| MILLENNIUM BANKSHARES CORP ITEM 1A RISK FACTORS Risks Associated with Millennium Our business is subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings and capital levels |
| The majority of our assets are monetary in nature and, as a result, we are subject to significant risk from changes in interest rates |
| Changes in interest rates can impact our net interest income as well as the valuation of our assets and liabilities |
| Our earnings are significantly dependent on our net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings |
| We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa |
| In either event, if market interest rates should move contrary to our position, this “gap” will work against us and our earnings may be negatively affected |
| An increase in the general level of interest rates may also, among other things, reduce the demand for loans and our ability to originate loans |
| Conversely, a decrease in the general level of interest rates, among other things, may lead to an increase in prepayments on our loans and increased competition for deposits |
| Accordingly, changes in the general level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan portfolios and our overall results |
| Although our asset-liability management strategy is designed to control our risk from changes in the general level of market interest rates, market interest rates are affected by many factors outside of our control, including inflation, recession, changes in unemployment, money supply and international disorder and instability in domestic and foreign financial markets |
| In view of the continued low interest rates on savings, loans and investments that currently prevail compared to historical ranges, it is quite possible that significant changes in interest rates may take place in the future, and we cannot always accurately predict the nature or magnitude of such changes or how such changes may affect our business |
| Market conditions may adversely affect our ability to continue to rely on brokered deposits as a source of funds and cause us to seek alternative sources that may not be on terms favorable to us |
| We solicit deposits from brokers because our banking offices do not attract enough deposits to fund all of the loans that we make |
| These “brokered deposits” represent funds that brokers gather from third parties and package in batches in order to find higher interest rates that are typically available for certificates of deposits with large balances, as compared to individually deposited smaller denomination deposits |
| Deposit holders then earn a higher rate on the money that they have invested, and the broker charges a fee for its service |
| Brokered deposits are available in bulk, and they do not require any investments in branch offices or branch personnel or spending for marketing or education of employees |
| At December 31, 2005, dlra69dtta2 million of our deposits were brokered deposits |
| The weighted average interest rate on our brokered deposits was 3dtta91prca at December 31, 2005 |
| Brokered deposits are normally more costly than traditional core deposits, as they carry a higher blended interest rate |
| If market conditions change, brokers may transfer deposited funds from us into other investments or demand higher interest rates for new deposits |
| Moreover, brokers operate in a national market and will place funds with banks that offer to pay the highest interest rates |
| Unlike businesses and individuals who bank with us in our market, there is no basis for a business relationship with deposit brokers that would provide a stable deposit base |
| There is a higher likelihood that, unlike deposits from our local customers, the funds that brokered deposits provide us will not remain with us after maturity |
| -15- ______________________________________________________________________ [39]Table of Contents We could be confronted with the choice of curtailing our lending activity or paying above market interest rates in order to attract and retain deposits |
| Either action could reduce our net income |
| Any inability to keep our deposit growth on pace with the growth in our loan portfolio may affect our net income |
| In this situation, we may need to obtain alternative sources of funding, which may or may not be available to us on terms that we would consider favorable |
| Government regulations may adversely affect our ability to continue to rely on brokered deposits as a source of funds and cause us to curtail our mortgage banking business |
| Federal Deposit Insurance Corporation regulations could affect our ability to continue to accept brokered deposits |
| A well-capitalized bank (one that significantly exceeds specified capital ratios) may accept brokered deposits without restriction |
| Undercapitalized banks (those that fail to meet minimum regulatory capital requirements) may not accept brokered deposits, and adequately capitalized banks (those that are not well-capitalized or undercapitalized) may only accept such deposits with the consent of the FDIC Millennium Bank currently is well-capitalized and, therefore, may accept brokered deposits without restriction |
| If, as a result of rapid asset growth or unanticipated losses, Millennium Bank ceased to be well-capitalized, the FDIC might not permit it to maintain its desired level of brokered deposits |
| If it were required to reduce its level of brokered deposits, Millennium Bank also would have to reduce its assets and, most likely, curtail its mortgage banking business |
| Any reduction could have an adverse effect on our revenues |
| Our success depends primarily on the general economic conditions of the geographic markets in which we operate |
| Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in the northern Virginia and Richmond, Virginia area |
| The local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of our borrowers to repay their loans and the value of the collateral securing these loans |
| A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic calamities, unemployment or other factors could impact these local economic conditions and negatively affect our financial results |
| A large percentage of our loans are secured by real estate, and an adverse change in the real estate market may result in losses and adversely affect our profitability |
| Approximately 94prca of our loan portfolio, including loans held for sale, as of December 31, 2005 was comprised of loans secured by real estate |
| An adverse change in the economy affecting values of real estate generally or in our market areas specifically could impair the value of our collateral and our ability to sell the collateral upon foreclosure |
| In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan |
| As a result, our profitability and financial condition could be negatively impacted by an adverse change in the real estate market |
| We could be subject to environmental risks and associated costs on our foreclosed real estate assets |
