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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  o  No  x

The number of shares of common stock outstanding as of August 4, 2006 is 6,286,084 shares.

 

 

FIRST MARINER BANCORP AND SUBSIDIARIES
CONTENTS

 

 

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PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

First Mariner Bancorp and Subsidiaries

Consolidated Statements of Financial Condition

(dollars in thousands, except per share data)

		June 30, 2006			December 31, 2005
		(unaudited)
ASSETS
Cash and due from banks		$	30,484		$	40,157
Federal funds sold and interest-bearing deposits		16,455			5,678
Securities available for sale, at fair value		266,639			276,939
Loans held for sale		119,405			92,351
Loans receivable		860,748			851,586
Allowance for loan losses		(12,112		)	(11,743		)
Loans, net		848,636			839,843
Other real estate owned		1,065			931
Restricted stock investments		13,446			13,647
Premises and equipment, net		44,215			40,402
Accrued interest receivable		8,750			8,037
Deferred income taxes		7,118			5,940
Bank-owned life insurance		27,882			27,375
Prepaid expenses and other assets		12,537			11,178
Total assets		$	1,396,632		$	1,362,478
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	187,218		$	182,049
Interest-bearing		695,550			693,961
Total deposits		882,768			876,010
Short-term borrowings		221,342			199,376
Long-term borrowings		129,829			131,000
Junior subordinated deferrable interest debentures		73,724			73,724
Accrued expenses and other liabilities		14,198			9,993
Total liabilities		1,321,861			1,290,103
Stockholders’ equity:
Common stock, $.05 par value; 20,000,000 shares authorized; 6,286,084 and 6,262,442 shares issued and outstanding, respectively		314			313
Additional paid-in capital		55,590			55,193
Retained earnings		24,045			20,185
Accumulated other comprehensive loss		(5,178		)	(3,316		)
Total stockholders’ equity		74,771			72,375
Total liabilities and stockholders’ equity		$	1,396,632		$	1,362,478

 

See accompanying notes to the consolidated financial statements

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First Mariner Bancorp and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands except per share data)

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
		(unaudited)						(unaudited)
Interest income:
Loans		$	20,668		$	16,514		$	39,696		$	31,186
Investments and other earning assets		3,520			3,519			6,807			7,006
Total interest income		24,188			20,033			46,503			38,192
Interest expense:
Deposits		5,585			4,004			10,632			7,512
Short-term borrowings		2,697			897			4,694			2,347
Long-term borrowings		3,264			3,192			6,293			5,149
Total interest expense		11,546			8,093			21,619			15,008
Net interest income		12,642			11,940			24,884			23,184
Provision for loan losses		623			981			1,045			1,395
Net interest income after provision for loan losses		12,019			10,959			23,839			21,789
Noninterest income:
Gain on sale of mortgage loans		2,263			979			3,706			1,739
Other mortgage-banking revenue		799			646			1,424			1,004
ATM fees		824			800			1,609			1,519
Service fees on deposits		1,769			1,801			3,448			3,472
Commissions on sales of nondeposit investment products		122			167			216			292
Income from bank-owned life insurance		256			252			508			509
Commissions on sales of other insurance products		753			569			1,318			982
Other		601			393			1,154			616
Total noninterest income		7,387			5,607			13,383			10,133
Noninterest expense:
Salaries and employee benefits		9,006			7,818			17,438			14,963
Occupancy		1,932			1,412			3,635			3,057
Furniture, fixtures and equipment		750			761			1,550			1,517
Professional services		257			310			459			643
Advertising		397			340			863			790
Data processing		468			518			917			1,039
ATM servicing expenses		242			277			525			559
Service & maintenance		528			428			1,066			838
Other		2,706			2,254			5,349			4,200
Total noninterest expense		16,286			14,118			31,802			27,606
Net income before income taxes		3,120			2,448			5,420			4,316
Income tax expense		919			721			1,559			1,214
Net income		$	2,201		$	1,727		$	3,861		$	3,102
Net income per common share:
Basic		$	0.35		$	0.28		$	0.62		$	0.52
Diluted		$	0.33		$	0.27		$	0.58		$	0.48

 

See accompanying notes to the consolidated financial statements.

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First Mariner Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
dollars in thousands)

