $        | 1,924      |     | $          | 7,822    |       | $ | 6,101 |   |
| Other  comprehensive income items:                                                                                                                   |       |     |       |     |       |     |       |
| Unrealized holding gains (losses) arising during the  period (net of tax expense (benefit) of $332, $(2,002), and $(582),  respectively)             |       | 528      |       | (3,184   | )          | (1,027   | )          |
| Less: reclassification adjustment for (losses) gains  (net of tax (benefit) expense of $(1,173), $0, and $165, respectively)  included in net income |       | (1,864   | )          | —   |       | 275      |       |
| Total other  comprehensive income (loss)                                                                                                             |       | 2,392    |       | (3,184   | )          | (1,302   | )          |
| Total  comprehensive income                                                                                                                          |       | $        | 4,316      |     | $          | 4,638    |       | $ | 4,799 |   |

 

**(19)  QuarterlyResults of Operations**

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended December 31, 2006 and 2005:

| ** **                                                                                                                                                  | ** ** | **Year Ended December 31, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ***(dollars in thousands)***                                                                                                                      | ** ** | **Fourth Quarter**                              | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
| Interest income                                                                                                                                             |       |                                                 | $          | 24,467 |   |   |   | $ | 24,778 |   |   |   | $ | 24,188 |   |   |   | $ | 22,315 |   |   |
| Interest expense                                                                                                                                            |       |                                                 | 12,489     |   |   |   | 12,374 |   |   |   | 11,546 |   |   |   | 10,073 |   |   |
| Net interest  income                                                                                                                                        |       |                                                 | 11,978     |   |   |   | 12,404 |   |   |   | 12,642 |   |   |   | 12,242 |   |   |
| Provision for  loan losses                                                                                                                                  |       |                                                 | 1,009      |   |   |   | 261 |   |   |   | 623 |   |   |   | 422 |   |   |
| Other operating  income                                                                                                                                     |       |                                                 | 6,942      |   |   |   | 6,477 |   |   |   | 7,387 |   |   |   | 5,998 |   |   |
| Gain (loss) on  sale of securities                                                                                                                          |       |                                                 | (3,063     | ) |   |   | 26 |   |   |   | — |   |   |   | — |   |   |
| Operating  expenses                                                                                                                                         |       |                                                 | 21,294     |   |   |   | 16,061 |   |   |   | 16,286 |   |   |   | 15,518 |   |   |
| Income (loss)  before taxes                                                                                                                                 |       |                                                 | (6,446     | ) |   |   | 2,585 |   |   |   | 3,120 |   |   |   | 2,300 |   |   |
| Income tax  expense (benefit)                                                                                                                               |       |                                                 | (2,466     | ) |   |   | 542 |   |   |   | 919 |   |   |   | 640 |   |   |
| Net income                                                                                                                                                  |       |                                                 | $          | (3,980 | ) |   |   | $ | 2,043 |   |   |   | $ | 2,201 |   |   |   | $ | 1,660 |   |   |
| Net income (loss)  per common share  (basic)                                                                                                                |       |                                                 | $          | (0.63 | ) |   |   | $ | 0.32 |   |   |   | $ | 0.35 |   |   |   | $ | 0.26 |   |   |
| Net income (loss)  per common share (diluted)                                                                                                               |       |                                                 | $          | (0.60 | ) |   |   | $ | 0.31 |   |   |   | $ | 0.33 |   |   |   | $ | 0.25 |   |   |
| Market prices:  high                                                                                                                                        |       |                                                 | $          | 20.45 |   |   |   | $ | 19.50 |   |   |   | $ | 19.60 |   |   |   | $ | 19.34 |   |   |
|                            low |       |                                                 | 18.36      |   |   |   | 18.51 |   |   |   | 18.30 |   |   |   | 17.26 |   |   |

 

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| ** **                                                                                                                                                  | ** ** | **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                                                                                                                                     |       |                                                 | 6,175      |   |   |   | 6,707 |   |   |   | 5,607 |   |   |   | 4,526 |   |   |
| Operating  expenses                                                                                                                                         |       |                                                 | 13,869     |   |   |   | 14,865 |   |   |   | 14,118 |   |   |   | 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 |   |   |