| A significant portion of our loan portfolio is secured by real property |
| There is a risk that hazardous or toxic waste could be found on the properties that secure our loans |
| If we acquire such properties as a result of foreclosure, we could be held responsible for the cost of cleaning up or removing this waste, and this cost could exceed the value of the underlying properties and adversely affect our profitability |
| Although we have policies and procedures that require us to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards |
| Our allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect our earnings |
| We are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans and the collateral securing the payment of these loans may be insufficient to fully compensate the banks for the outstanding balance of the loan plus the costs to dispose of the collateral |
| We may experience significant -16- ______________________________________________________________________ [40]Table of Contents loan losses, which could have a material adverse effect on our operating results and financial condition |
| Management makes various assumptions and judgments about the collectibility of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security, and the evaluation of our loan portfolio by the external loan review |
| We maintain an allowance for loan losses in an attempt to cover loan losses inherent in our loan portfolio |
| Additional loan losses will likely occur in the future and may occur at a rate greater than we have experienced to date |
| In determining the size of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions |
| If our assumptions prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio |
| Material additions to the allowance would materially decrease net income |
| In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management |
| Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material negative effect on our operating results and financial condition |
| Our small to medium-sized business target market may have fewer financial resources to weather a downturn in the economy |
| We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses |
| These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities |
| If general economic conditions negatively impact the central and northern Virginia area or the other markets in which we operate, our results of operations and financial condition may be negatively affected |
| We are dependent on our management team, and the loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business and financial results |
| Our success is dependent upon the continued service and skills of Carroll C Markley, Anita L Shull, Dale G Phelps and other senior officers |
| The unexpected loss of services of one or more of these key personnel could have an adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel |
| An interruption in or breach in security of our information systems may result in a loss of customer business |
| We rely heavily on communications and information systems to conduct our business |
| Any failure or interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposits, servicing or loan origination systems |
| We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us |
| The occurrence of any failures or interruptions could result in a loss of customer business and have a negative effect on our results of operations and financial condition |
| Our growth strategy may not be successful, and that could have an adverse effect on the value of your common stock |
| Our business strategy calls for us to take advantage of our existing investments in facilities and personnel by growing in our existing banking market and expanding into new markets if appropriate opportunities arise |
| We may not be successful in increasing the volume of our loans and deposits at acceptable risk levels and on acceptable terms, in expanding our asset base to a targeted size, or in managing the costs and implementation risks associated -17- ______________________________________________________________________ [41]Table of Contents with our growth strategy |
| Even if we successfully increase our capital, increasing the volume of our loans will require that we be able to fund that increase through additional deposits we accept in our market or through brokers, or through other funding sources, such as borrowings |
| In addition, we may not be able to maintain capital sufficient to support our continued growth and may not be able to fund any particular amount of increase in our loans |
| If we need additional capital in the future, we may not be able to obtain it on terms that are favorable, which may limit our growth |
| We anticipate that we will support our growth strategy through additional deposits at new branch locations and investment opportunities |
| It is possible that we may need to raise additional capital to support our future growth |
| Our ability to raise capital through borrowings or the sale of securities will depend primarily upon our financial condition and the conditions of financial markets at the time |
| We cannot make any assurance that additional capital would be available on terms satisfactory to us or at all |
| The failure to raise additional capital on terms that are favorable to us or at all may force us to limit our growth strategy |
| Risks Associated With Our Industry We face strong competition from other financial institutions and financial service companies, which could adversely affect our operations and financial condition |
| We face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions |
| A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services than we do |
| We also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations, each of which may offer more favorable financing than we are able to provide |
| Some of our nonbank competitors are not subject to the same extensive regulations that govern us |
| This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of operations and financial condition |
| We operate in a highly regulated environment and, as a result, are subject to extensive regulation and supervision that could adversely affect our financial performance, and we may be adversely affected by changes in federal and local laws and regulations |
| We are subject to extensive regulation, supervision and examination by federal and state banking authorities |
| Any change in applicable regulations or federal or state legislation could have a substantial impact on us, our subsidiaries, and our operations |
| Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations, or the powers, authority and operations of Millennium Bank, which could have a material adverse effect on our financial condition and results of operations |
| Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties |
| The exercise of this regulatory discretion and power may have a negative impact on us |