| FIRST MARINER BANCORP ITEM 1A RISK FACTORS Our Future Depends on the Successful Growth of the Bank and Finance Maryland Our primary business activity for the foreseeable future will be to act as a financial holding company |
| Our future profitability will 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 |
| The inability of the Bank to expand its business without substantially increasing the number of branches, the inability of our mortgage division to grow its residential mortgage business without substantially increasing its number of offices, or the inability of Finance Maryland to grow its consumer portfolio without substantially increasing its number of offices may prevent us from realizing our growth objectives |
| A Significant Amount of Our Business is Concentrated in Real Estate Lending, and Most of this Lending Involves Maryland Real Estate Approximately 28prca of our loan portfolio is comprised of commercial and consumer real estate development and construction loans, which are secured by the real estate being developed in each case |
| In addition to the risk that the market values of the real estate securing these loans may deteriorate, these loans are also subject to the development risks that the projects will not be completed in a timely manner, or according to original specifications |
| Real estate development and construction projects that are not completed in a timely manner, or according to original specifications, are generally less marketable than projects that are fully developed |
| The loans underlying such projects may be subject to greater losses in the event that the real estate collateral becomes the source of repayment |
| In addition to the financial strength and cash flow characteristics of the borrower in each case, the Bank often secures its loans with real estate collateral |
| At December 31, 2005, approximately 85prca of the Bank’s loans have real estate as a primary, secondary or tertiary component of collateral |
| The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower, and may deteriorate in value during the time the credit is extended |
| If we are required to liquidate the 14 ______________________________________________________________________ collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected |
| Additionally, because most of our loans are concentrated in Maryland, a decline in local economic conditions could adversely affect the values of real estate in Maryland |
| Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse |
| Mortgage-Banking Activities Generate a Significant Portion of Our Noninterest Income A significant portion of our business involves making residential mortgage loans through our mortgage division, which accounted for over 31prca and 25prca of our noninterest income for the years ended December 31, 2005 and 2004, respectively |
| Real estate loan origination activity, including refinancings, is generally greater during periods of low or declining interest rates and favorable economic conditions, and has been favorably affected by relatively lower market interest rates during the past three years |
| There is no assurance that such favorable conditions will continue; any adverse change in market conditions could have an adverse impact on our earnings |
| Moreover, most of our residential mortgage loans are secured by Maryland real estate; therefore, a decline in local economic conditions could also adversely impact our earnings |
| We May Experience Loan Losses in Excess of the Allowance The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan |
| Management maintains an allowance for loan losses based upon, among other things, historical loss experience in the loan portfolios, the levels and trends in past-due and nonaccrual loans, the status of nonaccrual loans and other loans identified as having the potential for further deterioration, credit risk and industry concentrations, trends in loan volume, the effects of any changes in lending policies and procedures or underwriting standards, and a continuing evaluation of the economic environment |
| Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectibility is considered questionable |
| If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if regulatory authorities require the Bank or Finance Maryland to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected |
| As of December 31, 2005, the allowance for loan losses was dlra11dtta743 million, which represented 1dtta38prca of outstanding loans, net of unearned income |
| Management actively administers its nonaccruing loans in an effort to minimize credit losses |
| Although management believes that its allowance for loan losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future loan losses |
| Further, although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to non performing or performing loans |
| Material additions to the allowance for loan losses would result in a decrease in net income and capital, and could have a material adverse effect on us |
| 15 ______________________________________________________________________ We currently hold a significant level of Bank Owned Life Insurance We currently hold a significant level of Bank Owned Life Insurance on key employees and executives that have cash surrender values of dlra27dtta375 million as of December 31, 2005 |
| The eventual repayment of the cash surrender value is subject to the ability of various insurance companies to pay benefits in the event of the death of an insured employee, or return the cash surrender value to us in the event of our need for liquidity |
| We continuously monitor the financial strength of the various insurance companies with whom we carry policies |
| However, there is no assurance that one or more of these companies will not experience a decline in financial strength which could impair its ability to pay benefits or return our cash surrender value |
| Additionally, should we need to liquidate these policies for liquidity needs, we would be subject to taxation on the increase in cash surrender value as well as penalties for early termination of the insurance contracts |
| These events would have a negative impact on our earnings |
| Economic Conditions and Monetary Policy Our operating results will depend to a great extent upon the rate differentials between the yields earned on our loans, securities and other earning assets and the rates paid on our deposits and other interest-bearing liabilities |
| These rate differentials are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities, in particular the Federal Reserve Board |
| The makeup of our loan and deposit portfolios, in particular, determines our sensitivity to these factors |
| At December 31, 2005, we had a one year cumulative interest sensitivity gap of dlra167dtta664 million |
| ” Like other depository institutions, the Company is affected by the monetary policies implemented by the Federal Reserve Board and other federal entities |
| A primary instrument of monetary policy employed by the Federal Reserve Board is the restriction or expansion of the money supply through open market operations, including the purchase and sale of government securities and the adjustment of reserve requirements |
