UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004.
Commission file number: 000-50345
OLD LINE BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 20-0154352
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2995 Crain Highway, Waldorf, Maryland 20601
-------------------------------------------
Address of principal executive offices
(301) 645-0333
--------------
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
At October 31, 2004, 1,776,394.5 shares of the issuer's Common Stock, par
value $.01 per share, were issued and outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 2,871,204 $ 2,477,119
Federal funds sold 7,064,879 4,002,828
Time deposits in other banks 400,000 700,000
Investment securities available for sale 16,423,223 17,381,519
Investment securities held to maturity 2,204,503 1,803,812
Loans, less allowance for loan losses 76,112,048 59,517,690
Restricted equity securities at cost 868,450 818,450
Investment in real estate, LLC 550,000
Bank premises and equipment 2,251,654 2,279,669
Accrued interest receivable 375,454 315,326
Deferred income taxes 71,332 60,925
Other assets 280,508 178,465
------------- -------------
$ 109,473,255 $ 89,535,803
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 24,253,167 $ 19,902,350
Interest bearing 65,309,315 49,422,727
------------- -------------
Total deposits 89,562,482 69,325,077
Borrowed funds 6,000,000 7,000,000
Accured interest payable 159,701 149,831
Income tax payable 125,220 130,675
Deferred income taxes - -
Other liabilities 261,244 102,566
------------- -------------
96,108,647 76,708,149
------------- -------------
Stockholders' equity
Common stock, par value $.01 per share in 2004 and 2003, authorized 5,000,000
shares in 2004 and 2003; issued and outstanding 1,776,394.50 in 2004
and 1,756,894.5 in 2003 $ 17,764 $ 17,569
Additional paid-in-capital 12,446,229 12,362,902
Retained earnings 927,338 517,097
------------- -------------
13,391,331 12,897,568
Accumulated other comprehensive income (26,723) (69,914)
------------- -------------
13,364,608 12,827,654
------------- -------------
$ 109,473,255 $ 89,535,803
============= =============
See accompanying notes to consolidated financial statements
1
OLD LINE BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST REVENUE
Loans, including fees $1,059,284 $ 853,377 $2,901,684 $2,380,330
U.S. Treasury securities 31,915 - 81,520 -
U. S. government agency securities 73,744 83,161 225,835 319,007
Mortgage backed securities 28,087 19,463 91,964 76,041
Tax exempt securities 28,807 24,738 82,430 63,660
Federal funds sold 18,708 27,322 39,544 64,017
Other 11,977 10,985 39,387 31,149
---------- ---------- ---------- ----------
Total interest revenue $1,252,522 $1,019,046 $3,462,364 $2,934,204
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 229,365 262,159 682,180 834,063
Borrowed funds 58,346 49,067 169,262 146,134
---------- ---------- ---------- ----------
Total interest expense 287,711 311,226 851,442 980,197
---------- ---------- ---------- ----------
Net interest income 964,811 707,820 2,610,922 1,954,007
PROVISION FOR LOAN LOSSES 85,000 48,000 175,000 126,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 879,811 659,820 2,435,922 1,828,007
---------- ---------- ---------- ----------
NONINTEREST REVENUE
Service charges on deposit accounts 65,583 62,990 185,756 178,484
Other fees and commissions 130,500 61,620 313,514 202,008
Gain on securities - - - 88,359
---------- ---------- ---------- ----------
Total noninterest revenue 196,083 124,610 499,270 468,851
---------- ---------- ---------- ----------
NONINTEREST EXPENSES
Salaries 369,188 323,253 1,027,861 890,941
Employee benefits 56,813 53,202 175,008 146,791
Occupancy 49,314 53,778 149,980 150,240
Equipment 30,340 30,788 90,806 88,433
Data processing 32,070 27,402 96,155 84,248
Other operating 181,456 190,896 528,450 442,300
---------- ---------- ---------- ----------
Total noninterest expenses 719,181 679,319 2,068,260 1,802,953
---------- ---------- ---------- ----------
Income before income taxes 356,713 105,111 866,932 493,905
Income taxes 117,432 28,884 296,950 156,024
---------- ---------- ---------- ----------
NET INCOME $ 239,281 $ 76,227 $ 569,982 $ 337,881
========== ========== ========== ==========
Basic earnings per common share $ 0.13 $ 0.04 $ 0.32 $ 0.27
Diluted earnings per common share $ 0.13 $ 0.04 $ 0.32 $ 0.27
See accompanying notes to consolidated financial statements
2
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
Accumulated
Additional other
Common stock paid-in Retained comprehensive Comprehensive
Shares Par value capital earnings income income
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 1,756,894.5 $ 17,569 $12,362,902 $ 517,097 $ (69,914)
Net income - - - 569,982 - $ 569,982
Unrealized gain (loss) on securities
available for sale, net of income taxes - - - - 43,191 43,191
-----------
Comprehensive income - - - - - $ 613,173
===========
Cash dividend $.03 per share - - - (159,741) -
Stock options exercised 19,500.0 195 83,327 - -
----------- ----------- ----------- ----------- -----------
Balance, September 30, 2004 1,776,394.5 $ 17,764 $12,446,229 $ 927,338 $ (26,723)
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
3
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 3,297,142 $ 2,929,077
Fees and commissions received 499,270 380,492
Interest paid (841,572) (1,030,940)
Cash paid to suppliers and employees (1,917,167) (1,668,433)
Income taxes paid (336,068) (45,389)
------------ ------------
701,605 564,807
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
Held to maturity (842,422) (2,498,750)
Available for sale at maturity or call (1,253,113) (8,743,847)
Proceeds from disposal of investment securities
Held to maturity 440,000 5,000,000
Available for sale at maturity or call 2,272,409 9,463,067
Available for sale sold - 1,249,275
Loans made, net of principal collected (16,657,087) (15,423,545)
Investment in Pointer Ridge, LLC (550,000)
Purchase of equity securities (50,000) (309,550)
Net purchase of certificates of deposit 300,000 (100,000)
Purchase of premises and equipment and software (87,441) (412,698)
Proceeds from sale of premises and equipment 21,000 -
------------ ------------
(16,406,654) (11,776,048)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits 7,381,465 276,623
Other deposits 12,855,939 9,606,962
Repurchase agreements (1,000,000) -
Proceeds from stock options exercised-2004 83,522 -
Proceeds from stock offering 2003 6,914,050
Dividends paid (159,741) (80,257)
------------ ------------
19,161,185 16,717,378
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,456,136 5,506,137
Cash and cash equivalents at beginning of period 6,479,947 7,032,155
------------ ------------
Cash and cash equivalents at end of period $ 9,936,083 $ 12,538,292
============ ============
See accompanying notes to consolidated financial statements.
4
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
---------- ---------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 569,982 $ 337,881
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 112,957 113,807
Provision for loan losses 175,000 126,000
Gain on disposal of securities - (88,359)
Loss (gain) on sale of equipment 964 -
Change in deferred loan fees net of costs (112,272) (31,153)
Amortization of premiums and discounts 7,178 26,017
Deferred income taxes (33,663) (20,146)
Increase (decrease) in
Accrued interest payable 9,870 (50,743)
Other liabilities 153,223 238,413
Decrease (increase) in
Accrued interest receivable (60,128) 9
Other assets (121,506) (86,919)
--------- ---------
$ 701,605 $ 564,807
========= =========
See accompanying notes to consolidated financial statements.
