| MONROE JAMES BANCORP INC ITEM 1A RISK FACTORS An investment in our common stock involves various risks |
| The following is a summary of certain risks identified by us as affecting our business |
| You should carefully consider the risk factors listed below, as well as other cautionary statements made in this Annual Report, and risks and uncertainties which we may identify in our other reports and documents filed with the Securities and Exchange Commission or other public announcements |
| These risk factors may cause our future earnings to be lower or our financial condition to be less favorable than we expect |
| In addition, other risks of which we are not aware, which relate to the banking and financial services industries in general, or which we do not believe are material, may cause earnings to be lower, or hurt our future financial condition |
| You should read this section together with the other information in this Annual Report |
| OUR LEVEL OF ASSETS AND EARNINGS MAY NOT CONTINUE TO GROW AS RAPIDLY AS THEY HAVE IN THE PAST FEW YEARS Since opening for business in 1998, our asset level has increased rapidly, including an 17dtta6prca increase in 2005 |
| Since 1999, the first full year for which we achieved profitability, our earnings have increased at least 15prca annually |
| We cannot assure you that we will continue to achieve comparable results in future years |
| As our asset size and earnings increase, it may become more difficult to achieve high rates of increase in assets and earnings |
| Additionally, it may become more difficult to achieve continued improvements in our expense levels and efficiency ratio |
| Declines in the rate of growth of income or assets, and increases in operating expenses or nonperforming assets may have an adverse impact on the value of our common stock |
| WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE CONTINUED GROWTH We expect that we will seek further growth in the level of our assets and deposits and the number of our branches |
| As our capital base grows, through earnings or otherwise, so does our legal lending limit |
| We cannot be certain as to our ability to manage increased levels of assets and liabilities, or to successfully make and supervise higher balance loans |
| 10 Further, we may not be able to maintain the relatively low levels of nonperforming loans that we have experienced |
| We may be required to make additional investments in equipment and personnel to manage higher asset levels and loan balances, which may adversely impact earnings, shareholder returns and our efficiency ratio |
| We cannot be certain as to out ability to obtain deposits or other liquidity sources to fund additional loans at interest rates that will permit an increase in our net interest margin |
| Increases in operating expenses or nonperforming assets may have an adverse impact on the value of our common stock |
| To the extent growth involves establishment of additional branch facilities, it can act to reduce or impede the growth of earning until the time, if ever, that the new branch facilities achieve profitability |
| TRADING IN OUR COMMON STOCK HAS BEEN SPORADIC AND VOLUME HAS BEEN LIGHT AS A RESULT, SHAREHOLDERS MAY NOT BE ABLE TO QUICKLY AND EASILY SELL THEIR COMMON STOCK Although our common stock is listed for trading on the Nasdaq Capital Market, and a number of brokers offer to make a market in the common stock on a regular basis, trading volume to date has been limited, averaging only approximately 3cmam016 shares per day over the twelve months ended February 28, 2006, and there can be no assurance that a more active and liquid market for the common stock will develop, or if developed that it can be maintained |
| Accordingly, shareholders may find it difficult to sell a significant number of shares at the prevailing market price |
| WE HAVE NO CURRENT PLANS TO PAY CASH DIVIDENDS James Monroe Bank is our principal revenue producing operation |
| As a result, the ability to pay cash dividends to shareholders largely depends on receiving dividends from James Monroe Bank |
| The amount of dividends that a bank may pay is limited by state and federal laws and regulations |
| Even if we have earnings in an amount sufficient to pay cash dividends, our Board of Directors currently intends to retain earnings for the purpose of financing growth |
| OUR DIRECTORS AND EXECUTIVE OFFICERS OWN 19dtta5prca OF THE OUTSTANDING SHARES OF COMMON STOCK COMMON AS A RESULT OF THEIR COMBINED OWNERSHIP, THEY COULD MAKE IT MORE DIFFICULT TO OBTAIN APPROVAL FOR SOME MATTERS SUBMITTED TO SHAREHOLDER VOTE, INCLUDING MERGERS AND ACQUISITIONS THE RESULTS OF THE VOTE MAY BE CONTRARY TO THE DESIRES OR INTERESTS OF THE PUBLIC SHAREHOLDERS Our directors and executive officers and their affiliates own approximately 19dtta5prca of the outstanding common stock, and are deemed to beneficially own approximately 26dtta0prca of the common stock, including options to purchase shares of common stock |