		Six Months Ended June 30,
		2006			2005
		(unaudited)
Cash flows from operating activities:
Net income		$	3,861		$	3,102
Adjustments to reconcile net income to net cash from operating activities:
Stock-based compensation		51			—
Depreciation and amortization		2,200			1,847
Amortization of unearned loan fees and costs, net		(612		)	(477		)
Amortization of premiums and discounts on loans, net		(368		)	(370		)
Amortization of premiums and discounts on mortgage-backed securities, net		115			144
Gain on sale of mortgage loans		(3,706		)	(1,739		)
Increase in accrued interest receivable		(713		)	(459		)
Provision for loan losses		1,045			1,395
Gain on sale of other real estate owned		(9		)	—
Loss (gain) on disposal of premises and equipment		2			(2		)
Increase in cash surrender value of bank-owned life insurance		(508		)	(514		)
Originations of mortgage loans held for sale		(615,874		)	(554,556		)
Proceeds from mortgage loans held for sale		592,526			490,828
Net increase in accrued expenses and other liabilities		4,191			1,215
Net increase in prepaids and other assets		(1,360		)	(222		)
Net cash used in operating activities		(19,159		)	(59,808		)
Cash flows from investing activities:
Loan disbursements, net of principal repayments		(9,858		)	(67,546		)
Purchases of premises and equipment		(6,030		)	(22,783		)
Proceeds from disposals of premises and equipment		15			—
Redemptions (purchases) of restricted stock investments		201			(3,606		)
Activity in securities available for sale:
Maturities/calls/repayments of securities available for sale		12,402			26,468
Purchase of securities available for sale		(5,250		)	(10,367		)
Proceeds from sales of other real estate owned		875			—
Net cash used in investing activities		(7,645		)	(77,834		)
Cash flows from financing activities:
Net increase in deposits		6,759			58,709
Net increase in other borrowed funds		20,795			94,619
Repayment of repurchase agreements		—			(10,000		)
Excess tax benefit on share-based compensation		7			—
Proceeds from stock issuance		347			4,285
Repurchase of common stock, net of costs		—			(1,578		)
Net cash provided by financing activities		27,908			146,035
Increase in cash and cash equivalents		1,104			8,393
Cash and cash equivalents at beginning of period		45,835			35,447
Cash and cash equivalents at end of period		$	46,939		$	43,840
Supplemental information:
Interest paid on deposits and borrowed funds		$	21,308		$	14,565
Income taxes paid		$	1,616		$	1,107
Real estate acquired in satisfaction of loans		$	1,000		$	866

 

See accompanying notes to the consolidated financial statements.

 

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First Mariner Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of and for the three and six months
ended June 30, 2006 and 2005 is unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis Of Presentation

The accompanying consolidated financial statements for First Mariner Bancorp (the “Company”) have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a full presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements should be read in conjunction with the audited financial statements included in our 2005 Annual Report on Form 10-K.

The consolidated financial statements include the accounts of the Company’s subsidiaries, First Mariner Bank (the “Bank”), Finance Maryland LLC (“Finance Maryland”), and FM Appraisals, LLC (“FM Appraisals”).  All significant intercompany balances and transactions have been eliminated.

The consolidated financial statements as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 are unaudited but include all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of financial position and results of operations for those periods. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results that will be achieved for the entire year.

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for credit losses (the “allowance”), other than temporary impairment of investment securities, accounting for gain on sale of mortgage loans, determination of changes in fair value for the derivative loan commitments, use of derivatives to manage interest rate risk, and deferred tax assets.

Certain reclassifications have been made to amounts previously reported to conform to the classifications made in 2006.

Derivative Loan Commitments Hedging Activities

In connection with our mortgage-banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. We enter into these commitments through retail and broker channels and also purchase loan commitments from correspondent lenders. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 90 days after inception of the rate lock commitment. Such a commitment is referred to as a derivative loan commitment if the loan that will result from exercise of the commitment will be held for sale upon funding under Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” As such, loan commitments that are derivatives must be recognized at fair value on the consolidated balance sheets with changes in their fair values recorded as part of income from mortgage-banking operations. Fair value of derivative loan commitments is considered the value that would be generated when the loan arising from exercise of the loan commitment is sold in the secondary mortgage market. 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 Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” Subsequent to inception, we estimate the fair value of the commitment, taking into consideration the probability of funding of the loan, and compare it to the fair value calculated at inception to measure the change in value, which is recorded through current period earnings with a corresponding asset for an increase in value or a liability for a decrease in value.

Historically, we have protected the price risk of our rate lock commitments exclusively through the use of best efforts forward delivery commitments, where we commit to sell a loan to a buyer that has agreed to buy the loan at the interest rate committed to the customer.  With best efforts forward delivery commitments, we are not exposed to losses nor will we realize gains related to our rate lock commitments due to changes in interest rates. We assume any change in the fair value of the best efforts forward delivery commitments would be equal to any change in the fair value of the corresponding rate lock commitment with the customer.

Beginning in January 2006, we expanded our secondary marketing and hedging operations, and began to hedge a portion of

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our rate lock commitments through the use of forward sales of mortgage-backed securities and Eurodollars.  The use of forward sales of mortgage-backed securities and Eurodollars allows us to aggregate pools of mortgage loans to be sold on a bulk basis, and we expect the overall impact of selling loans in bulk (net of related hedging costs) will produce higher net profits compared to selling loans individually via best efforts forward delivery commitments.