 

**(20)  FinancialInformation of Parent Company**

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

**Statements of Financial Condition**

| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ***(dollars in thousands)***           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Assets:                                          |       |                  |       |   |   |
| Cash and  interest-bearing deposits              |       | $                     | 2,127      |   | $ | 17,920 |   |
| Subordinated  notes                              |       | 7,500                 |       | 7,500 |   |
| Loans receivable                                 |       | 19,854                |       | 7,256 |   |
| Securities  available for sale                   |       | 1,395                 |       | 1,310 |   |
| Investment in  subsidiaries                      |       | 117,685               |       | 108,429 |   |
| Company-owned  life insurance                    |       | 2,778                 |       | 2,678 |   |
| Other assets                                     |       | 2,318                 |       | 1,983 |   |
| Total assets                                     |       | $                     | 153,657    |   | $ | 147,076 |   |
| Liabilities and  stockholders’ equity:      |       |                  |       |   |   |
| Other liabilities                                |       | $                     | 1,304      |   | $ | 977 |   |
| Junior  subordinated debentures                  |       | 73,724                |       | 73,724 |   |
| Stockholders’  equity                       |       | 78,629                |       | 72,375 |   |
| Total liabilities  and stockholders’ equity |       | $                     | 153,657    |   | $ | 147,076 |   |

 

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**Statements of Operations**

| ** **                                                      | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ***(dollars in thousands)***                          | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income:                                                         |       |                                                          |       |   |   |   |   |
| Interest on investments  and interest-bearing deposits          |       | $                                                             | 261        |   | $ | 130 |   | $ | 150 |   |
| Interest on subordinated  note                                  |       | 493                                                           |       | 411 |   | 274 |   |
| Interest on loans                                               |       | 1,205                                                         |       | 645 |   | 470 |   |
| Gain on sale of  securities                                     |       | 26                                                            |       | — |   | — |   |
| Other income                                                    |       | 883                                                           |       | 846 |   | 741 |   |
| Total income                                                    |       | 2,868                                                         |       | 2,032 |   | 1,635 |   |
| Expenses:                                                       |       |                                                          |       |   |   |   |   |
| Interest expense                                                |       | 5,384                                                         |       | 3,762 |   | 2,426 |   |
| Professional expenses                                           |       | 297                                                           |       | 259 |   | 248 |   |
| Other expenses                                                  |       | 366                                                           |       | 402 |   | 304 |   |
| Total expenses                                                  |       | 6,047                                                         |       | 4,423 |   | 2,978 |   |
| Loss before income tax  benefit                                 |       | (3,179                                                        | )          | (2,391 | ) | (1,343 | ) |
| Income tax benefit                                              |       | (412                                                          | )          | (96 | ) | (107 | ) |
| Loss before equity in  undistributed net income of subsidiaries |       | (2,767                                                        | )          | (2,295 | ) | (1,236 | ) |
| Equity in undistributed  net income of subsidiaries             |       | 4,691                                                         |       | 10,117 |   | 7,337 |   |
| Net income                                                      |       | $                                                             | 1,924      |   | $ | 7,822 |   | $ | 6,101 |   |

 

**Statements of Cash Flows**

| ** **                                                                    | ** ** | **For the Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ***(dollars in thousands)***                                        | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                        |       |                                                          |       |   |   |   |   |
| Loss before undistributed net income of subsidiaries                          |       | $                                                             | (2,767     | ) | $ | (2,295 | ) | $ | (1,236 | ) |
| Gain on sale of securities                                                    |       | 26                                                            |       | — |   | — |   |
| Increase in other assets                                                      |       | (404                                                          | )          | (436 | ) | (251 | ) |
| Income from company-owned life insurance                                      |       | (100                                                          | )          | (100 | ) | (78 | ) |
| Excess tax benefit on stock-based compensation                                |       | (585                                                          | )          | — |   | — |   |
| Increase (decrease) in other liabilities                                      |       | 327                                                           |       | 627 |   | (1,067 | ) |
| Net cash used in operating activities                                         |       | (3,503                                                        | )          | (2,204 | ) | (2,632 | ) |
| Cash flows from  investing activities:                                        |       |                                                          |       |   |   |   |   |
| Investment in subsidiaries                                                    |       | (1,695                                                        | )          | (16,874 | ) | (1,428 | ) |
| Loans (disbursements) repayments, net                                         |       | (12,598                                                       | )          | 4,075 |   | 10,287 |   |
| Purchase of subordinated note                                                 |       | —                                                        |       | (2,500 | ) | (5,000 | ) |
| Purchase of securities available for sale                                     |       | —                                                        |       | — |   | (170 | ) |
| Sale of securities available for sale                                         |       | 116                                                           |       | — |   | — |   |
| Purchase of company-owned life insurance                                      |       | —                                                        |       | — |   | (2,500 | ) |
| Net cash (used in) provided by investing activities                           |       | (14,177                                                       | )          | (15,299 | ) | 1,189 |   |
| Cash flows from  financing activities:                                        |       |                                                          |       |   |   |   |   |
| Proceeds from stock issuance, net                                             |       | 1,884                                                         |       | 5,001 |   | 1,690 |   |
| Repurchase of common stock, net                                               |       | (582                                                          | )          | (1,578 | ) | (609 | ) |
| Excess tax benefit on stock-based compensation                                |       | 585                                                           |       | — |   | — |   |
| Proceeds from issuance of junior subordinated deferrable  interest debentures |       | —                                                        |       | 15,475 |   | 10,310 |   |
| Net cash provided by financing activities                                     |       | 1,887                                                         |       | 18,898 |   | 11,391 |   |
| Net (decrease) increase in cash and cash equivalents                          |       | (15,793                                                       | )          | 1,395 |   | 9,948 |   |
| Cash and cash  equivalents at beginning of year                               |       | 17,920                                                        |       | 16,525 |   | 6,577 |   |
| Cash and cash  equivalents at end of year                                     |       | $                                                             | 2,127      |   | $ | 17,920 |   | $ | 16,525 |   |

 

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**(21)  RecentAccounting Pronouncements**

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3*.This statement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange. In the case of impracticability in retrospective application, thestatement gives guidance as to the appropriate treatment of the change orcorrection. The statement is effective for accounting changes made in fiscalyears beginning after December 15, 2005. The adoption of this standard didnot have a material impact on our financial condition, results of operations orliquidity.

In February 2006, the FASB issued SFAS No. 155,*Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140*. Thisstatement amends SFAS No. 133 and SFAS No. 140 by: permitting fairvalue remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation; clarifying whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133; establishing a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation; clarifying that concentrations ofcredit risk in the form of subordination are not embedded derivatives and;amending SFAS No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. The statement is effective for fiscal years beginning after September 15,2006. The adoption of this standard is not anticipated to have a materialimpact on our financial condition, results of operations or liquidity.

In March 2006, the FASB issued SFAS No. 156,*Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140*. This statement amends SFASNo. 140 with respect to the accounting for separately recognized servicingassets and servicing liabilities. It requires an entity to recognize aservicing asset or servicing liability each time an obligation is undertaken toservice a financial asset by entering into a servicing contract in certainsituations and requires all separately recognized servicing assets andliabilities to be initially measured at fair value, if practicable. Thestatement permits the choice between the “amortization method” and the “fairvalue measurement method” for the subsequent measurement of the servicingassets or liabilities and allows for a one-time reclassification ofavailable-for-sale securities to trading securities at initial adoption.  The statement also requires separate presentationof servicing assets and servicing liabilities subsequently measured at fairvalue in the statement of financial position and additional disclosures for allseparately recognized servicing assets and servicing liabilities.  Thestatement is effective for fiscal years beginning after September 15, 2006.The adoption of this standard is not anticipated to have a material impact onour financial condition, results of operations or liquidity.

In July 2006, the FASB issued FASB InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109*. Theinterpretation clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes*. Theinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosures, and transition. The interpretation is effective for fiscal yearsbeginning after December 15, 2006. Theadoption of this interpretation is not anticipated to have a material impact onour financial condition, results of operations or liquidity.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. Thisstatement defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles, 

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and expands disclosuresabout fair value measurements. The statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007. The adoption of this interpretation is notanticipated to have a material impact on our financial condition, results ofoperations or liquidity.

In September 2006,the FASB ratified the consensus reached by the EITF on Issue No. 06-4,*Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*. EITF 06-4 requires the recognition of aliability and related compensation costs for endorsement split-dollar lifeinsurance policies that provide a benefit to an employee that extends topostretirement periods as defined in SFAS No. 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pensions*. The EITF reached a consensus that Bank OwnedLife Insurance policies purchased for this purpose do not effectively settlethe entity’s obligation to the employee in this regard and, thus, the entitymust record compensation costs and a related liability. Entities shouldrecognize the effects of applying this Issue through either, (a) a changein accounting principle through a cumulative-effective adjustment to retainedearnings or to other components of equity or net assets in the balance sheet asof the beginning of the year of adoption, or (b) a change in accountingprinciple through retrospective application to all prior periods. This Issue iseffective for fiscal years beginning after December 15, 2007. Managementis currently evaluating the impact of adopting this Issue on the Company’sfinancial statements.

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

None.

**ITEM 9A**           CONTROLSAND PROCEDURES

**ConclusionRegarding The Effectiveness Of Disclosure Controls 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, asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, seniormanagement has recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and therefore has been required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

In accordance with Rule 13a-15(b) ofthe Exchange Act, as of the end of the fiscal year ended December 31,2006, 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 our disclosurecontrols and procedures are, in fact, effective at the reasonable assurancelevel.

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**Management’s ReportOn Internal Control Over Financial Reporting**

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 31,2006, 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, 2006 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 of the effectiveness of theCompany’s internal control over financial reporting as of December 31,2006 has been audited by Stegman and Company, an independent registered publicaccounting firm, and their report follows management’s report.

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**Report OfIndependent Registered Public Accounting Firm**

The Board of Directors and StockholdersFirst Mariner BancorpBaltimore, Maryland

We have audited management’s assessment, included inthe preceding Management’s Report on Internal Control Over Financial Reporting,that First Mariner Bancorp (the “Company”) maintained effective internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in *InternalControl-Integrated Framework* issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO). The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

Weconducted our audit 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 materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the Company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2006, is fairly stated, in all material respects, based oncriteria established in *Internal Control-IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Also, in our opinion, the Company maintained, inall material respects, effective internal control over financial reporting asof December 31, 2006, based on criteria established in *Internal Control-Integrated Framework* issued by theCommittee of Sponsoring Organizations 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, 2006 and2005 and the related consolidated statements of operations, changes instockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006 and our report dated March 3, 2007 expressedan unqualified opinion on those consolidated financial statements.

|  |   | /s/ Stegman & Company |
|--|--------|--------------------------------|

Baltimore, Maryland

March 3,2007

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**Changes In InternalControl Over Financial Reporting**

During the quarter endedDecember 31, 2006, there have been no changes in our internal controlsover financial reporting that has materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

**ITEM 9B**          OTHERINFORMATION

None.

**PART III**

**ITEM 10**            DIRECTORSAND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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 onMay 1, 2007, which proxy statement will be filed with the Securities andExchange Commission no later than 120 days after the close of our fiscalyear.

The information called forby Item 10 with respect to executive officers is set forth above inPart 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) trading prohibitions during “blackout period;” (ii) prohibitionsagainst insider trading; (iii) corporate opportunities; and(iv) loans to insiders policy.

**ITEM 11**            EXECUTIVECOMPENSATION

Certain informationrelating to our directors’ and executive officers’ compensation and ourCompensation Committee’s report on executive compensation is incorporated byreference herein from our definitive proxy statement in connection with ourAnnual Meeting of Stockholders to be held on May 1, 2007, which proxystatement will be filed with the Securities and Exchange Commission no laterthan 120 days after the close of our fiscal year.

See information relatingto our stock performance in Item 5—“Market for the Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities” in PartII of this 10-K.

**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 1, 2007, 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“Equity Compensation Plan Information” in Item 5 of this Form 10-K.

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**ITEM 13**            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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 1, 2007, 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 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 1, 2007, 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**

**ITEM15**            EXHIBITS AND FINANCIALSTATEMENT SCHEDULES

| a.     |   | (1), (2) Financial  Statements                                                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | Report of Independent  Registered Public Accounting Firm                                                                                                                         |
|   |   | Consolidated Statements  of Financial Condition as of December 31, 2006 and 2005                                                                                            |
|   |   | Consolidated Statements  of Operations for the years ended December 31, 2006, 2005,      and 2004                                                                 |
|   |   | Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31,             2006, 2005, and 2004 |
|   |   | Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005,   and 2004                                                                              |
|   |   | Notes to  Consolidated Financial Statements for the years ended December 31, 2006,  2005,  and 2004                                                                         |
|   |   | (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,  2007 |     | 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, 2007.

| /s/ EDWIN F. HALE SR.                           |   | /s/ MARK A. KEIDEL                            |
|-------------------------------------------------|--------|-----------------------------------------------|
| Edwin F. Hale  Sr., Chief Executive Officer and |   | Mark A. Keidel,  Chief Financial Officer      |
| Director                                        |   |                                          |
| /s/  JOSEPH A. CICERO                           |   | /s/  GEORGE H. MANTAKOS                       |
| Joseph A. Cicero,  President and Director       |   | George H.  Mantakos, Executive Vice President |
|                                            |   | and Director                                  |
| /s/  BARRY B. BONDROFF                          |   | /s/  MELVIN KABICK                            |
| Barry B.  Bondroff, Director                    |   | Melvin Kabick,  Director                      |
| /s/  JOHN BROWN III                             |   | /s/  JOHN MCDANIEL                            |
| John Brown III,  Director                       |   | John McDaniel,  Director                      |
| /s/  THOMAS L. BROMWELL                         |   | /s/  JOHN J. OLIVER                           |
| Thomas L.  Bromwell, Director                   |   | John J. Oliver,  Director                     |
| /s/  EDITH B. BROWN                             |   | /s/  PATRICIA SCHMOKE                         |
| Edith B. Brown,  Director                       |   | Patricia Schmoke,  Director                   |
| /s/  ROBERT CARET                               |   | /s/  HECTOR TORRES                            |
| Robert Caret,  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.)                        |

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| 10.17 |   | Change of Control Agreement dated April 2, 2003  between First Mariner Bancorp and Brett J. Carter (Incorporated by reference  to Exhibit 10.17 to the Company’s Form 10-Q for the quarter  ended March 31, 2003.)                       |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18 |   | Lease Agreement dated June 2, 2003 between  Canton Crossing LLC and First Mariner Bank (Incorporated by reference to  Exhibit 10.18 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)              |
| 10.26 |   | Description of  Board Fees (Incorporated by reference to Exhibit 10.1 to the Company’s  Form 8-K filed on February 1, 2006)                                                                                                                   |
| 10.27 |   | Description of  2006 Executive Bonus Plan (Incorporated by reference to Exhibit 10.2 to  the Company’s Form 8-K filed on February 1, 2006)                                                                                                    |
| 10.28 |   | Lease Agreement dated January 8, 2007 between  First Mariner Bank and Canton Crossing Tower, LLC, (Incorporated by reference  to Exhibit 10.1 to the Company’s Form 8-K filed on  March 14, 2007)                                        |
| 10.29 |   | Description of  2007 Short-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to  the Company’s Form 8-K filed on March 14, 2007)                                                                                                                |
| 21.1  |   | Subsidiaries of Registrant filed herewith                                                                                                                                                                                                                         |
| 23.1  |   | Consent of Stegman & Company filed herewith                                                                                                                                                                                                              |
| 31.1  |   | Certification 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  |   | Certification 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  |   | Certification 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  |   | Certification 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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