5
OLD LINE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
ORGANIZATION
Old Line Bancshares, Inc. was incorporated under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of Old Line Bank. On
May 22, 2003, the stockholders of Old Line Bank approved an Agreement and Plan
of Reorganization and Articles of Share Exchange. The reorganization became
effective at 12:01 a.m. on September 15, 2003. Pursuant to the Agreement and
Plan of Reorganization and Articles of Share Exchange, (i) Old Line Bank became
a wholly-owned subsidiary of Old Line Bancshares, Inc., and (ii) each
outstanding share (or fraction thereof) of Old Line Bank common stock was
converted into one share (or fraction thereof) of Old Line Bancshares, Inc.
common stock, and the former holders of Old Line Bank common stock became the
holders of all the outstanding shares of Old Line Bancshares, Inc. common stock.
The reorganization became effective at 12:01 a.m. on September 15, 2003.
The reorganization was accounted for in a manner similar to that for a
pooling of interests. Under this accounting treatment, the net assets and
liabilities of Old Line Bank were recorded as the asset of Old Line Bancshares,
Inc. (investment in subsidiary) at book value, and the stockholders' equity
account of Old Line Bancshares, Inc. equals the stockholders' equity account of
Old Line Bank. As part of this reorganization, $500,000 was transferred from Old
Line Bank to fund the expenses associated with the holding company formation and
other anticipated holding company expenses.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the activity of
Old Line Bancshares, Inc. and its wholly owned subsidiary, Old Line Bank. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The foregoing consolidated financial statements are unaudited; however, in
the opinion of management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the results of the interim period
have been included. The balances as of December 31, 2003 were derived from
audited financial statements. These statements should be read in conjunction
with Old Line Bancshares' financial statements and accompanying notes included
in Old Line Bancshares, Inc.'s Form 10-KSB/A. There have been no significant
changes to the Company's accounting policies as disclosed in the Form 10-KSB/A.
The results shown in this interim report are not necessarily indicative of
results expected for the full year 2004.
The accounting and reporting policies of Old Line Bancshares, Inc. conform
to accounting principles generally accepted in the United States of America.
2. INVESTMENT SECURITIES
As Old Line Bancshares, Inc. purchases securities, management determines
if the securities should be classified as held to maturity, available for sale
or trading. Securities which management has the intent and ability to hold to
maturity are recorded at amortized cost which is cost adjusted for amortization
of premiums and accretion of discounts to maturity. Securities which management
may sell before maturity are classified as available for sale and carried at
fair value with unrealized gains and
6
losses included in stockholders' equity on an after tax basis. Management has
not identified any investment securities as trading.
3. INCOME TAXES
The provision for income taxes includes taxes payable for the current year
and deferred income taxes. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
4. EARNINGS PER SHARE
Basic earnings per common share are determined by dividing net income by
the weighted average number of shares of common stock outstanding giving
retroactive affect to the 200% stock dividend paid to shareholders of record on
September 26, 2003 and payable October 10, 2003. Diluted earnings per share is
calculated including the average dilutive common stock equivalents outstanding
during the period. Dilutive common equivalent shares consist of stock options,
calculated using the treasury stock method.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Weighted average number of shares 1,776,395 1,756,894 1,772,124 1,231,180
Dilutive average number of shares 27,028 35,264 28,524 27,758
5. STOCK-BASED COMPENSATION
Old Line Bancshares, Inc. applies APB No. 25 in accounting for stock
options. Accordingly, Old Line Bancshares has not recognized compensation for
stock options granted. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) was issued in October,
1995 to establish accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 requires measurement of compensation expense
provided by stock-based plans using a fair value based method of accounting, and
recognition of compensation expense in the statement of income or disclosure in
the notes to the financial statements.
A summary of the status of the outstanding options follows:
September 30, 2004
Number of Weighted Average
Shares exercise price
------ --------------
Outstanding, beginning of year 89,250 $ 5.92
Options granted -
Options exercised (19,500) 3.75
------- -------
Outstanding, September 30, 2004 69,750 $ 6.55
======= =======
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Some of the matters discussed below include forward-looking statements.
Forward-looking statements often use words such as "believe," "expect," "plan,"
"may," "will," "should," "project," "contemplate," "anticipate," "forecast,"
"intend" or other words of similar meaning. You can also identify them by the
fact that they do not relate strictly to historical or current facts. Our actual
results and the actual outcome of our expectations and strategies could be
different from those anticipated or estimated for the reasons discussed below
and the reasons under the heading "Information Regarding Forward Looking
Statements."
GENERAL
Old Line Bancshares, Inc. was formed under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of Old Line Bank, a
Maryland commercial bank.
On May 22, 2003, the stockholders of Old Line Bank approved an Agreement
and Plan of Reorganization and Articles of Share Exchange. The reorganization
became effective at 12:01 a.m. on September 15, 2003. Pursuant to the Agreement
and Plan of Reorganization and Articles of Share Exchange, (i) Old Line Bank
became a wholly-owned subsidiary of Old Line Bancshares, Inc., and (ii) each
outstanding share (or fraction thereof) of Old Line Bank common stock was
converted into one share (or fraction thereof) of Old Line Bancshares, Inc.
common stock, and the former holders of Old Line Bank common stock became the
holders of all the outstanding shares of Old Line Bancshares, Inc. common stock.
The discussion contained herein with respect to time periods prior to September
15, 2003 relates solely to Old Line Bank.
In June 2003, Old Line Bank completed a public offering of 299,000 shares
of common stock at an offering price of $25 per share. The $6.9 million in net
offering proceeds provided Old Line Bank the capital necessary to retain higher
percentages of loans that it previously participated to other financial
institutions. It also allowed Old Line Bank to maintain its well capitalized
status with the bank regulatory authorities. The Company has used these funds
for future expansion efforts including, potentially, opening or acquiring new
branch locations as described below.
Other than owning all of the capital stock of Old Line Bank, Old Line
Bancshares, Inc. does not currently engage in any other business activity.
All share amounts and dollar amounts per share with regard to the common
stock have been adjusted, unless otherwise indicated, to reflect the 200% stock
dividend paid October 10, 2003.
8
SUMMARY OF RECENT PERFORMANCE AND OTHER ACTIVITIES
We are pleased to report that during the quarter and nine months that
ended September 30, 2004, we have continued to make progress towards
accomplishing the goals outlined in our December 31, 2003 Form 10-KSB/A. As we
outlined in that report, during 2004 we plan to improve earnings by:
- Increasing interest revenue through continued growth.
- Reducing interest expense by growing core deposits and non-interest
bearing deposits with increased business development and promotional
campaigns.
- Reducing other operating expenses relative to revenues with reductions in
security costs and legal and organization expenses.
Because of our continued and we believe successful business development
efforts, Old Line Bank has achieved increased name recognition in the markets in
which we operate and experienced a 27.88% growth in net loans and a 29.19%
growth in deposits during the nine months ended September 30, 2004 compared to
December 31, 2003. This loan and deposit growth coupled with expense management
have allowed us to improve Old Line Bancshares' net interest income while
maintaining asset quality. At September 30, 2004, we had no loans past due more
than 90 days. We had one impaired loan with a balance of $33,446 on which we
continue to receive payments. We maintained an allowance for loan losses to
period end gross loans of 0.94% at September 30, 2004 compared to 0.91% at
December 31, 2003. We have accomplished this growth while preserving leverage
and capital standards that exceed regulatory requirements.
Non-interest revenue grew during the three and nine month period primarily
because of the increase in the dollar value and number of loan commitments
accepted during the period. This growth in loan commitments caused an increase
in the other fees and commissions component of non-interest revenue.
Non-interest expense grew because of the hiring of a loan officer in March 2003,
a credit officer in March 2004, and the addition of a new branch manager in
September 2004. Our increased customer base, new services offered to our
customers, increased costs associated with SEC filings and Nasdaq fees, and the
deductible on our insurance policy for robbery related expenses in June 2004
also caused an increase in non-interest expense. During the period, we made the
initial capital contribution of $550,000 to the limited liability company that
will construct and lease an office building in Bowie, Maryland.
