UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number:  0-21815

FIRST MARINER BANCORP

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such report, and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý  No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes  ý  No  o

The number of shares of common stock outstanding as of August 5, 2005 is 6,208,439 shares.

FIRST MARINER BANCORP
INDEX

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Financial Condition

See accompanying notes to the consolidated financial statements

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First Mariner Bancorp and Subsidiaries

Consolidated Statements of Operations (Unaudited)

See accompanying notes to the consolidated financial statements.

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First Mariner Bancorp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30,

See accompanying notes to the consolidated financial statements.

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FIRST MARINER BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The foregoing consolidated financial statements of First Mariner Bancorp (the “Company”) are unaudited; however, in the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of interim periods have been included.  The balances as of December 31, 2004 have been derived from audited financial statements.  There have been no significant changes to the Company’s accounting policies as disclosed in the 2004 annual report. These statements should be read in conjunction with the financial statements and accompanying notes included in First Mariner Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2004.  The results shown in this interim report are not necessarily indicative of results to be expected for the full year or any other period.

Consolidation of financial information has resulted in the elimination of all significant intercompany accounts and transactions. Certain reclassifications have been made to amounts previously reported to conform with the classifications made in 2005.  All figures for the periods ended June 30, 2005 and June 30, 2004 are unaudited amounts.

NOTE 2 – COMPREHENSIVE INCOME

NOTE 3 – PER SHARE DATA

Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding.  Diluted earnings per share is computed after adjusting the denominator of the basic earnings per share computation for the effects of all dilutive potential common shares outstanding during the period. The dilutive effects of options, warrants and their equivalents are computed using the “treasury stock” method.  For the period ended June 30, 2005 and 2004, there were 271,000 and 0 shares, respectively, which were antidilutive and excluded from the computation.

Information relating to the calculation of earnings per common share is summarized as follows:

NOTE 4 - STOCK BASED COMPENSATION

We apply the intrinsic value method to account for stock-based compensation plans.  Under this method, compensation cost is recognized for awards of shares of common stock to employees only if the quoted market price of the stock at the grant date (or

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other measurement date, if later) is greater than the amount the employee must pay to acquire the stock.

The option price is equal to the market price of the common stock at the date of grant for all of our options granted in 2005 and 2004 and, accordingly, we do not record compensation expense related to options granted.  If we had applied the fair value-based method to recognize compensation cost for the options granted, our net income and net income per share would have been changed to the following pro forma amounts for the three and six months ended June 30:

NOTE 5 – SEGMENT INFORMATION

The Company is in the business of providing financial services, and operates in three business segments—commercial and consumer banking, consumer finance and mortgage-banking.  Commercial and consumer banking is conducted through First Mariner Bank (the “Bank”) and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises.  This segment also includes the Company’s treasury and administrative functions.  Mortgage-banking is conducted through First Mariner Mortgage, a division of the Bank, and involves originating residential single family mortgages for sale in the secondary market and to the Bank.  Consumer finance is conducted through Finance Maryland, and involves originating small direct consumer loans and the purchase of retail installment sales contracts.  FM Appraisal’s results are included in the mortgage-banking segment.

The following table presents certain information regarding the Company’s business segments:

For the six month period ended June 30, 2005:

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For the six month period ended June 30, 2004:

NOTE 6 – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R,  “Share-Based Payment (Revised 2004),” which establishes standards for accounting for transactions in which an entity (i) exchanges its equity instruments for goods and services, or (ii) incurs liabilities in exchange for goods and services that are based on an entity’s equity instruments or that may be settled by the issuance of equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using Accounting Principles Bulletin (“APB”) No. 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant.  In April 2005, the SEC adopted a rule to amend the compliance date for SFAS 123R.  Under the new rule, companies may implement SFAS 123R at the beginning of their next fiscal year instead of the Statement’s original implementation date of the next reporting period beginning after June 15, 2005.  SFAS 123R is now effective on January 1, 2006 for the Company. The Company will transition to fair value-based compensation using a modified version of the prospective application, which means the fair value-based method prescribed under SFAS 123R will apply to new awards, modification of previous awards, repurchases and cancellations after January 1, 2006.  Additionally, compensation cost for awards for which requisite service has not been rendered (non-vested options and stock grants) that are outstanding as of January 1, 2006 must be recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of SFAS 123R.  The determination of compensation cost for awards granted prior to January 1, 2006 will be based on the same methods and on the same fair values previously determined for the pro forma disclosures required for companies that did not previously adopt the fair value accounting method for stock-based compensation.