The process of selling loans on a bulk basis and use of forward sales of mortgage-backed securities and Eurodollars to hedge interest rate risk associated with customer interest rate lock commitments involves greater risk than selling loans on an individual basis through best efforts forward delivery commitments.  Hedging interest rate risk in bulk sales requires management to estimate the expected “fallout” (rate lock commitments with customers that do not complete the loan process).  Additionally, the fair value of the hedge may not correlate precisely with the change in fair value of the rate lock commitments with the customer due to changes in market conditions, such as demand for loan products, or prices paid for differing types of loan products.  Variances from management’s estimates for customer fallout or market changes making the forward sale of mortgage-backed securities and/or Eurodollars non-effective may result in higher volatility in our profits from selling mortgage loans originated for sale. We have engaged an experienced third party to assist us in managing our activities in hedging and marketing our bulk sales delivery strategy.

Counterparty Credit Risk

We have exposure to credit loss in the event of contractual non-performance by our trading counterparties and counterparties to our various over-the-counter derivative financial instruments.  We manage this credit risk by selecting only well-established, financially strong counterparties, spreading the credit risk among many such counterparties, and by placing contractual limits on the amount of unsecured credit extended to any single counterparty.

NOTE 2 — COMPREHENSIVE INCOME

The following table shows the Company’s comprehensive income for the three months ended June 30, 2006 and 2005:

		Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)		2006			2005			2006			2005
Net income		$	2,201		$	1,727		$	3,861		$	3,102
Other comprehensive income items:
Unrealized holding gains (losses) arising during the period (net of tax expense (benefit) of $(426), $1,080, $(1,172), and $(438), respectively)		(677		)	1,717			(1,862		)	(701		)
Total other comprehensive income (loss)		(677		)	1,717			(1,862		)	(701		)
Total comprehensive income		$	1,524		$	3,444		$	1,999		$	2,401

 

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 three month period ended June 30, 2006 and 2005, there were 8,600 and 271,000 shares, respectively, which were antidilutive and excluded from the computation and for the six month period ended June 30, 2006 and 2005, there were 4,324 and 149,290 shares, respectively, which were antidilutive and excluded from the computation.

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

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		Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands, except for per share data)		2006			2005			2006			2005
Net income - basic and diluted		$	2,201		$	1,727		$	3,861		$	3,102
Weighted-average share outstanding - basic		6,276,362			6,090,962			6,270,629			5,960,496
Dilutive securities - options and warrants		352,783			368,961			342,364			465,040
Adjusted weighted-average shares outstanding - dilutive		6,629,145			6,459,923			6,612,993			6,425,536
Earnings per share - basic		$	0.35		$	0.28		$	0.62		$	0.52
Earnings per share - diluted		$	0.33		$	0.27		$	0.58		$	0.48

 

NOTE 4 — STOCK BASED COMPENSATION

We have stock option award arrangements, which provide for the granting of options to acquire common stock to our directors and key employees. Option prices are equal to or greater than the estimated fair market value 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 an immediate acceleration of the vesting for all unvested stock options previously awarded.  On that date, all outstanding options became fully vested.  Prior to that date, options granted had a three-year vesting schedule with the first year vested upon issuance. As of June 30, 2006, all outstanding options are fully vested.  All of our options expire ten years after the date of grant.   There have been no modifications to the existing plan.

In addition to our stock option plan, we currently offer an employee stock purchase plan whereby our employees can purchase our stock through payroll deductions. We generally provide a discount of up to 10% of the purchase price.  As of June 30, 2006, we have set aside 249,243 shares out of our total authorized but unissued shares for these two plans.

In January 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R,  “Share-Based Payment (Revised 2004)” for our shareholder-approved Long-Term Incentive Plan, which permits the grant of share options and shares to our directors and key employees.  We made the transition to fair value-based compensation using the modified version of the prospective application, which means the fair value-based method prescribed under SFAS 123R applies to new awards, 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 previously determined for the pro forma disclosures previously required.  We recognized compensation cost of $50,579 for both the three and six months ended June 30, 2006. We had no options as of January 1, 2006 for which requisite service remains as we accelerated the vesting of all options in 2005.

Information with respect to stock options is as follows for the six months ended June 30, 2006:

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							Weighted-
				Weighted-			Average		Aggregate
				Average			Remaining		Intrinsic
		Number		Exercise			Contractual		Value
		of Shares		Price			Term (in years)		(in thousands)
Outstanding at beginning of period		981,934		$	12.16
Granted		9,600		18.62
Exercised		(13,020	)	12.57
Forfeited/Cancelled		(10,233	)	15.54
Outstanding at end of period		968,281		$	12.18		5.6		$	6,893,753
Exercisable at end of period		968,281		$	12.18		5.6		$	6,893,753

 

The weighted average fair values of our option grants for the six months ended June 30, 2006 and 2005 were $5.71 and $6.17, respectively, on the dates of grants. The fair values of our options granted were calculated using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions for the six months ended June 30, 2006 and 2005:

 

For 2005, prior to adoption of SFAS 123R, the option price was equal to the market price of the common stock at the date of grant for all of our options and, accordingly, we did 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, 2005:

 

The total intrinsic value of options exercised and the related tax benefit during the six months ended June 30, 2006 amounted to $81,288 and $31,393, respectively, and proceeds from exercises of stock options amounted to $163,692 for the six months ended June 30, 2006.