| By voting against a proposal submitted to shareholders, the directors and officers, as a group, may be able to make approval more difficult for proposals requiring the vote of shareholders, such as some mergers, share exchanges, asset sales, and amendments to the Articles of Incorporation |
| THE LOSS OF THE SERVICES OF ANY KEY EMPLOYEES COULD ADVERSELY AFFECT INVESTOR RETURNS Our business is service oriented, and our success depends to a large extent upon the services of John R Maxwell, our President and Chief Executive Officer, and other senior officers |
| Maxwell or other senior officers could adversely affect our business |
| Although we have dlra1 million in key man insurance on Mr |
| Maxwell, the proceeds of this policy are not intended to fully compensate us for the loss of Mr |
| A SUBSTANTIAL PORTION OF OUR LOANS ARE REAL ESTATE RELATED LOANS IN THE NORTHERN VIRGINIA/WASHINGTON DC METROPOLITAN AREA, AND SUBSTANTIALLY ALL OF OUR LOANS ARE MADE TO BORROWERS IN THAT AREA ADVERSE CHANGES IN THE REAL ESTATE MARKET OR ECONOMY IN THIS AREA COULD LEAD TO HIGHER LEVELS OF PROBLEM LOANS AND CHARGE OFFS, AND ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION We have a substantial amount of loans secured by real estate in the Northern Virginia/Washington DC metropolitan area as collateral, and substantially all of our loans are to borrowers in that area |
| At December 31, 2005, 71dtta2prca of our loans were commercial real estate loans and 11dtta6prca were construction and land development loans |
| An additional 12dtta5prca were commercial and industrial loans which are not secured by real estate |
| These loans have a higher risk of default than other types of loans, such as single family residential mortgage loans |
| In addition, the repayments of these loans often depends on the successful operation of a business or the sale or development of the underlying property, and as a result are more likely to be adversely affected by adverse conditions in the real estate market or the economy in general |
| These concentrations expose us to the risk that adverse developments in the real estate market, or in the general economic conditions in the Northern 11 Virginia/Washington DC metropolitan area, could increase the levels of nonperforming loans and charge offs, and reduce loan demand and deposit growth |
| In that event, we would likely experience lower earnings or losses |
| Additionally, if economic conditions in the area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the areaapstas economy, our ability to develop our business relationships may be diminished, the quality and collectibility of our loans may be adversely affected, the value of collateral may decline and loan demand may be reduced |
| Commercial and commercial real estate and construction loans also generally have larger balances than single family mortgages loans and other consumer loans |
| Because the loan portfolio contains a significant number of commercial and commercial real estate and construction loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets |
| An increase in nonperforming loans could result in: a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on our results of operations and financial condition |
| OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE ADVERSELY AFFECTED IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO ABSORB ACTUAL LOSSES OR IF WE ARE REQUIRED TO INCREASE OUR ALLOWANCE FOR LOAN LOSSES Experience in the banking industry indicates that a portion of our loans will become delinquent, and that some may only be partially repaid or may never be repaid at all |
| Despite our underwriting criteria, we may experience losses for reasons beyond our control, such as general economic conditions |
| We may be particularly susceptible to losses due to: (1) the geographic concentration of our loans, (2) the concentration of higher risk loans, such as commercial real estate, construction and commercial and industrial loans, and (3) the relative lack of seasoning of certain of our loans |
| Although we believe that our allowance for loan losses is maintained at a level adequate to absorb any inherent losses in our loan portfolio, these estimates of loan losses are necessarily subjective and their accuracy depends on the outcome of future events |
| As a result, there can be no assurance that we will be able to maintain our relatively low levels of non-performing assets and charge-offs |
| If we need to make significant and unanticipated increases in our loss allowance in the future, our results of operations would be materially adversely affected at that time |
| While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as nonperforming or potential problem loans |
| We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that are identified |
| As a result, future additions to the allowance may be necessary |