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

In March 2004, the FASB Emerging Issues Task Force (“EITF”) released Issue 03-01, “Meaning of Other Than Temporary Impairment,” which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurement requirements of Issue 03-01, and other disclosure requirements not already implemented, were effective for periods after June 15, 2004.  In September 2004, the FASB staff issued FASB Staff Position (“FSP”) EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance during the period of delay until a final consensus is reached.   In June 2005, the FASB staff issued an FSP that supersedes EITF 03-01 and effectively reverts the guidance for other-than-temporary impairments to previously established literature.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.”  This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.  In the case of impracticability in retrospective application, the statement gives guidance as to the appropriate treatment of the change or correction.  The statement is effective for accounting changes made in fiscal years beginning after December 15, 2005.  The adoption of this standard is not expected to have a material impact on our financial condition, results of operations, or liquidity.

In June 2005, the EITF released Issue 05-2, “The Meaning of ‘Conventional Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock’” to clarify the issue

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of an exception in Issue 00-19.  Issue 00-19 contains an exception to its general requirements for evaluating whether, pursuant to SFAS No. 133, an embedded derivative indexed to a company’s own stock would be classified as stockholders’ equity.  The exception applies to a “conventional convertible debt instrument” in which the holder may realize the value of the conversion option only by exercising the option and receiving all proceeds in a fixed number of shares or in the equivalent amount of cash (at the discretion of the issuer).  Issue 05-2 provides for the retention of the exception as described in Issue 00-19.  The Issue requires that instruments that provide the holder with an option to convert into a fixed number of shares (or an equivalent amount of cash at the issuer’s discretion) for which the ability to exercise the option feature is based on the passage of time or on a contingent event be considered “conventional” for purposes of applying Issue 00-19.  Convertible preferred stock having a mandatory redemption date may still qualify for the exception if the economic characteristics indicate that the instrument is more like debt than equity.  Application of Issue 05-2 should be applied to new instruments entered into and/or modified in periods beginning after June 29, 2005.

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

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read and reviewed in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Portions of this 10-Q may contain forward-looking language within the meaning of The Private Securities Litigation Reform Act of 1995.  Statements may include expressions about the Company’s confidence, policies, and strategies, provisions and allowance for loan losses, adequacy of capital levels, and liquidity.  Such forward looking statements involve certain risks and uncertainties, including general economic conditions, competition in the geographic and business areas in which the Company operates, inflation, fluctuations in interest rates, legislation and government regulation.  For a more complete discussion of risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements, see “Risk Factors” filed as Exhibit 99 to the Company’s Form 10-K for the year ended December 31, 2004.  The Company assumes no obligation to update forward-looking statements at any time.

The Company

The Company is a financial holding company incorporated under the laws of Maryland and registered under the federal Bank Holding Company Act of 1956, as amended.  The Company was organized in 1994 and changed its name to First Mariner Bancorp in May 1995. Since 1995, the Company’s strategy has involved building a network of banking branches, ATMs and other financial services outlets to capture market share and build a community franchise for stockholders, customers and employees.  The Company is currently focused on growing assets and earnings by capitalizing on the broad network of bank branches, mortgage offices, consumer finance offices, and ATMs established during its infrastructure expansion phase.