While our employee stock purchase plan provides for a 10% discount from market value at issuance, we do not recognize compensation expense on the discount as:  substantially all employees that meet limited employment qualifications may participate in the plan on an equitable basis; the plan incorporates no option features, other than employees are permitted a short period of time after the purchase price has been fixed to enroll in the plan, the purchase price is based solely on the market price of the shares at the date of purchase, and employees are permitted to cancel participation before the purchase date and obtain a refund of amounts previously paid and;  the discount from the market price does not exceed the per-share amount of share issuance costs that would have been incurred to raise a significant amount of capital by a public offering.

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NOTE 5 — COMMITMENTS AND CONTINGENT LIABILITIES

We are party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of customers.  These financial instruments include commitments to extend credit, available lines of credit and standby letters of credit.  Our exposure to credit risk is represented by the contractual amounts of those financial instruments.  We apply the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.  A summary of the financial instruments at June 30, 2006 whose contract amounts represent potential credit risk is as follows:

 

 

NOTE 6 — SEGMENT INFORMATION

We are in the business of providing financial services, and we operate 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 our treasury and administrative functions.  Mortgage-banking is conducted through First Mariner Mortgage, a division of the Bank, and involves originating first- and second-lien residential 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.  The results of our subsidiary, FM Appraisals, are included in the mortgage-banking segment.

The following table presents certain information regarding the our business segments:

For the six month period ended June 30, 2006:

 

		Commercial and			Consumer			Mortgage-
(dollars in thousands)		Consumer Banking			Finance			Banking			Total
Interest income		$	36,272		$	6,569		$	3,662		$	46,503
Interest expense		17,687			1,461			2,471			21,619
Net interest income		18,585			5,108			1,191			24,884
Provision for loan losses		100			945			—			1,045
Net interest income after provision for loan losses		18,485			4,163			1,191			23,839
Noninterest income		6,868			1,575			4,940			13,383
Noninterest expense		21,623			4,665			5,514			31,802
Net intersegment income		(119		)	—			119			—
Net income before income taxes		$	3,611		$	1,073		$	736		$	5,420
Total assets		$	1,219,742		$	57,485		$	119,405		$	1,396,632

 

For the six month period ended June 30, 2005:

 

		Commercial and			Consumer			Mortgage-
(dollars in thousands)		Consumer Banking			Finance			Banking			Total
Interest income		$	31,046		$	4,893		$	2,253		$	38,192
Interest expense		12,961			834			1,213			15,008
Net interest income		18,085			4,059			1,040			23,184
Provision for loan losses		675			720			—			1,395
Net interest income after provision for loan losses		17,410			3,339			1,040			21,789
Noninterest income		6,528			1,016			2,589			10,133
Noninterest expense		19,555			3,724			4,327			27,606
Net intersegment income		(406		)	—			406			—
Net income before income taxes		$	3,977		$	631		$	(292	)	$	4,316
Total assets		$	1,212,924		$	41,833		$	145,422		$	1,400,179

 

NOTE 7 — FINANCIAL INSTRUMENTS

We utilize various derivative instruments to economically hedge the price risk associated with our outstanding derivative loan commitments, and loans which have settled with the borrower which have not been contracted for sale to investors.  Management

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expects these derivatives will experience changes in fair value opposite to changes in fair value of the derivative loan commitments and warehouse loans, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments. The instruments used to economically hedge the fair value of the derivative loan commitments include forward loan sales of mortgage-backed securities or Eurodollars under mandatory contracts and forward sales commitments under best efforts contracts. A forward loan sales commitment protects us from losses on sales of the loans arising from exercise of the loan commitments by securing the ultimate sales price and delivery date of the loans. A forward contract to sell mortgage-backed securities or Eurodollars hedges and protects price, volume and other interest rate lock commitment risks.  We take into account various factors and strategies in determining the portion of the mortgage pipeline (derivative loan commitments) we want to hedge economically.  Estimates of fair value take into consideration the probability of funding the loan.

The notional amounts of forward sales commitments and forward sales of mortgage-backed securities and Eurodollars may differ from the notional amount of interest rate lock commitments and our loans held for sale (“warehouse”) due to a number of factors.  We attempt to approximate the weighted average duration of forward sales of mortgage-backed securities and Eurodollars to the weighted average duration of the loan products in our pipeline or warehouse awaiting sale.  Use of shorter duration hedges (such as Eurodollars) will likely result in the notional amounts of the hedge exceeding the notional amounts of our pipeline and warehouse.  Use of longer duration hedges will likely result in the notional amounts of the hedge being less than the notional amount of the pipeline and warehouse.

Information pertaining to the notional amounts of our derivative financial instruments is as follows as of June 30, 2006:

 

 

NOTE 8 — RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“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 did not have a material impact on our financial condition, results of operations or liquidity.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.”  This statement amends Statements No. 133 and 140 by: permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifying which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishing a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifying that concentrations of credit risk in the form of subordination are not embedded derivatives and; amending Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  The statement is effective for fiscal years beginning after September 15, 2006.  The adoption of this standard is not anticipated to have a material impact on our financial condition, results of operations or liquidity.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.”  This statement amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities.  It requires an entity to recognize a servicing asset or servicing liability each time an obligation is undertaken to service a financial asset by entering into a servicing contract in certain situations and requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable.  The statement permits the choice between the “amortization method” and the “fair value measurement method” for the subsequent measurement of the servicing assets or liabilities and allows for a one-time reclassification of available-for-sale securities to trading securities at initial adoption.   The statement also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of

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financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.   The statement is effective for fiscal years beginning after September 15, 2006.  The adoption of this standard is not anticipated to have a material impact on our financial condition, results of operations or liquidity.

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 our Annual Report on Form 10-K for the year ended December 31, 2005.

Forward-Looking Statements

This quarterly report on Form 10-Q may contain forward-looking language within the meaning of The Private Securities Litigation Reform Act of 1995.  Statements may include expressions about our confidence, policies, and strategies, provisions and allowance for loan losses, adequacy of capital levels, and liquidity.  All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Statements that include the use of terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates” and similar expressions also identify forward-looking statements. The forward-looking statements are based on our current intent, belief and expectations. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to statements of our plans, strategies, objectives, intentions, including, among other statements, statements involving our projected loan and deposit growth, loan collateral values, collectibility of loans, anticipated changes in other operating income, payroll and branching expenses, branch, office and product expansion of the Company and its subsidiaries, and liquidity and capital levels.  Such forward-looking statements involve certain risks and uncertainties, including general economic conditions, competition in the geographic and business areas in which we operate, inflation, fluctuations in interest rates, legislation and government regulation.  These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. 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 Item 1A of Part I in our Form 10-K for the year ended December 31, 2005 and “Risk Factors” found in Item 1a of Part II of this 10-Q.  Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise.

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.  First Mariner Bancorp is presently the fourth largest publicly held bank holding company headquartered in the state of Maryland.  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”).  The Bank is the largest operating subsidiary of the Company with assets exceeding $1.3 billion as of June 30, 2006. 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 currently has an application pending to open a branch in Pennsylvania.  The 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.

First Mariner Mortgage, a division of the Bank, engages in mortgage-banking activities, providing mortgages and associated products to customers and selling most of those mortgages on the secondary market.  During the first quarter of 2006, First Mariner Mortgage expanded its secondary marketing activities significantly and began hedging the interest rate risk associated with mortgage-banking activities.

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

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loans to individuals via direct mail solicitations. Finance Maryland currently operates 17 branches, including a central approval office, 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 $57.5 million as of June 30, 2006.

FM Appraisals, which commenced operations in the fourth quarter of 2003, is a residential real estate appraisal preparation and management company that is headquartered in Baltimore City. FM Appraisals offers appraisal services for residential real estate lenders, including appraisal preparation, the compliance oversight of sub-contracted appraisers, appraisal ordering and administration, and appraisal review services. FM Appraisals has historically provided these services to First Mariner Mortgage and began marketing appraisal management services to outside lenders in 2006.

Critical Accounting Policies

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

Allowance for loan losses

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

The allowance is established and maintained at a level that management believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans.  Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio.  Current trends in delinquencies and charge-offs, the views of Bank regulators, changes in the size and composition of the loan portfolio and peer comparisons are also factors.  The analysis also requires consideration of the economic climate and direction and change in the interest rate environment, which may impact a borrower’s ability to pay, legislation impacting the banking industry and environmental and economic conditions specific to the Bank’s service areas.  Because the calculation of the allowance for loan losses relies on estimates and judgments relating to inherently uncertain events, results may differ from our estimates.

Investment securities

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Deferred income taxes

Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. For financial reporting purposes, a valuation allowance of 100% of the deferred tax asset has been recognized to offset the deferred tax assets related to state tax loss carryforwards. If management determines that we may be able to realize all or part of the state deferred tax asset in the future, a credit to income tax expense may be required to increase the recorded value of the state net deferred tax asset to the expected realizable amount.

Loan income recognition

Interest income on loans is accrued at the contractual rate based on the principal outstanding. Loan origination fees and

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certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual loan terms. Accrual of interest is discontinued when its receipt is in doubt, which typically occurs when a loan becomes 90 days past due as to principal or interest. Any interest accrued to income in the year when interest accruals are discontinued is reversed. Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to satisfy the principal balance and accrued interest. Loans are returned to accrual status once the doubt concerning collectibility has been removed and the borrower has demonstrated the ability to pay and remain current. Payments on nonaccrual loans are generally applied to principal.

Financial Condition

The Company’s total assets were $1.397 billion at June 30, 2006, compared to $1.362 billion at December 31, 2005, increasing $34.154 million or 2.5% for the first six months of 2006.  Earning assets increased $36.492 million or 2.9% to $1.277 billion from $1.240 billion.  The increase in assets was primarily due to increases in short-term investments (+$10.777 million), loans held for sale (+$27.054 million), and net loans outstanding (+$8.793 million), partially offset by declines in cash and due from banks (-$9.673 million) and securities available for sale (-$10.300 million).  The growth in assets was funded by increases in deposits (+$6.758 million) and short-term borrowings (+$21.966 million).

Investment securities available for sale

We utilize the investment portfolio as part of our overall asset/liability management practices to enhance interest revenue while providing necessary liquidity for the funding of loan growth or deposit withdrawals.  Total investment securities declined $10.300 million due to normal principal payments on mortgage-backed securities, scheduled maturities of other investments, and a decline in market values, offset by additional purchases of securities of $5.250 million. At June 30, 2006, our unrealized loss on securities classified as available for sale totaled $8.436 million, compared to $5.402 million at December 31, 2005.  The decline resulted from increases in short-term and long-term interest rates from December 31, 2005 to June 30, 2006, which resulted in lower market valuation of our fixed income investments.  We consider the decline in market values to be temporary and do not expect to realize losses on any of the securities currently in the investment portfolio.  The investment portfolio composition is as follows:

 

		June 30,					December 31,
		2006					2005
					Percent					Percent
(dollars in thousands)		Balance			of Total		Balance			of Total
Investment securities available for sale:
Mortgage-backed securities		$	145,733		54.6	%	$	161,112		58.2	%
Trust preferred securities		38,708			14.5	%	34,087			12.3	%
US government agency notes		68,258			25.6	%	68,271			24.7	%
US Treasury securities		988			0.4	%	986			0.3	%
Obligations of state and municipal subdivisions		2,930			1.1	%	2,969			1.1	%
Corporate obligations		1,893			0.7	%	1,777			0.6	%
Equity securities		1,409			0.5	%	1,310			0.5	%
Foreign government bonds		1,750			0.7	%	1,481			0.5	%
Other investment securities		4,970			1.9	%	4,946			1.8	%
Total investment securities available for sale		$	266,639		100.0	%	$	276,939		100.0	%

 

Loans

Total loans increased $9.162 million during the first six months of 2006.  Growth was realized in our residential mortgage loan portfolio (+$5.790 million), commercial construction portfolio (+$8.375 million), commercial portfolio (+$7.268 million), consumer loan portfolio (+$8.497 million) and second mortgages on real estate portfolio (+$4.503 million).  Our loans secured by deposits and other also increased by $241,000.  The growth in these loan types was offset by decreases in our commercial real estate portfolio (-$16.155 million) and consumer residential construction portfolio (-$9.352 million).  The total loan portfolio was comprised of the following:

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		June 30,					December 31,
		2006					2005
					Percent					Percent
(dollars in thousands)		Balance			of Total		Balance			of Total
Loans secured by first mortgages on real estate:
Residential		$	46,718		5.4	%	$	40,928		4.8	%
Commercial		334,073			38.8	%	350,228			41.1	%
Consumer residential construction		117,140			13.6	%	126,492			14.8	%
Commercial/residential construction		121,770			14.1	%	113,395			13.3	%
		619,701			71.9	%	631,043			74.0	%
Commercial		75,086			8.7	%	67,818			8.0	%
Loans secured by second mortgages on real estate		101,249			11.8	%	96,746			11.4	%
Consumer loans		64,116			7.4	%	55,619			6.5	%
Loans secured by deposits		1,334			0.2	%	1,093			0.1	%
Total loans		861,486			100.0	%	852,319			100.0	%
Unamortized loan discounts		(172		)			(121		)
Unearned loan fees, net		(566		)			(612		)
		$	860,748				$	851,586

 

Allowance for Loan Losses and Credit Risk Management

We attempt to manage the risk characteristics of the 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, we seek to rely primarily on the cash flow of our 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.

We provide for loan losses through the establishment of an allowance for loan losses (the “allowance”) by provisions charged against earnings. Based upon management’s evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio. The provision for loan losses was $623,000 and $1.045 million for the three and six months ended June 30, 2006, respectively, as compared to $981,000 and $1.395 million for the same periods in 2005, respectively. Overall loan quality remained very strong and the provision for credit losses decreased in an amount proportionate to the incremental inherent risk associated with growth in total loans and qualitative factors management uses in establishing the unallocated portion of the allowance for loan losses. We recorded net charge-offs of $676,000 during the first six months of 2006 compared to net charge-offs of $506,000 for the same period in 2005.

The allowance consists of three elements: (1) specific reserves for individual credits; (2) general reserves for types or portfolios of loans based on historical loan loss experience, judgmentally adjusted for current conditions and credit risk concentrations; and (3) unallocated reserves. Combined specific reserves and general reserves by loan type are considered allocated reserves. All outstanding loans are considered in evaluating the adequacy of the allowance. The allowance does not provide for estimated losses stemming from uncollectible interest because we generally require all accrued but unpaid interest to be reversed once a loan is placed on nonaccrual status.