The following outlines the highlights of our financial performance for the
three month period ended September 30, 2004 compared to the three month period
ended September 30, 2003 (000's):
THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 $ CHANGE % CHANGE
NET INCOME $ 239 $ 76 $ 163 214.47%
INTEREST REVENUE 1,253 1,019 234 22.96%
INTEREST EXPENSE 288 311 (23) (7.40%)
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 880 660 220 33.33%
NON-INTEREST REVENUE 196 125 71 56.80%
NON-INTEREST EXPENSE 718 679 39 5.74%
EARNINGS PER SHARE, BASIC 0.13 0.04 0.09 225.00%
EARNINGS PER SHARE, DILUTED 0.13 0.04 0.09 225.00%
9
The following outlines the highlights of our financial performance for the
nine month period ended September 30, 2004 compared to the nine month period
ended September 30, 2003 (000's):
NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 $ CHANGE % CHANGE
NET INCOME $ 570 $ 338 $ 232 68.64%
INTEREST REVENUE 3,462 2,934 528 18.00%
INTEREST EXPENSE 851 980 (129) (13.16%)
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 2,436 1,828 608 33.26%
NON-INTEREST REVENUE 499 469 30 6.40%
NON-INTEREST EXPENSE 2,068 1,803 265 14.70%
AVERAGE INTEREST EARNING ASSETS 90,817 74,418 16,399 22.04%
AVERAGE GROSS LOANS 66,485 49,086 17,399 35.45%
AVERAGE INTEREST BEARING DEPOSITS 57,210 51,177 6,033 11.79%
AVERAGE NON INTEREST BEARING DEPOSITS 20,432 15,522 4,910 31.63%
INTEREST MARGIN (1) 3.92% 3.57%
RETURN ON AVERAGE EQUITY 5.94% 5.58%
EARNINGS PER SHARE BASIC $ 0.32 $ 0.27
EARNINGS PER SHARE DILUTED $ 0.32 $ 0.27
(1) See "Reconciliation of Non-GAAP Measures"
In July 2004, Old Line Bancshares executed an Operating Agreement to
become a 50% partner in a limited liability company that will construct and
lease an office building located at the intersection of Pointer Ridge Road and
Route 301 North in Bowie, Maryland. Old Line Bancshares Inc. plans to lease 50%
of this building, establish a branch office for Old Line Bank in the building
and relocate its headquarters to it from Waldorf. Old Line Bank plans to
maintain the branch currently located at its Waldorf headquarters and lease the
space currently occupied as Old Line Bancshares, Inc.'s headquarters to
tenant(s). In July 2004, Old Line Bank executed a lease and applied to
regulatory authorities to open a branch in Crofton, Maryland in Anne Arundel
County, approximately 10 miles north of the anticipated new Bowie main office.
The Bank has received regulatory approval for this branch. We expect that the
branch will open in the second quarter 2005.
As we look ahead at the remainder of the year, our loan backlog remains
strong. The economic conditions in the communities in which we operate remain
solid with unemployment rates below the national average and growth rates among
the highest in the nation. As a result, we anticipate that our loans and
deposits will continue to grow and we will continue to realize improved earnings
over the prior year.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between income on interest earning
assets and the cost of funds supporting those assets. Earning assets are
comprised primarily of loans, investments, and federal funds sold; interest on
interest-bearing deposits and other borrowings make up the cost of funds.
Non-
10
interest bearing deposits and capital are also funding sources. Changes in the
volume and mix of earning assets and funding sources along with changes in
associated interest rates determine changes in net interest income.
Three months ended September 30, 2004 compared to three months ended
September 30, 2003
Net interest income after provision for loan losses for the three months
ended September 30, 2004 increased 33.34% to $879,811 from $659,820 for the same
period in 2003. The increase was primarily attributable to an increase in
average loans outstanding during the period.
Interest revenue increased from $1.0 million for the three months ended
September 30, 2003 to $1.3 million for the same period in 2004. Interest expense
for all interest bearing liabilities amounted to $287,711 for the three months
ended September 30, 2004 versus $311,226 for the three months ended September
30, 2003. These changes were a result of normal business growth offset by
declines in interest rates.
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003
Net interest income after provision for loan losses for the nine months
ended September 30, 2004 increased 33.33% to $2.4 million from $1.8 million for
the same period in 2003. The increase was primarily attributable to a 22.04% or
$16.4 million increase in total average interest earning assets to $90.8 million
for the nine months ended September 30, 2004 from $74.4 million for the same
period in 2003.
Interest revenue increased from $2.9 million for the nine months ended
September 30, 2003 to $3.5 million for the same period in 2004. Interest expense
for all interest bearing liabilities amounted to $851,442 for the nine months
ended September 30, 2004 versus $980,197 for the nine months ended September 30,
2003. As discussed below and outlined in detail in the Rate/Volume Analysis,
these changes were a result of normal business growth offset by declines in the
interest rates.
Our net interest margin was 3.92% for the first nine months of 2004, as
compared to 3.57% for the first nine months of 2003. The increase in the net
interest margin is the result of a $17.4 million or 35.44% increase in average
gross loans outstanding to $66.5 million at September 30, 2004 compared to $49.1
million at September 30, 2003. We also had a $6.0 million increase in average
interest bearing deposits to $57.2 million from $51.2 million at September 30,
2003 and a $4.9 million increase in non interest-bearing deposits. These volume
increases along with average interest rate changes in loans and deposits
improved the interest margin.
The following table illustrates average balances of total interest earning
assets and total interest bearing liabilities for the periods indicated, showing
the average distribution of assets, total liabilities, stockholders' equity and
related income, expense and corresponding weighted average yields and rates. The
average balances used in this table and other statistical data were calculated
using average daily balances.
11
AVERAGE BALANCES, INTEREST, AND YIELDS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
-----------------------------------------------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
-----------------------------------------------------------------------------
ASSETS:
Federal Funds Sold $ 4,629,960 $ 39,925 1.15% $ 8,025,942 $ 64,017 1.07%
Interest bearing deposits 607,299 13,507 2.97 605,128 14,645 3.24
Investment Securities (1) (2)
U.S. Treasury 3,537,691 85,469 3.17 - -
U.S. Agency 8,780,810 236,774 3.54 11,349,622 319,007 3.76
Mortgage-backed securities 3,101,206 91,964 3.90 2,748,656 76,041 3.70
Tax exempt securities 3,362,437 130,419 5.10 2,631,717 95,295 4.84
Other 932,775 26,289 3.70 429,463 16,503 5.14
----------- ----------- ---- ----------- ----------- ----
Total investment securities 19,714,919 570,915 3.80 17,159,458 506,846 3.95
----------- ----------- ---- ----------- ----------- ----
Loans:
Commercial 8,798,947 466,848 7.09 6,183,865 383,668 8.30
Mortgage 37,591,912 1,611,876 5.73 25,127,873 1,173,220 6.24
Installment 20,094,395 822,960 5.47 17,774,440 823,442 6.19
---------- ---------- ---- ---------- --------- ----
Total gross loans 66,485,254 2,901,684 5.83 49,086,178 2,380,330 6.48
Allowance for loan losses 620,561 458,573
----------- ----------- ---- ----------- ----------- ----
Total loans, net of allowance 65,864,693 2,901,684 5.88 48,627,605 2,380,330 6.54
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets 90,816,871 3,526,031 5.17 74,418,133 2,965,838 5.33
----------- ----------- ---- ----------- ----------- ----
Noninterest-bearing cash 2,422,155 2,069,010
Premises and equipment 2,276,629 2,099,619
Other assets 1,122,665 1,103,454
----------- ----------- ---- ----------- ----------- ----
Total Assets $96,638,320 $ 3,526,031 4.86% $79,690,216 $ 2,965,838 4.98%
----------- ----------- ---- ----------- ----------- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and Now deposits $10,994,744 $ 40,431 0.49% 12,499,427 $ 52,524 0.56%
Money market and super NOW 16,605,322 56,852 0.46 12,107,766 52,653 0.58
Other time deposits 29,610,300 584,897 2.64 26,570,051 728,887 3.67
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing deposits 57,210,366 682,180 1.59 51,177,244 834,064 2.18
Borrowed funds 5,811,491 169,262 3.89 4,049,451 146,134 4.82
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities 63,021,857 851,442 1.80 55,226,695 980,198 2.37
Non interest-bearing deposits 20,432,017 15,521,909
----------- ----------- ---- ----------- ----------- ----
83,453,874 851,442 1.36 70,748,604 980,198 1.85
Other liabilities 373,880 838,913
Stockholders' equity 12,810,566 8,102,699
----------- -----------
Total liabilities and stockholders' equity $96,638,320 $79,690,216
=========== ===========
NET INTEREST SPREAD 3.37% 2.96%
----------- -----------
NET INTEREST INCOME $ 2,674,589 3.92% $ 1,985,640 3.57%
=========== ==== =========== ====
(1) Interest revenue is presented on a fully taxable equivalent (FTE) basis.
The FTE basis adjusts for the tax favored status of these types of
securities. Management believes providing this information on a FTE basis
provides investors with a more accurate picture of our net interest spread
and net interest income and we believe it to be the preferred industry
measurement of these calculations. See "Reconciliation of Non-GAAP
Measures."
(2) Available for sale investment securities are presented at amortized cost.
12
The following table describes the impact on our interest income and expense
resulting from changes in average balances and average rates for the periods
indicated. The change in interest income due to both volume and rate is
allocated between the rate and volume amounts based on the magnitude of each
amount.
RATE/VOLUME VARIANCE ANALYSIS
Nine months ended September 30,
2004 compared to 2003
Variance due to:
Total Rate Volume
--------- --------- ---------
EARNING ASSETS:
Federal Funds Sold $ (24,092) 5,171 $ (29,263)
Interest bearing deposits (1,138) (1,189) 51
Investment Securities
U.S. Treasury 85,469 - 85,469
U.S. Agency (82,233) (16,892) (65,341)
Mortgage backed 15,923 4,721 11,202
Tax exempt securities 35,124 5,694 29,430
Other 9,786 (3,074) 12,860
Loans: -
Commercial 83,180 (70,862) 154,042
Mortgage 438,656 (138,137) 576,793
Installment (482) (3,759) 3,277
--------- --------- ---------
Total interest revenue (1) 560,193 (218,327) 778,520
--------- --------- ---------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits (12,093) (7,430) (4,663)
Money market and supernow 4,199 (9,070) 13,269
Other time deposits (143,990) (239,939) 95,949
Other borrowed funds 23,128 (13,951) 37,079
--------- --------- ---------
Total interest expense (128,756) (270,390) 141,634
--------- --------- ---------
NET INTEREST INCOME $ 688,949 $ 52,063 $ 636,886
========= ========= =========
(1) Interest revenue is presented on a fully taxable equivalent (FTE) basis. The
FTE basis adjusts for the tax favored status of these types of securities.
Management believes providing this information on a FTE basis provides investors
with a more accurate picture of our net interest spread and net interest income
and we believe it to be the preferred industry measurement of these
calculations. See "Reconciliation of Non-GAAP Measures."
PROVISION FOR LOAN LOSSES
Originating loans involves a degree of risk that credit losses will occur
in varying amounts according to, among other factors, the type of loans being
made, the credit-worthiness of the borrowers over the term of the loans, the
quality of the collateral for the loan, if any, as well as general economic
13
conditions. We charge the provision for loan losses to earnings to maintain the
total allowance for loan losses at a level considered by management to represent
its best estimate of the losses known and inherent in the portfolio that are
both probable and reasonable to estimate, based on, among other factors, prior
loss experience, volume and type of lending conducted, estimated value of any
underlying collateral, economic conditions (particularly as such conditions
relate to Old Line Bank's market area), regulatory guidance, peer statistics,
management's judgment, past due loans in the loan portfolio, loan charge-off
experience and concentrations of risk (if any). We charge losses on loans
against the allowance when we believe that collection of loan principal is
unlikely. Recoveries on loans previously charged off are added back to the
allowance.
The provision for loan losses increased $37,000 or 77.08% to $85,000 for
the three months ended September 30, 2004 versus $48,000 for the three months
ended September 30, 2003. During the quarter, we increased the provision for
loan losses due to growth in mortgage and commercial loans.
The provision for loan losses was $175,000 for the nine months ended
September 30, 2004, as compared to $126,000 for the nine months ended September
30, 2003, an increase of $49,000 or 38.89%. The increase was primarily the
result of growth in loan balances outstanding in all segments of the portfolio.
We review the adequacy of the allowance for loan losses at least
quarterly. Our review includes evaluation of impaired loans as required by SFAS
No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure. Also incorporated in determining the adequacy of the allowance is
guidance contained in the Securities and Exchange Commissions SAB No. 102, Loan
Loss Allowance Methodology and Documentation; and the Federal Financial
Institutions Examination Council's Policy Statement on Allowance for Loan and
Lease Losses Methodologies and Documentation for Banks and Savings Institutions.
We base the evaluation of the adequacy of the allowance for loan losses
upon loan categories. We categorize loans as installment and other consumer
loans (other than boat loans), boat loans, mortgage loans (commercial real
estate, residential real estate and real estate construction) and commercial
loans. We apply loss ratios to each category of loans other than commercial
loans (including letters of credit and unused commitments). We further divide
commercial loans by risk rating and apply loss ratios by risk rating, to
determine estimated loss amounts. We evaluate delinquent loans and loans for
which management has knowledge about possible credit problems of the borrower or
knowledge of problems with loan collateral separately and assign loss amounts
based upon the evaluation.
We determine loss ratios for installment and other consumer loans (other
than boat loans), boat loans and mortgage loans (commercial real estate,
residential real estate and real estate construction) based upon a review of
prior 18 months delinquency trends for the category, the three year loss ratio
for the category, peer group loss ratios and industry standards.
With respect to commercial loans, management assigns a risk rating of one
through eight to each loan at inception, with a risk rating of one having the
least amount of risk and a risk rating of eight having the greatest amount of
risk. For commercial loans of less than $250,000, we may review the risk rating
annually based on, among other things, the borrower's financial condition, cash
flow and ongoing financial viability; the collateral securing the loan; the
borrower's industry and payment history. We review the risk rating for all
commercial loans in excess of $250,000 at least annually. We evaluate loans with
a risk rating of five or greater separately and assign loss amounts based upon
the evaluation. For loans with risk ratings between one and four, we determine
loss ratios based upon a review of prior 18 months delinquency trends, the three
year loss ratio, peer group loss ratios and industry standards.
14
We also identify and make any necessary allocation adjustments for any
specific concentrations of credit in a loan category that in management's
estimation increase the risk inherent in the category. If necessary, we will
also make an adjustment within one or more loan categories for economic
considerations in our market area that may impact the quality of the loans in
the category. For all periods presented, there were no specific adjustments made
for concentrations of credit or economic considerations. We will not create a
separate valuation allowance unless we consider a loan impaired under SFAS No.
114 and SFAS No. 118. At September 30, 2004, we had one impaired loan with an
outstanding balance of $33,446 and allocated the appropriate allowance.
Our policies require a review of assets on a regular basis, and we believe
that we appropriately classify loans as well as other assets if warranted. We
believe that we use the best information available to make a determination with
respect to the allowance for loan losses, recognizing that the determination is
inherently subjective and that future adjustments may be necessary depending
upon, among other factors, a change in economic conditions of specific borrowers
or generally in the economy, and new information that becomes available to us.
However, there are no assurances that the allowance for loan losses will be
sufficient to absorb losses on non-performing assets, or that the allowance will
be sufficient to cover losses on non-performing assets in the future.
The allowance for loan losses represents 0.94% of gross loans at September
30, 2004 and 0.91% of gross loans at December 31, 2003. Old Line Bank has no
exposure to foreign countries or foreign borrowers. Management believes that the
allowance for loan losses is adequate for each period presented.
15
The following table represents an analysis of the allowance for loan
losses for the periods indicated:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
2004 2003 2003
Balance, beginning of period $ 547,690 $ 389,553 $ 389,553
Provision for loan losses 175,000 126,000 162,000
--------- --------- ---------
Chargeoffs:
Commercial - - -
Mortgage - - -
Consumer (18,409) (4,039) (16,554)
--------- --------- ---------
Total chargeoffs (18,409) (4,039) (16,554)
Recoveries:
Commercial - - -
Mortgage - - -
Consumer 16,113 12,617 12,691
--------- --------- ---------
Total recoveries 16,113 12,617 12,691
--------- --------- ---------
Net chargeoffs (2,296) 8,578 (3,863)
Balance, end of period $ 720,394 $ 524,131 $ 547,690
========= ========= =========
Allowance for loan losses to gross loans 0.94% 0.89% 0.91%
Ratio of net-chargeoffs during period to
average loans outstanding during period (0.003%) 0.018% (0.007%)
16
The following table provides a breakdown of the allowance for loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2004 2003 2003
---- ---- ----
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ --------
Installment & others $ 7,550 0.81% $ 12,043 1.63% 9,840 1.29%
Boat 150,858 27.05 137,317 30.98 141,826 31.04
Mortgage 362,163 58.10 282,189 56.19 278,329 53.89
Commercial 199,823 14.04 92,582 11.20 117,695 13.78
-------- ------ --------- ------ --------- ------
TOTAL $720,394 100.00% $ 524,131 100.00% $ 547,690 100.00
======== ====== ========= ====== ========= ======
NON-INTEREST REVENUE
Three months ended September 30, 2004 compared to three months ended
September 30, 2003
Non-interest revenue for the three months ended September 30, 2004 and
September 30, 2003 included primarily construction loan fees, fee income from
service charges on deposit accounts, mortgage origination fees from a third
party processor, credit card fees, ATM fees and gain on disposal of assets.
Non-interest revenue totaled $196,083 for the three months ended September 30,
2004, an increase of $71,473 or 57.36% over the 2003 amount of $124,610. The
increase was primarily because of a $68,880 or 111.78% increase in other fees
and commissions during the period. Other fees and commissions consists of
construction loan fees, broker/origination fees, other loan fees and letter of
credit fees. Other loan fees increased $130,494 to $144,344 for the three months
ended September 30, 2004 compared to $13,850 for the three months ended
September 30, 2003. This increase was primarily due to the increase in the
dollar value of commitments accepted by customers during the period. Letter of
credit fees increased $6,290 due to an increase in the dollar value of letters
of credit issued. A $17,038 decline in construction loan fees during the period
and $75,301 decline in broker/origination fees offset these increases.
Construction loan fees declined because the builders that are our customers
started construction of fewer homes during the period. Broker fees declined
because fewer individuals refinanced their residences through us during the
period. We anticipate we will continue to improve fee income during the year due
to the addition of new customer relationships unless there is a significant rise
in interest rates that may cause a curtailment in credit requests.
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003
Non-interest revenue for the nine months ended September 30, 2004 included
primarily construction loan fees, fee income from service charges on deposit
accounts, mortgage origination fees from a third party processor, credit card
fees, ATM fees and gain on disposal of assets. Total non-interest revenue
increased $30,419 or 6.29% to $499,270 at September 30, 2004 from $468,851 at
September 30, 2003. The increase was primarily because of an $111,506 or 55.20%
increase in other fees and commissions during the period offset by an $88,359
decline in gain on disposal of assets. Other fees and commissions consists of
construction loan fees, broker/origination fees, other loan fees and letter of
credit fees. Other loan fees increased $144,344 to $185,055 for the nine months
ended September 30, 2004 compared to $40,711 for the nine months ended September
30, 2003. This increase was due to the increase in the dollar value and number
of commitments accepted by customers during the period. Letter of credit
17
fees increased $19,293 due to an increase in the dollar value of letters of
credit issued. Construction loan fees increased $13,028 to $79,969 at September
30, 2004 from $66,941 at September 30, 2004. This increase occurred because of
the establishment of new relationships with local builders and an increase in
new constructions by these builders. A $65,807 decline in broker fees offset
these increases. Broker fees declined because fewer individuals refinanced their
residences through us during the period. During the period ended September 30,
2003, we sold securities with total gains of $88,359 and we sold no securities
and recorded no gains for the period ended September 30, 2004. We anticipate we
will continue to improve fee income during the year due to the addition of new
customer relationships unless there is a significant rise in interest rates that
may cause a curtailment in credit requests.
NON-INTEREST EXPENSE
Three months ended September 30, 2004 compared to three months ended
September 30, 2003
Non-interest expense for the three months ended September 30, 2004
increased $39,862 or 5.87% to $719,181 compared to $679,319 at September 30,
2003. Salaries and benefit expenses increased $49,546 during the period because
we hired a new credit officer in March 2004, a new branch manager in September
2004 and changed our method of accruing annual bonus payments in September 2003.
Other operating expenses decreased $9,440. Because of continued growth in the
loan portfolio and deposits, we expect that we will hire an additional loan
officer during the next six months. We expect this to increase salary expense
and employee benefits.
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003
Non-interest expense for the nine months ended September 30, 2004 was $2.1
million versus $1.8 million for the same period in 2003. The $265,307 or 14.66%
increase was attributable to an $11,907 increase in data processing costs and
other operating expenses. The increase in data processing occurred because of an
increased volume of customers and new services we began offering. Other
operating expenses increased $86,150 to $528,450 from $442,300 because of
expenses associated with SEC and public filings, and Nasdaq fees incurred by the
holding company that we did not have in 2003. Additionally, we incurred a
$25,000 expense that represented the deductible on Old Line Bank's robbery
insurance policy because of a robbery in June. Salary and benefit expenses were
$165,137 higher due to the hiring of a new lending officer in March 2003, a new
credit officer in March 2004, a new branch manager in September 2004, annual
payroll increases and a change in our method of accruing for annual bonus
payments. Although these bonus payments remain discretionary, in September 2003,
we began accruing for this annual expense on a twelve month basis. Historically,
we had accrued for these bonuses during the last quarter of the year. During the
nine month period ended September 30, 2004, we incurred approximately $22,570 in
expenses associated with filing fees and Nasdaq listing fees for the holding
company (included in other operating expenses). Old Line Bancshares, Inc. did
not exist until the quarter ended September 30, 2003 and therefore, did not
incur similar expenses during 2003.
18
INCOME TAXES
Three months ended September 30, 2004 compared to three months ended
September 30, 2003
Income tax expense was $117,432 (32.92%) of pre-tax income for the three
months ended September 30, 2004 as compared to $28,884 (27.48%) for the three
months ended September 30, 2003.
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003
Income tax expense was $296,950 (34.25%) of pre-tax income for the nine
months ended September 30, 2004 as compared to $156,024 (31.59% of pre-tax net
income) for the same period in 2003.
NET INCOME
Three months ended September 30, 2004 compared to three months ended
September 30, 2003
Net income increased $163,054 or 213.91% to $239,281 for the three months
ended September 30, 2004 compared to $76,227 for the three months ended
September 30, 2003. Earnings per share increased for the three months to $0.13
basic and diluted for the three months ended September 30, 2004 from $0.04 basic
and diluted for the three months ended September 30, 2003 because of the
increase in net income. The $163,054 increase in net income was due to the
$219,991 increase in net interest income after provision for loan losses, the
$71,473 increase in non-interest revenue offset by the $39,862 increase in
non-interest expenses and the $88,548 increase in income taxes.
Nine months ended September 30, 2004 compared to nine months ended
September 30, 2003
Net income was $569,982 or $0.32 basic and diluted earnings per common
share for the nine month period ending September 30, 2004, an increase of
$232,101 or 68.69% compared to net income of $337,881 or $0.27 basic and diluted
earnings per common share for the same period in 2003. The increase in net
income was the result of a $607,915 increase in net interest income after
provision for loan losses, and a $30,514 increase in non-interest revenue offset
by a $265,307 increase in non-interest expense and a $140,926 increase in income
tax expense for the period as compared to the same period in 2003. Earnings per
share increased because of the $232,101 increase in net income.
19
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
Old Line Bank's portfolio consists primarily of U.S. Treasury securities,
U.S. government agency securities, securities issued by states, counties and
municipalities, mortgage-backed securities, and certain equity securities,
including Federal Reserve Bank Stock and Federal Home Loan Bank Stock. The
portfolio provides a source of liquidity, collateral for repurchase agreements
as well as a means of diversifying Old Line Bank's earning asset portfolio.
While we generally intend to hold the investment portfolio assets until
maturity, we classify the majority (88.17%) of the portfolio as available for
sale. We account for securities so classified at fair value and report the
unrealized appreciation and depreciation as a separate component of
stockholders' equity, net of income tax effects. We account for securities
classified in the held to maturity category at amortized cost. Old Line Bank
invests in securities for the yield they produce and not to profit from trading
the securities. There are no trading securities in the portfolio.
The investment portfolio at September 30, 2004 amounted to $18.6 million,
a decrease of $557,605, or 2.91%, from the amount at December 31, 2003. The
decrease in the investment portfolio occurred because some of these assets
matured or were called and we deployed the proceeds into loans and federal funds
for future loan fundings. The carrying value of available for sale securities
includes unrealized depreciation of $43,285 at September 30, 2004 (reflected as
unrealized depreciation of $27,723 in stockholders' equity after deferred taxes)
as compared to net unrealized depreciation of $109,732 ($69,914 net of taxes) as
of December 31, 2003. In general, this increase in unrealized depreciation was a
result of rising interest rates, the maturity of securities or the fact that
some of the securities were called.
INVESTMENT IN POINTER RIDGE LLC
On July 22, 2004, the Old Line Bancshares, Inc. executed an Operating
Agreement as a member with unaffiliated parties and Chesapeake Custom Homes,
LLC, as members, and Chesapeake Pointer Ridge Manager, LLC, as manager, to
establish Pointer Ridge Office Investment, LLC ("Pointer Ridge"). The members'
ownership of Pointer Ridge is as follows:
Unaffiliated parties 25.0%
Lucente Enterprises, Inc. 12.5%
Chesapeake Custom Homes, LLC 12.5%
Old Line Bancshares, Inc. 50.0%
Mr. Frank Lucente, Vice Chairman and a member of the Board of Directors of
Old Line Bancshares, Inc., is the President and majority owner of Lucente
Enterprises, Inc. Lucente Enterprises, Inc. is the manager and majority member
of Chesapeake Custom Homes, LLC and Chesapeake Pointer Ridge Manager, LLC.
The purpose of Pointer Ridge is to acquire, own, hold for profit, sell,
assign, transfer, operate, lease, develop, mortgage, refinance, pledge and
otherwise deal with real property located at the intersection of Pointer Ridge
Road and Route 301 in Bowie, Maryland. Pointer Ridge intends to acquire the
property and construct a commercial office building containing approximately
40,000 square feet. Old Line Bancshares, Inc. plans to lease approximately 50%
of this building for its main office (moving its existing main office from
Waldorf, Maryland) and a branch of Old Line Bank. On August 26, 2004, Old Line
Bancshares, Inc. transferred its initial $550,000 capital contribution to
Pointer Ridge. We believe Old Line Bancshares, Inc. will incur an increase in
non-interest revenue from lease income from Pointer Ridge and an increase in
non-interest expense caused by the increase in the main office's
20
occupancy expense. Old Line Bank plans to maintain the branch currently located
at its Waldorf headquarters. We also plan to identify and execute leases with
tenant(s) for the remaining Waldorf office space that we currently occupy as our
main office. We anticipate these changes will cause a modest negative impact on
net income. We anticipate moving to our new headquarters in the fourth quarter
of 2005.
LOAN PORTFOLIO
The loan portfolio, net of allowance, unearned fees and origination costs
increased $16.6 million or 27.90% to $76.1 million at September 30, 2004 from
$59.5 million at December 31, 2003. This growth was attributable to increased
business development efforts as well as our ability to retain a higher dollar
amount of loans. Commercial business loans increased by $2.4 million (28.92%),
commercial real estate loans (generally owner-occupied) increased by $5.3
million (19.70%), residential real estate loans (generally home equity and fixed
rate home improvement loans) increased by $4.1 million (113%), real estate
construction loans increased by $2.8 million (156%) and installment loans
increased by $1.9 million (9.79%) from their respective balances at December 31,
2003.
Loans secured by real estate or luxury boats comprise the majority of the
loan portfolio. Old Line Bank's loan customers are generally located in the
greater Washington, D.C. metropolitan area.
During the period, our increased business development efforts have allowed
Old Line Bank to establish several new customer relationships and expand
existing relationships. Considering our current backlog of approved loans, we
anticipate that loan growth will continue during the fourth quarter, albeit at a
slower rate of growth than in the third quarter.
The following table summarizes the composition of the loan portfolio by
dollar amount and percentages:
LOAN PORTFOLIO
(Dollars in thousands)
September 30, December 31,
2004 % 2003 %
Real Estate
Commercial $ 32,167 42.03 $ 26,859 44.87
Construction 4,567 5.97 1,762 2.94
Residential 7,730 10.10 3,641 6.08
Commercial 10,743 14.04 8,251 13.78
Installment 21,317 27.86 19,355 32.33
-------- ------ --------- ------
76,524 100.00 59,868 100.00
-------- ------ --------- ------
Allowance for loan losses 720 547
Net deferred loan fees and (costs) (308) (197)
-------- ---------
412 350
-------- ---------
$ 76,112 $ 59,518
======== =========
ASSET QUALITY
Management performs reviews of all delinquent loans and relationship
officers are charged with working with customers to resolve potential credit
issues in a timely manner. Management generally
21
classifies loans as non-accrual when collection of full principal and interest
under the original terms of the loan is not expected or payment of principal or
interest has become 90 days past due. Classifying a loan as non-accrual results
in Old Line Bank no longer accruing interest on such loan and reversing any
interest previously accrued but not collected. We will generally restore a
non-accrual loan to accrual status when delinquent principal and interest
payments are brought current and we expect to collect future monthly principal
and interest payments. Old Line Bank recognizes interest on non-accrual loans
only when received
As of September 30, 2004, Old Line Bank had one loan on non-accrual status
with an outstanding principal balance of $33,446 versus none at December 31,
2003. Old Line Bank has received payments on the loan subsequent to September
30, 2004 and it currently has a principal balance of $21,266. We anticipate we
will collect most, if not all, of this balance. We have allocated a sufficient
reserve for any potential loss on this loan. As of September 30, 2004 and
December 31, 2003, Old Line Bank had no accruing loans past due more than 90
days.
We classify any property acquired as a result of foreclosure on a mortgage
loan as "real estate owned" and record it at the lower of the unpaid principal
balance or fair value at the date of acquisition and subsequently carry the loan
at the lower of cost or net realizable value. We charge any required write-down
of the loan to its net realizable value against the allowance for credit losses
at the time of foreclosure. We charge to expense any subsequent adjustments to
net realizable value. Upon foreclosure, Old Line Bank generally requires an
appraisal of the property and, thereafter, appraisals of the property on at
least an annual basis and external inspections on at least a quarterly basis. At
September 30, 2004 and December 31, 2003, Old Line Bank held no real estate
acquired as a result of foreclosure.
Old Line Bank applies the provisions of Statement of Financial Accounting
Standards No. 114 ("SFAS No. 114"), "Accounting by Creditors for Impairment of a
Loan," as amended by Statement of Financial Accounting Standards No. 118 ("SFAS
No. 118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosure." SFAS No. 114 and SFAS No. 118 require that impaired loans,
which consist of all modified loans and other loans for which collection of all
contractual principal and interest is not probable, be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, an impairment is
recognized through a valuation allowance and corresponding provision for credit
losses. Old Line Bank considers consumer loans as homogenous loans and thus does
not apply the SFAS No. 114 impairment test to these loans. We write off impaired
loans when collection of the loan is doubtful.
At September 30, 2004, we had one impaired loan with a balance of $33,446
compared to none at December 31, 2003.
DEPOSITS
We seek deposits within our market area by paying competitive interest
rates, offering high quality customer service and using technology to deliver
deposit services effectively. At September 30, 2004, the deposit portfolio had
grown to $89.6 million, a $20.3 million or 29.29% increase over the December 31,
2003 level of $69.3 million. We have seen growth in several key categories over
the period. Demand deposits, money market and certificates of deposit, savings
and real estate settlement accounts have all grown while NOW accounts have
declined. Our deposit base expanded due to increased commercial relationships.
22
As a general practice, we do not purchase brokered deposits. During the
periods reported, we had no brokered deposits. As market conditions warrant and
balance sheet needs dictate, we may participate in the wholesale certificates of
deposit market.
BORROWINGS
Old Line Bank has available lines of credit, including overnight federal
funds and repurchase agreements from its correspondent banks totaling $8.5
million as of September 30, 2004. Old Line Bank has an additional secured line
of credit from the Federal Home Loan Bank of $16.3 million at September 30, 2004
of which we have borrowed $6 million as outlined below. At September 30, 2004,
Old Line Bank had nothing outstanding in overnight federal funds. As of
September 30, 2004, Old Line Bank had borrowed $6.0 million from the Federal
Home Loan Bank. Old Line Bank borrowed $4.0 million of the $6.0 million in
January 2001, currently pays interest only at 4.80%, and must repay the $4.0
million in January 2011. In February 2004, Old Line Bank borrowed an additional
$2 million from the Federal Home Loan Bank, Old Line Bank pays interest only,
currently at 1.79%, and must repay the $2.0 million in February 2009. Old Line
Bank may not prepay the loans prior to maturity without incurring a significant
prepayment penalty. These facilities have variable interest rates that are
subject to adjustments on the 2 or 5 year anniversary.
INTEREST RATE SENSITIVITY ANALYSIS AND INTEREST RATE RISK MANAGEMENT
A principal objective of Old Line Bank's asset/liability management policy
is to minimize exposure to changes in interest rates by an ongoing review of the
maturity and re-pricing of interest-earning assets and interest-bearing
liabilities. The Asset and Liability Committee of the Board of Directors
oversees this review.
The Asset and Liability Committee establishes policies to control interest
rate sensitivity. Interest rate sensitivity is the volatility of a bank's
earnings resulting from movements in market interest rates. Management monitors
rate sensitivity in order to reduce vulnerability to interest rate fluctuations
while maintaining adequate capital levels and acceptable levels of liquidity.
Monthly financial reports supply management with information to evaluate and
manage rate sensitivity and adherence to policy. Old Line Bank's asset/liability
policy's goal is to manage assets and liabilities in a manner that stabilizes
net interest income and net economic value within a broad range of interest rate
environments. Adjustments to the mix of assets and liabilities are made
periodically in an effort to achieve dependable, steady growth in net interest
income regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and
Liability Committee examines the extent to which Old Line Bank's assets and
liabilities are interest rate sensitive and monitors the interest rate
sensitivity gap. An interest rate sensitive asset or liability is one that,
within a defined time period, either matures or experiences an interest rate
change in line with general market rates. The interest rate sensitivity gap is
the difference between interest-earning assets and interest-bearing liabilities
scheduled to mature or re-price within such time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of declining
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. If re-pricing of assets and liabilities were equally flexible
and moved concurrently, the impact of any increase or decrease in interest rates
on net interest income would be minimal.
23
Old Line Bank currently has a positive gap over the short term, which
suggests that the net yield on interest earning assets may increase during
periods of rising interest rates. However, a simple interest rate "gap" analysis
by itself may not be an accurate indicator of how net interest income will be
affected by changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities may not be
affected uniformly by changes in interest rates. In addition, the magnitude and
duration of changes in interest rates may have a significant impact on net
interest income. Although certain assets and liabilities may have similar
maturities or periods of re-pricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market interest rates,
while interest rates on other types may lag behind changes in general market
rates. In the event of a change in interest rate, prepayment and early
withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest rate increase.
LIQUIDITY
Our overall asset/liability strategy takes into account our need to
maintain adequate liquidity to fund asset growth and deposit runoff. Our
management monitors the liquidity position daily in conjunction with Federal
Reserve guidelines. We have credit lines unsecured and secured available from
several correspondent banks totaling $8.5 million. Additionally, we may borrow
funds from the Federal Home Loan Bank of Atlanta. We can use these credit
facilities in conjunction with the normal deposit strategies, which include
pricing changes to increase deposits as necessary. We can also sell or pledge
investment securities to create additional liquidity. From time to time we may
sell or participate out loans to create additional liquidity as required.
Additional sources of liquidity include funds held in time deposits and cash
from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks and federal
funds sold. As of September 30, 2004, we had $2.9 million in cash and due from
banks and $7.1 million in federal funds sold and other overnight investments
compared to $2.5 million in cash and due from banks and $4.0 million in Federal
Funds sold at December 31, 2003.
Old Line Bank has sufficient liquidity to meet its loan commitments as
well as fluctuations in deposits. We usually retain maturing certificates of
deposit as we offer competitive rates on certificates of deposit. Management is
not aware of any demands, trends, commitments, or events that would result in
Old Line Bank's inability to meet anticipated or unexpected liquidity needs.
CAPITAL
Our stockholders' equity amounted to $13.4 million at September 30, 2004
and $12.8 million at December 31, 2003. We are considered "well capitalized"
under the risk-based capital guidelines adopted by the Federal Reserve.
Stockholders' equity increased during the period as a result of net income of
$569,982, the $83,522 in proceeds after tax adjustment for stock options
exercised less the $159,741 dividends paid in March, June and September and the
$43,191 appreciation in securities.
OFF-BALANCE SHEET ARRANGEMENTS
Old Line Bancshares, Inc. is a party to financial instruments with
off-balance sheet risk in the normal course of business. These financial
instruments primarily may include commitments to extend credit, lines of credit
and standby letters of credit. In addition, Old Line Bancshares, Inc. also has
operating lease obligations. Old Line Bancshares, Inc. uses these financial
instruments to meet the financing needs of its customers. These financial
instruments involve, to varying degrees, elements of credit, interest rate, and
24
liquidity risk. These do not represent unusual risks and management does not
anticipate any losses which would have a material effect on Old Line Bancshares,
Inc.