| These actions may at times result in significant fluctuations in interest rates, which could have adverse effects on our operations |
| In particular, our ability to make loans, attract deposits and realize gains on the sale of residential mortgage loans, as well as public demand for loans, could be adversely affected |
| ” Our Ability to Pay Cash Dividends is Limited Holders of shares of our common stock are entitled to dividends if declared by our board of directors out of funds legally available for that purpose |
| Although the board of directors has declared cash dividends in the past, it has discontinued such payments to conserve cash and capital resources, and does not intend to declare cash dividends until current earnings are sufficient to generate adequate internal capital to support growth |
| Our current ability to pay dividends is largely dependent upon the receipt of dividends from the Bank |
| Federal and state laws impose restrictions on the ability of the Bank to pay dividends |
| Additional restrictions are placed upon us by the policies of federal regulators, including the FRB’s November 14, 1985 policy statement, which provides that bank holding companies should pay dividends only out of the past year’s net income, and then only if their prospective rate of earnings retention appears consistent with their capital needs, asset quality, and overall financial condition |
| Our ability to pay dividends is further subject to our ability to make payments of interest under junior subordinated debentures due through 2035 held by our statutory trusts Mariner Capital Trust II, III, IV, V, VI, VII, and VIII (“the trusts”) |
| These payments are necessary to fund the distributions that the trusts each must pay to holders of its trust preferred 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 Mariner Trust Preferred Securities, we will not be permitted 16 ______________________________________________________________________ to pay dividends to holders of our common stock until such time as we recommence making payments or are not otherwise in default |
| In general, future dividend policy is subject to the discretion of the board of directors and will depend upon a number of factors, including the future earnings, capital requirements, regulatory constraints, and our financial condition as well as that of the Bank and Finance Maryland |
| Our Management Controls a Significant Percentage of Our Stock At December 31, 2005, our directors and executive officers beneficially owned approximately 30prca shares of our common stock (either directly or with options or warrants), or 22prca of our outstanding shares of common stock |
| Edwin F Hale, Sr, who is our Chairman, Chief Executive Officer, and largest stockholder, beneficially owns 1cmam412cmam941 shares of common stock (with options), or 20prca of our outstanding shares of common stock as of December 31, 2005 |
| Because of the large percentage of stock held by our directors and executive officers, these persons could influence the outcome of any matter submitted to a vote of our stockholders |
| Our Stock is Not Heavily Traded The average daily trading volume of our shares on The Nasdaq National Market for the previous three months was approximately 6cmam700 shares |
| Thus, our common stock is not heavily traded and can be more volatile than stock trading in an active public market |
| Factors such as our financial results, the introduction of new products and services by us or our competitors, and various factors affecting the banking industry generally may have a significant impact on the market price of our common stock |
| We cannot predict the extent to which an active public market for our common stock will develop or be sustained |
| In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance |
| Therefore, our stockholders may not be able to trade large blocks of shares at the volumes, prices, or times that they desire |
| Our Stock is Not Insured Investments in the shares of our common stock are not deposits and are not insured against loss by the government |
| We Operate in a Competitive Market We operate in a competitive environment, competing for deposits, loans and customers with commercial banks, thrifts, finance companies, and other financial entities |
| Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market, and mutual funds, and other investment alternatives |
| Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, consumer finance companies, credit unions, and other financial intermediaries |
| Many of the financial intermediaries operating in our market area offer certain services, such as trust, investment, and international banking services, which we do not offer |
| In addition, companies with a larger capitalization and financial intermediaries not subject to regulatory restrictions, have larger lending limits, and are thereby able to serve the needs of larger customers |
| Finally, our continued growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing, and technical personnel |
| Competition for qualified personnel in the banking industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel |
| 17 ______________________________________________________________________ Contracts With Our Officers May Discourage a Takeover or Adversely Affect Our Takeover Value We have entered into change in control agreements with six of our officers |
| These agreements provide for a payment to each officer of a multiple (ranging from 1 to 2dtta99) of his or her salary and bonus upon the occurrence of either a change in control that results in the loss of employment or a significant change in his or her employment |
| Thus, we may be required to make significant payments in the event that the rights under these agreements are triggered by a change in control |
| As a result, these contracts may discourage a takeover, or adversely affect the consideration payable to stockholders in the event of a takeover |
| Our Articles of Incorporation and Bylaws May Discourage a Corporate Takeover Our Amended and Restated Articles of Incorporation (“Articles”), and Amended and Restated Bylaws (“Bylaws”), contain certain provisions designed to enhance the ability of the board of directors to deal with attempts to acquire control of the Company |
| These provisions provide for the classification of our board of directors into three classes; directors of each class serve for staggered three year periods |
| The Articles also provide for supermajority voting provisions for the approval of certain business combinations |
| Although these provisions do not preclude a takeover, they may have the effect of discouraging a future takeover attempt which would not be approved by our board of directors, but pursuant to which stockholders might receive a substantial premium for their shares over then-current market prices |
| As a result, stockholders who might desire to participate in such a transaction might not have the opportunity to do so |
| Such provisions will also render the removal of our board of directors and of management more difficult and, therefore, may serve to perpetuate current management |
| Further, such provisions could potentially adversely affect the market price of the common stock |