The process of establishing the allowance with respect to our commercial and commercial real estate loan portfolios begins when a loan officer initially assigns each loan a risk grade, using established credit criteria. A significant portion of the risk grades are reviewed and validated annually by an independent consulting firm, as well as periodically by the our internal credit review function. Management reviews, on a quarterly basis, current conditions that affect various lines of business and may warrant adjustments to historical loss experience in determining the required allowance. Adjustment factors that are considered include: the level and trends in past-due and nonaccrual loans; trends in loan volume; effects of any changes in lending policies and procedures or underwriting standards; and the experience and depth of lending management. Management also includes an economic environmental element to its analysis for loans which could be affected by economic environmental conditions.  Historical factors by product type are adjusted each quarter based on actual loss history. Management also evaluates credit risk concentrations, including trends in large dollar exposures to related borrowers, and industry concentrations. All nonaccrual loans in the commercial and non-residential real estate portfolios, as well as other loans in the portfolios identified as having the potential for further deterioration, are analyzed individually to confirm the appropriate risk grading and accrual status and to determine the need for a specific reserve.

Consumer and residential mortgage loans are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions in retail and residential mortgage pools are analyzed and historical loss experience is adjusted accordingly.

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Adjustment factors for the retail and residential mortgage portfolios are consistent with those for the commercial portfolios.

The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific and general portions of the allowance. We have risk management practices designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may exist inherently within the loan portfolios. The judgmental aspects involved in applying the risk grading criteria, analyzing the quality of individual loans and assessing collateral values can also contribute to undetected, but probable, losses. The allowance at June 30, 2006 is considered by management to be sufficient to address the credit losses inherent in the current loan portfolio.   The changes in the allowance are presented in the following table:

		Six Months Ended June 30,
(dollars in thousands)		2006			2005
Allowance for loan losses, beginning of year		$	11,743		$	9,580
Loans charged off:
Commercial		—			(15		)
Commercial/residential construction		—			—
Commercial mortgages		—			—
Residential construction - consumer		(9		)	—
Residential mortgages		—			—
Consumer		(895		)	(700		)
Total loans charged off		(904		)	(715		)
Recoveries:
Commercial		—			—
Commercial/residential construction		—			—
Commercial mortgages		—			—
Residential construction - consumer		22			34
Residential mortgages		—			—
Consumer		206			175
Total recoveries		228			209
Net charge-offs		(676		)	(506		)
Provision for loan losses		1,045			1,395
Allowance for loan losses, end of period		$	12,112		$	10,469
Loans (net of premiums and discounts):
Period-end balance		$	860,748		$	813,166
Average balance during period		854,757			771,535
Allowance as a percentage of period-end loan balance		1.41		%	1.29		%
Percent of average loans:
Provision for loan losses (annualized)		0.24		%	0.36		%
Net charge-offs (annualized)		0.16		%	0.13		%

 

During the first six months of 2006, annualized net charge-offs as compared to average loans outstanding increased slightly to 0.16%, as compared to 0.13% during the same period of 2005, mostly due to a relatively large charge-off ($99,000) taken on a home equity loan in the second quarter of 2006.  Nonperforming assets, expressed as a percentage of total assets, totaled 0.29% at June 30, 2006 and December 31, 2005 and 0.28% at June 30, 2005.  The increase as compared to June 30, 2005 reflects an increase in residential real estate acquired by foreclosure.  In addition, we have a larger percentage of residential mortgage loans and lot loans classified as nonaccrual as of June 30, 2006 compared to June 30, 2005, when a larger percentage consisted of commercial loans.  Loans past due 90 days or more and still accruing totaled $4.466 million compared to $860,000 at December 31, 2005 and $1.713 million as of June 30, 2005.  Of the $4.466 million total as of June 30, 2006, $2.453 million of the balance of loans past due 90 days or more is for one commercial construction loan, which is well-collateralized and we do not anticipated realizing a loss on this loan.

Loans are placed on nonaccrual status when they are past-due 90 days or more as to either principal or interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. Management may grant a waiver from nonaccrual status for a past-due loan that is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current.

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

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		June 30,			December 31,			June 30,
(dollars in thousands)		2006			2005			2005
Nonaccrual loans		$	2,995		$	3,019		$	2,951
Real estate acquired by foreclosure		1,065			931			931
Total nonperforming assets		$	4,060		$	3,950		$	3,882
Loans past-due 90 days or more and accruing		$	4,466		$	860		$	1,713

 

A loan is determined to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during a period of delay in payment 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 to 90 days.   Commercial loans are evaluated individually for impairment.  Pools of smaller-balance homogeneous loans such as consumer installment, residential first and second mortgage loans and credit card loans are collectively evaluated for impairment.

As of June 30, 2006, we had impaired loans of $1.289 million.  The valuation allowance for impaired loans was approximately $644,000 as of June 30, 2006.

At June 30, 2006, the allowance for loan losses represented 298.3% of nonperforming assets compared to 297.3% at December 31, 2005.  Management believes the allowance for loan losses is adequate as of June 30, 2006.