Outstanding loan commitments and lines and letters of credit at September
30, 2004 and December 31, 2003 are as follows:
September 30, December 31,
2004 2003
------------- ------------
(DOLLARS IN THOUSANDS)
Commitments to extend credit and available credit lines:
Commercial $ 3,037 $ 1,395
Real estate-undisbursed development and construction 9,166 3,931
Real estate-undisbursed home equity lines of credit 3,536 2,686
--------- ---------
$ 15,739 $ 8,012
========= =========
Standby letters of credit $ 1,615 $ 317
========= =========
We are not aware of any loss we would incur by funding our commitments or
lines of credit. Commitments for real estate development and construction, which
totaled $9.2 million, or 58.60% of the $15.7 million, are generally short-term
and turn over rapidly, satisfying cash requirements with principal repayments
and from sales of the properties financed.
RECONCILIATION OF NON-GAAP MEASURES
Below is a reconciliation of the FTE adjustments and the GAAP basis
information presented in this report.
NINE MONTHS ENDED SEPTEMBER 30, 2004
Federal Funds Investment Interest Total Net Interest Net Interest
Sold Securities Earning Assets Assets Income Spread
GAAP Interest income $ 39,544 $ 507,629 $ 3,462,364 $ 3,462,364 $ 2,610,922
Tax Equivalent adjustment 381 63,286 63,667 63,667 63,667
----------- --------- ------------- ------------ -------------
Tax Equivalent interest income $ 39,925 $ 570,915 $ 3,526,031 $ 3,526,031 $ 2,674,589
=========== ========= ============= ============ =============
GAAP Interest yield 1.14% 3.38% 5.08% 4.77% 3.83% 3.28%
Taxable Equivalent adjustment 0.01% 0.42% 0.09% 0.09% 0.09% 0.09%
----------- --------- ------------- ------------ ------------- ----
Tax Equivalent interest yield 1.15% 3.80% 5.17% 4.86% 3.92% 3.37%
=========== ========= ============= ============ ============= ====
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NINE MONTHS ENDED SEPTEMBER 30, 2003
Federal Funds Investment Interest Total Net Interest Net Interest
Sold Securities Earning Assets Assets Income Spread
GAAP Interest income $ 64,017 $ 475,212 $ 2,934,204 $ 2,934,204 $ 1,954,007
Tax Equivalent adjustment - 31,634 31,634 31,634 31,633
----------- --------- ------------- ------------ -------------
Tax Equivalent interest income $ 64,017 $ 506,846 $ 2,965,838 $ 2,965,838 $ 1,985,640
=========== ========= ============= ============ =============
GAAP Interest yield 1.07% 3.70% 5.27% 4.92% 3.51% 2.90%
Taxable Equivalent adjustment 0.00% 0.25% 0.06% 0.06% 0.06% 0.06%
----------- --------- ------------- ------------ ------------- ----
Tax Equivalent interest yield 1.07% 3.95% 5.33% 4.98% 3.57% 2.96%
=========== ========= ============= ============ ============= ----
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and follow general
practices within the industry in which we operate. 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. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based either
on quoted market prices or are provided by other third-party sources, when
available.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, management has identified the determination of the provision for loan
losses as the accounting area that requires the most subjective or complex
judgments, and as such could be most subject to revision as new information
becomes available.
Management has significant discretion in making the judgments inherent in
the determination of the provision and allowance for loan losses, including in
connection with the valuation of collateral and the financial condition of the
borrower, and in establishing loss ratios and risk ratings. The establishment of
allowance factors is a continuing exercise and allowance factors may change over
time, resulting in an increase or decrease in the amount of the provision or
allowance based upon the same volume and classification of loans.
Changes in allowance factors or in management's interpretation of those
factors will have a direct impact on the amount of the provision, and a
corresponding effect on income and assets. Also, errors in management's
perception and assessment of the allowance factors could result in the allowance
not being adequate to cover losses in the portfolio, and may result in
additional provisions or charge-offs, which
26
would adversely affect income and capital. For additional information regarding
the allowance for loan losses, see the "Provision for Loan Losses" section of
this financial review.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information contained in Part I of this
Quarterly Report on Form 10-QSB, the discussion in Part I of this Quarterly
Report on Form 10-QSB contains certain forward-looking statements.
Forward-looking statements often use words such as "believe," "expect," "plan,"
"may," "will," "should," "project," "contemplate," "anticipate," "forecast,"
"intend" or other words of similar meaning. You can also identify them by the
fact that they do not relate strictly to historical or current facts.
The statements presented herein with respect to, among other things, Old
Line Bancshares, Inc.'s plans, objectives, expectations and intentions,
including statements regarding profitability, liquidity, allowance for loan
losses, interest rate sensitivity, market risk and financial and other goals are
forward looking. These statements are based on Old Line Bancshares, Inc.'s
beliefs, assumptions and on information available to Old Line Bancshares, Inc.
as of the date of this filing, and involve risks and uncertainties. These risks
and uncertainties include, among others, those discussed in this Quarterly
Report on Form 10-QSB; the dependence on key personnel; the composition of the
loan portfolio; fluctuations in market rates of interest and the effect on loan
and deposit pricing, adverse changes in the overall national economy as well as
adverse economic conditions in Old Line Bancshares, Inc.'s specific market area;
competitive factors within the financial services industry; changes in
regulatory requirements and/or restrictive banking legislation; Old Line
Bancshares, Inc.'s lending limit; sufficiency of the allowance for loan losses;
market value of the investment portfolio and Old Line Bancshares, Inc.'s
expansion strategy. For a more complete discussion of some of these risks and
uncertainties see the discussion under the caption "Factors Affecting Future
Results" in Old Line Bancshares, Inc.'s Annual Report on Form 10K-SB/A.
Old Line Bancshares, Inc.'s actual results could differ materially from
those discussed herein and you should not put undue reliance on any
forward-looking statements. All forward-looking statements speak only as of the
date of this filing, and Old Line Bancshares, Inc. undertakes no obligation to
make any revisions to the forward-looking statements to reflect events or
circumstances after the date of this filing or to reflect the occurrence of
unanticipated events.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report on Form
10-QSB, Old Line Bancshares, Inc.'s Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of Old Line Bancshares, Inc.'s disclosure
controls and procedures. Based upon that evaluation, Old Line Bancshares, Inc.'s
Chief Executive Officer and Chief Financial Officer concluded that Old Line
Bancshares, Inc.'s disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by Old Line Bancshares, Inc. in
the reports that it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
In addition, there were no changes in Old Line Bancshares, Inc.'s internal
controls over financial reporting (as defined in Rule 13a-15 or Rule 15d-15)
under the Securities Act of 1934, as amended) during the quarter ended September
30, 2004, that have materially affected, or are reasonably likely to materially
affect, Old Line Bancshares, Inc.'s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable
Item 5. Other Information.
Not applicable.
Item 6. Exhibits
(a) Exhibits.
10.1 Commercial Lease Agreement dated July 7, 2004 by and between
Ridgely I, LLC and Old Line Bank.
10.2 Operating Agreement For Pointer Ridge Office Investment, LLC
among J. Webb Group, Inc., Michael M. Webb, Lucente
Enterprises, Inc., Chesapeake Custom Homes, L.L.C. and Old
Line Bancshares, Inc., all as Members and Chesapeake Pointer
Ridge Manager, LLC.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
28
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Old Line Bancshares, Inc.
Date: November 8, 2004 By: /s/ James W. Cornelsen
---------------------------------
James W. Cornelsen, President
(Principal Executive Officer)
Date: November 8, 2004 By: /s/ Christine M. Rush
------------------------------------------------
Christine M. Rush, Chief Financial Officer
(Principal Accounting and Financial Officer)
30