The Company’s business is conducted primarily through its wholly-owned subsidiaries, First Mariner Bank (the “Bank”), Finance Maryland LLC (“Finance Maryland”), and FM Appraisals, LLC (“FM Appraisals”).  First Mariner Bank is the largest operating subsidiary of the Company with assets exceeding $1.3 billion as of June 30, 2005. The Bank was formed in 1995 through the merger of several small financial institutions. The Bank’s primary market area for its core banking operations, which consist of traditional commercial and consumer lending, as well as retail and commercial deposit operations, is central Maryland as well as portions of Maryland’s eastern shore. The Bank’s mortgage division, First Mariner Mortgage, primarily serves the same core market area as the Bank, while several sourcing units of First Mariner Mortgage operate on a regional and national basis. About half of First Mariner Mortgage’s loan production comes from the core Bank’s market area. First Mariner Bank is an independent community bank, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is engaged in the general commercial banking business, with particular attention and emphasis on the needs of individuals and small to mid-sized businesses, and delivers a wide range of financial products and services that are offered by many larger competitors. Products and services include traditional deposit products, a variety of consumer and commercial loans, residential and commercial mortgage and construction loans, wire transfer services, non-deposit investment products, and internet banking and similar services. Most importantly, the Bank provides customers with access to local Bank officers who are empowered to act with flexibility to meet customers’ needs in an effort to foster and develop long-term loan and deposit relationships.

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Finance Maryland was formed in July 2002, and engages in traditional consumer finance activities, making small direct cash loans to individuals, the purchase of installment loan sales contracts from local merchants and retail dealers of consumer goods, and loans to individuals via direct mail solicitations. Finance Maryland currently operates 14 branches in the State of Maryland and four branches in the state of Delaware, which operate under the trade name “Finance Delaware.” Finance Maryland had total assets of $41.8 million as of June 30, 2005.

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

Financial Condition

The Company’s total assets were $1.400 billion at June 30, 2005, compared to $1.251 billion at December 31, 2004, increasing $149.648 million or 12.0% for the first six months of 2005.  Earning assets increased $124.107 million or 10.6% to $1.291 billion from $1.167 billion.  The growth in assets was primarily due to growth in loans outstanding (+$67.020 million), higher levels of loans held for sale (+65.467 million) and higher short-term investments (+$5.401 million).  Property and equipment increased $20.938 million due to the purchase of the Company’s headquarters building. Growth in total assets was funded by an increased level of customer deposits of $58.709 million and by a net increase in borrowed funds and repurchase agreements of  $84.609 million.

Total investment securities declined $17.387 million due to normal principal payments on mortgage-backed securities, scheduled maturities of other investments, and a decline in market values.  At June 30, 2005, the Company’s unrealized loss on securities classified as available for sale totaled $1.351 million, compared to $216 thousand at December 31, 2004.  Management considers the decline in market values to be temporary and does not expect to realize losses on any of the securities currently in the investment portfolio.  There were no securities sold during the six months ended June 30, 2005, and purchase activity amounted to $10.367 million. The investment portfolio composition is as follows:

Total loans increased $67.020 million during the first six months of 2005.  The underlying economic strength in the Company’s core market, affordable interest rates and continued emphasis on business development all contributed to the continued growth in loans.  Significant growth was realized in the Company’s commercial mortgage loan portfolio (+24.489 million), commercial construction loan portfolio (+$27.818 million) and second mortgages on real estate portfolio (+$13.192 million).  The total loan portfolio was comprised of the following:

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Credit Risk Management

The Company attempts to manage the risk characteristics of its loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances.  However, the Company seeks to rely primarily on the cash flow of its borrowers as the principal source of repayment.  Although credit policies are designed to minimize risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio as well as general and regional economic conditions.

The provision for loan losses for the three and six months ended June 30, 2005 was $981 thousand and $1.395 million, respectively, compared to $489 thousand and $789 thousand for the same periods ended June 30, 2004, respectively.  The higher provision for 2005 primarily reflects higher loan growth compared to the same periods last year.  The allowance for loan losses totaled $10.469 million at June 30, 2005 compared to $9.580 million at December 31, 2004.  As of June 30, 2005 the allowance for loan losses as a percentage of outstanding loans remained relatively stable at 1.29% as compared to 1.28% at December 31, 2004.

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Activity in the allowance for loan losses is as follows:

During the first six months of 2005, annualized net chargeoffs as compared to average loans outstanding decreased slightly to 0.13%, as compared to 0.15% during the same period of 2004.  Non-performing assets, expressed as a percentage of total assets, totaled 0.28% at June 30, 2005, down from 0.38% at December 31, 2004, but higher than 0.21% at June 30, 2004.  The decrease as compared to December 31, 2004 reflects a decrease in nonperforming assets of $811 thousand.  Loans past due 90 days or more and still accruing totaled $1.713 million compared to $1.658 million at December 31, 2004 and $6.127 million as of June 30, 2004.  The decrease in delinquencies when compared to June 2004 reflects significant declines in the Company’s residential construction-consumer portfolio.

At June 30, 2005, the allowance for loan losses represented 269.7% of nonperforming assets compared to 204.1% at December 31, 2004.  Management believes the allowance for loan losses at June 30, 2005 is adequate.

Deposits

Deposits totaled $884.126 million as of June 30, 2005, increasing $58.709 million or 7.1% from the December 31, 2004

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balance of $825.417 million.  The increase in deposits is attributable to management’s growth strategy, which includes significant marketing, promotion and cross selling of existing customers into additional products.  The mix of deposits has not significantly changed during 2005 compared to December 31, 2004. Continued successful marketing campaigns have maintained a strong mix of noninterest checking accounts, NOW and money market accounts.

Results of Operations

Net Income.  For the six months ended June 30, 2005, net income totaled $3.102 million compared to $2.680 million for the six month period ended June 30, 2004.  Basic earnings per share for the first six months of 2005 totaled $0.52 compared to $0.47 per share for the same period of 2004, while diluted earnings per share totaled $0.48 for the first six months of 2005 compared to $0.42 for the first six months of 2004.  Earnings for the six months ended June 30, 2005 were driven by higher net interest income and noninterest income; offset somewhat by a higher provision for credit losses and growth in noninterest expenses.

For the second quarter of 2005, net income totaled $1.727 million compared to $1.373 million for the three month period ended June 30, 2004.  Basic earnings per share for the three month period ended June 30, 2005 totaled $.28 compared to $.24 per share for the same period of 2004.  Diluted earnings per share totaled $.27 for the second quarter of 2005 compared to $.22 for the second quarter of 2004.  Increased net income for the second quarter of 2005 was attributable to increases in net interest income and noninterest income, while noninterest expense, the provision for loan losses and income tax expense also increased.

Net Interest Income.  Net interest income for the first six months of 2005 totaled $23.184 million, an increase of 15.1% over $20.148 million for the six months ended June 30, 2004. The net interest margin for the six month period was 3.88% compared to 3.99% for the comparable period of 2004, while average earning assets increased by $187.416 million or 18.8%.

Total interest income increased by $7.353 million primarily due to growth in average loans, loans held for sale and investments.  Average loans outstanding increased by $145.670 million, average investment securities increased by $10.413 million and average loans held for sale increased $38.329 million.  Yields on earning assets for the period increased to 6.43% from 6.15% due to the higher mix of loans and loans held for sale (which carry higher yields than investments and other earning assets) and increases in market interest rates.  Interest expense increased by $4.317 million.  Average interest-bearing liabilities increased by $164.892 million.  Average interest-bearing deposits increased by $33.340 million and average borrowings increased by $131.552 million.  Yields on interest-bearing liabilities increased to 2.90% from 2.45% for the same period in 2004 as a result of increased mix of borrowings as a percentage of interest-bearing funding sources and higher interest rates.

Second quarter net interest income was $11.940 million in 2005, an increase of 16.7% over $10.227 million for the second quarter of 2004.  The net interest margin for the three month period was 3.86% compared to 3.92% for the comparable period of 2004. Interest income increased $4.335 million.  Average loans outstanding for the second quarter increased by $158.394 million and average investments decreased $20.526 million.  Average loans held for sale increased $56.882 million and average interest-bearing deposits decreased by $10.898 million.  Yields on earning assets for the period increased to 6.51% from 6.05%, reflecting an increase in loans as a percentage of earning assets and an increase in market interest rates.  Interest expense increased by $2.622 million. Average interest-bearing liabilities increased by $171.097 million, as average interest-bearing deposits increased by $33.210 million and average borrowings increased by $137.887 million.  Rates paid on interest-bearing liabilities for the quarter ended June 30, 2005 increased to 3.00% from 2.41% for the same period in 2004 as a result of increased mix of borrowings as a percentage of interest-bearing funding sources and higher interest rates.

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