Deposits

Deposits totaled $882.768 million as of June 30, 2006, increasing $6.758 million or 0.8% from the December 31, 2005 balance of $876.010 million.  The increase in deposits is attributable to continued marketing, promotion and cross selling of existing customers into additional products.  The mix of deposits has changed somewhat during 2006, with a higher percentage of NOW & money market savings deposits and less time deposits as of June 30, 2006 compared to December 31, 2005. Continued successful marketing and promotional campaigns have maintained a strong mix of noninterest checking accounts, NOW and money market accounts.  The deposit breakdown is as follows:

 

		June 30, 2006					December 31, 2005
(dollars in thousands)		Balance			Percent of Total		Balance			Percent of Total
NOW & money market savings deposits		$	255,127		28.9	%	$	218,694		25.0	%
Regular savings deposits		68,903			7.8	%	69,647			7.9	%
Time deposits		371,520			42.1	%	405,620			46.3	%
Total interest-bearing deposits		695,550			78.8	%	693,961			79.2	%
Noninterest-bearing demand deposits		187,218			21.2	%	182,049			20.8	%
Total deposits		$	882,768		100.0	%	$	876,010		100.0	%

 

Core deposits represent deposits that we believe will not be affected by changes in interest rates and therefore, will be retained regardless of the movement of interest rates.  We consider our core deposits to be all noninterest-bearing, NOW, money market accounts less than $100,000, and saving deposits, as well as all time deposits less than $100,000 that mature in greater than one year.  As of June 30, 2006, our core deposits were $541.601 million.  The remainder of our deposits could be susceptible to attrition due to interest rate movements.

Borrowings

Our borrowings consist of short-term promissory notes issued to certain qualified investors, short-term and long-term advances from the Federal Home Loan Bank at Atlanta (“FHLB”), a mortgage warehouse line of credit, a mortgage loan, a long-term line of credit, and junior subordinated deferrable interest debentures. Our short-term promissory notes are in the form of commercial paper, which reprice daily and have maturities of 270 days or less. Our advances from the FHLB may be in the form of short-term or long-term obligations. Short-term advances have maturities for one year or less and can be paid without penalty. Long-term borrowings through the FHLB have original maturities up to 15 years and generally contain prepayment penalties and call provisions.

Long-term borrowings consist of advances from the FHLB, a mortgage loan on our headquarters building, and a line of credit and totaled $129.829 million and $131.000 million at June 30, 2006 and December 31, 2005, respectively. The long-term line of credit is used to fund Finance Maryland’s lending business. As of June 30, 2006, total borrowings under this line were $35.200 million, down from $36.290 million at December 31, 2005. In March of 2005, we purchased our headquarters building and assumed the existing mortgage loan on the property. As of June 30, 2006, the balance on the loan was $9.629 million compared to $9.710 million as of December 31, 2005.  FHLB long-term advances remained unchanged at $85.000 million.

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Short-term borrowings consist of short-term promissory notes, short-term advances from the FHLB, and a mortgage warehouse line of credit secured by certain loans held for sale. Short-term borrowings increased $21.966 million, from $199.376 million at December 31, 2005 to $221.342 million at June 30, 2006, reflecting increased borrowing primarily to fund growth in mortgage loans held for sale.

As an ongoing part of our funding and capital planning, we issue trust preferred securities from statutory trusts (“Trust Preferred Securities”), which are wholly owned by First Mariner Bancorp. The proceeds from the sales of Trust Preferred Securities ($71.500 million), combined with our equity investment in these trusts ($2.224 million), are exchanged for subordinated deferrable interest debentures. We currently maintain seven of these trusts with aggregated debentures of $73.724 million as of both June 30, 2006 and December 31, 2005.

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

The junior subordinated deferrable interest debentures are the sole assets of the trusts. First Mariner has fully and unconditionally guaranteed all of the obligations of the trusts.

Under applicable regulatory guidelines, a portion of the Trust Preferred Securities will qualify as Tier I capital, and the remaining portion will qualify as Tier II capital. Under applicable regulatory guidelines, $26.633 million of the outstanding Trust Preferred Securities qualify as Tier I capital and the remaining $44.867 million of the Trust Preferred Securities qualify as Tier II capital at June 30, 2006.

Capital Resources

Stockholders’ equity increased $2.396 million in the first six months of 2006 to $74.771 million from $72.375 million as of December 31, 2005.  Retained earnings grew by the retention of net income of $3.861 million for the first six months of 2006.  Common stock and additional paid-in-capital increased by $398,000 due to the sale of stock through the exercise of options and warrants ($164,000), shares issued through the employee stock purchase plan ($183,000), and stock compensation expense ($51,000).  Accumulated other comprehensive loss deteriorated by $1.862 million due to the decrease in estimated fair values of the securities portfolio.

Banking regulatory authorities have implemented strict capital guidelines directly related to the credit risk associated with an institution’s assets.  Banks and bank holding companies are required to maintain capital levels based on their “risk adjusted” assets so that categories of assets with higher “defined” credit risks will require more capital support than assets with lower risk.  Additionally, capital must be maintained to support certain off-balance sheet instruments.

The Company and the Bank have exceeded their capital adequacy requirements to date.  We regularly monitor the Company’s capital adequacy ratios to assure that the Bank exceeds its regulatory capital requirements.  The regulatory capital ratios are shown below:

 

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