| OUR BANK REGULATORS MAY REQUIRE US TO INCREASE OUR ALLOWANCE FOR LOAN LOSSES, WHICH COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS Federal and state regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses |
| These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge offs based upon their judgments, which may be different from ours |
| Any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our financial condition and results of operations |
| LACK OF SEASONING OF OUR LOAN PORTFOLIO MAY INCREASE THE RISK OF CREDIT DEFAULTS IN THE FUTURE Most of the loans in our loan portfolio were originated within the past four years, and as of December 31, 2005, approximately 46prca of loans outstanding were either originated or renewed within 2005 |
| In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as "e seasoning "e |
| As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio |
| Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be somewhat higher than current levels |
| THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO SUCCESSFULLY COMPETE WITH OTHERS FOR BUSINESS The Northern Virginia/Washington DC metropolitan area in which we operate is considered highly attractive from an economic and demographic viewpoint, and is therefore a highly competitive banking market |
| We compete for loans, deposits, and investment dollars with numerous large, regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as the online divisions of out-of market banks, securities firms, 12 insurance companies, savings associations, credit unions, mortgage brokers, and private lenders |
| Many competitors have substantially greater resources than us, and operate under less stringent regulatory regimens |
| The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings |
| CHANGES IN INTEREST RATES AND OTHER FACTORS BEYOND OUR CONTROL COULD HAVE AN ADVERSE IMPACT ON OUR EARNINGS Our operating income and net income depend to a great extent on our net interest margin ie, the difference between the interest yields we receive on loans, securities and other interest bearing assets and the interest rates we pay on interest bearing deposits and other liabilities |
| These rates are highly sensitive to many factors which are beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Board of Governors of the Federal Reserve System |
| As discussed in Item 7 of this report, "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e , under the caption "e Liquidity and Interest Rate Sensitivity Management "e , the Company manages its exposure to possible changes in interest rates by simulation modeling or "e what if "e scenarios to quantify the potential financial implications of changes in interest rates |
| At December 31, 2005, the Companyapstas modeling indicated that continued declines in market interest rates could reduce net interest income up to 5dtta5prca |
| Increases in market rates would likely have an adverse impact on our noninterest income, as a result of reduced demand for mortgage loans, which we make on a pre-sold basis |
| Adverse changes in the real estate market in our market area could also have an adverse affect on our cost of funds and net interest margin, as we typically have a large amount of noninterest bearing deposits related to real estate sales and development |
| While we expect that we would be able to replace the liquidity provided by these deposits, the replacement funds would likely be more costly, negatively impacting earnings |
| Additionally, changes in applicable law, if enacted, including those that would permit banks to pay interest on checking and demand deposit accounts established by businesses, could have a significant negative effect on net interest income, net income, net interest margin, return on assets and return on equity |
| A significant portion of our deposits, 22dtta7prca at December 31, 2005, are noninterest bearing demand deposits |
| Government policy relating to the deposit insurance funds may also adversely affect our results of operations |
| Under current law and regulation, if the reserve ratio of the Bank Insurance Fund falls below 1dtta25prca, all insured banks will be required to pay deposit insurance premiums |
| We do not currently pay any deposit insurance premiums |
| These changes or other legislative or regulatory developments could have a significant negative effect on our net interest income, net income, net interest margin, return on assets and return on equity |
| SUBSTANTIAL REGULATORY LIMITATIONS ON CHANGES OF CONTROL AND ANTI-TAKEOVER PROVISIONS OF VIRGINIA LAW MAY MAKE IT MORE DIFFICULT FOR YOU TO RECEIVE A CHANGE IN CONTROL PREMIUM With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be "e acting in concert "e from, directly or indirectly, acquiring more than 10prca (5prca if the acquiror is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve |
| There are comparable prior approval requirements for changes in control under Virginia law |
| Also, Virginia corporate law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock |