e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
Commission File Number: 000-50345
Old Line Bancshares, Inc.
(Exact name of registrant as specified in its charter)
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Maryland
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20-0154352 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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1525 Pointer Ridge Place
Bowie, Maryland
(Address of principal executive offices)
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20716
(Zip Code) |
Registrants telephone number, including area code: (301) 430-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of October 29, 2007, the registrant had 4,254,598.5 shares of common stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
Old Line Bancshares, Inc. & Subsidiary
Consolidated Balance Sheets
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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Assets |
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|
|
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Cash and due from banks |
|
$ |
3,293,249 |
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$ |
5,120,068 |
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Federal funds sold |
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|
17,236,791 |
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34,508,127 |
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Total cash and cash equivalents |
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20,530,040 |
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39,628,195 |
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Investment securities available for sale |
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12,416,484 |
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14,118,649 |
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Investment securities held to maturity |
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2,301,792 |
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2,802,389 |
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Loans, less allowance for loan losses |
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188,060,945 |
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150,417,217 |
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Restricted equity securities at cost |
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1,585,250 |
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1,575,550 |
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Investment in real estate LLC |
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783,648 |
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|
793,714 |
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Bank premises and equipment |
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4,242,934 |
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4,049,393 |
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Accrued interest receivable |
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|
950,180 |
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|
820,628 |
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Deferred income taxes |
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|
211,673 |
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|
226,873 |
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Bank owned life insurance |
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7,685,110 |
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3,458,065 |
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Other assets |
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473,180 |
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|
239,989 |
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$ |
239,241,236 |
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$ |
218,130,662 |
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Liabilities and Stockholders Equity |
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Deposits |
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Noninterest-bearing |
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$ |
31,017,479 |
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$ |
37,963,066 |
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Interest-bearing |
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148,691,269 |
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131,708,780 |
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Total deposits |
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179,708,748 |
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169,671,846 |
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Short-term borrowings |
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22,576,637 |
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9,193,391 |
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Long-term borrowings |
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3,000,000 |
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Accrued interest payable |
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770,814 |
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|
629,557 |
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Income tax payable |
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|
49,085 |
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|
334,496 |
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Other liabilities |
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393,826 |
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485,418 |
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203,499,110 |
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183,314,708 |
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Stockholders equity |
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Common stock, par value $.01 per share; authorized 15,000,000 shares;
issued and outstanding 4,254,598.5 in 2007, and 4,253,698.5 in 2006 |
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42,546 |
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|
42,537 |
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Additional paid-in capital |
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32,023,889 |
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31,868,025 |
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Retained earnings |
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|
3,758,139 |
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|
3,077,313 |
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|
|
|
|
|
|
|
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35,824,574 |
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34,987,875 |
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Accumulated other comprehensive income |
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|
(82,448 |
) |
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|
(171,921 |
) |
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|
|
|
|
|
|
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35,742,126 |
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|
34,815,954 |
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$ |
239,241,236 |
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$ |
218,130,662 |
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The accompanying notes are an integral part of these consolidated financial statements
1
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Income
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Interest revenue |
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|
|
|
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|
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|
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Loans, including fees |
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$ |
3,359,297 |
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$ |
2,467,945 |
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$ |
9,210,576 |
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$ |
6,418,661 |
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U.S. Treasury securities |
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27,993 |
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31,899 |
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89,337 |
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95,239 |
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U.S. government agency securities |
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70,848 |
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65,658 |
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230,830 |
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183,035 |
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Mortgage backed securities |
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11,731 |
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15,936 |
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38,447 |
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50,005 |
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Municipal securities |
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|
26,954 |
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27,509 |
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80,898 |
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|
83,601 |
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Federal funds sold |
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|
270,175 |
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|
190,922 |
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1,025,129 |
|
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|
952,888 |
|
Other |
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19,268 |
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|
20,556 |
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|
62,196 |
|
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|
59,303 |
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Total interest revenue |
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3,786,266 |
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2,820,425 |
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10,737,413 |
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7,842,732 |
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Interest expense |
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Deposits |
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|
1,485,826 |
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|
786,304 |
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|
4,249,039 |
|
|
|
2,136,419 |
|
Borrowed funds |
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|
180,826 |
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|
145,822 |
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|
|
420,122 |
|
|
|
374,763 |
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|
|
|
|
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|
|
|
|
|
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Total interest expense |
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|
1,666,652 |
|
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|
932,126 |
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|
4,669,161 |
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|
2,511,182 |
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|
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|
|
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Net interest income |
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|
2,119,614 |
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|
1,888,299 |
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|
6,068,252 |
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|
5,331,550 |
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|
|
|
|
|
|
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|
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|
|
|
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Provision for loan losses |
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|
120,000 |
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|
26,000 |
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|
206,000 |
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|
296,000 |
|
|
|
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|
|
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Net interest income after provision for loan losses |
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|
1,999,614 |
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|
1,862,299 |
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|
5,862,252 |
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|
5,035,550 |
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Non-interest revenue |
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Service charges on deposit accounts |
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|
76,579 |
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|
|
67,339 |
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|
220,497 |
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|
195,693 |
|
Marine division broker origination fees |
|
|
49,260 |
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|
71,828 |
|
|
|
262,218 |
|
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|
263,611 |
|
Earnings on bank owned life insurance |
|
|
91,492 |
|
|
|
37,261 |
|
|
|
248,130 |
|
|
|
108,092 |
|
Income (loss) on investment in real estate LLC |
|
|
(3,512 |
) |
|
|
77,528 |
|
|
|
256 |
|
|
|
77,774 |
|
Gain (loss) on disposal of assets |
|
|
(7,372 |
) |
|
|
|
|
|
|
(7,372 |
) |
|
|
|
|
Other fees and commissions |
|
|
71,436 |
|
|
|
68,100 |
|
|
|
191,105 |
|
|
|
140,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue |
|
|
277,883 |
|
|
|
322,056 |
|
|
|
914,834 |
|
|
|
786,008 |
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
851,056 |
|
|
|
713,357 |
|
|
|
2,406,093 |
|
|
|
1,988,168 |
|
Employee benefits |
|
|
236,253 |
|
|
|
202,888 |
|
|
|
749,518 |
|
|
|
548,661 |
|
Occupancy |
|
|
241,648 |
|
|
|
194,081 |
|
|
|
676,269 |
|
|
|
324,808 |
|
Equipment |
|
|
66,197 |
|
|
|
61,232 |
|
|
|
184,599 |
|
|
|
125,842 |
|
Data processing |
|
|
51,293 |
|
|
|
47,824 |
|
|
|
165,385 |
|
|
|
122,532 |
|
Other operating |
|
|
338,654 |
|
|
|
315,172 |
|
|
|
1,027,878 |
|
|
|
886,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
1,785,101 |
|
|
|
1,534,554 |
|
|
|
5,209,742 |
|
|
|
3,996,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
492,396 |
|
|
|
649,801 |
|
|
|
1,567,344 |
|
|
|
1,825,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
163,857 |
|
|
|
233,177 |
|
|
|
503,603 |
|
|
|
618,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
328,539 |
|
|
$ |
416,624 |
|
|
$ |
1,063,741 |
|
|
$ |
1,206,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Basic earnings per common share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.25 |
|
|
$ |
0.28 |
|
Diluted earnings per common share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.25 |
|
|
$ |
0.28 |
|
The accompanying notes are an integral part of these consolidated financial statements
2
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
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|
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|
|
|
|
|
|
|
|
|
|
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|
Accumulated |
|
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|
|
|
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|
|
|
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Additional |
|
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|
other |
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|
|
Common stock |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
Comprehensive |
|
|
|
Shares |
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|
Par value |
|
|
capital |
|
|
earnings |
|
|
income |
|
|
income |
|
|
Balance, December
31, 2006 |
|
|
4,253,698.5 |
|
|
$ |
42,537 |
|
|
$ |
31,868,025 |
|
|
$ |
3,077,313 |
|
|
$ |
(171,921 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,063,741 |
|
|
|
|
|
|
$ |
1,063,741 |
|
Unrealized gain on
securities
available for
sale, net of
income taxes of $48,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,473 |
|
|
|
89,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,153,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based
compensation awards |
|
|
|
|
|
|
|
|
|
|
149,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend $0.09
per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(382,915 |
) |
|
|
|
|
|
|
|
|
Stock options
exercised,
including tax
benefit of $2,001 |
|
|
900.0 |
|
|
|
9 |
|
|
|
6,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September
30, 2007 |
|
|
4,254,598.5 |
|
|
$ |
42,546 |
|
|
$ |
32,023,889 |
|
|
$ |
3,758,139 |
|
|
$ |
(82,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2007 |
|
|
2006 |
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Interest received |
|
$ |
10,538,974 |
|
|
$ |
7,774,627 |
|
Fees and commissions received |
|
|
700,985 |
|
|
|
608,438 |
|
Interest paid |
|
|
(4,527,904 |
) |
|
|
(2,420,056 |
) |
Cash paid to suppliers and employees |
|
|
(5,112,192 |
) |
|
|
(3,413,506 |
) |
Income taxes paid |
|
|
(830,109 |
) |
|
|
(525,650 |
) |
|
|
|
|
|
|
|
|
|
|
769,754 |
|
|
|
2,023,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of investment securities |
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
(599,758 |
) |
Available for sale |
|
|
|
|
|
|
(1,000,000 |
) |
Proceeds from disposal of investment securities |
|
|
|
|
|
|
|
|
Held to maturity at maturity or call |
|
|
500,000 |
|
|
|
|
|
Available for sale at maturity or call |
|
|
1,845,400 |
|
|
|
426,990 |
|
Loans made, net of principal collected |
|
|
(37,780,841 |
) |
|
|
(33,267,281 |
) |
Purchase of equity securities |
|
|
(9,700 |
) |
|
|
(472,800 |
) |
Investment in bank owned life insurance (BOLI) |
|
|
(4,000,000 |
) |
|
|
|
|
Return of principal from real estate, LLC |
|
|
10,322 |
|
|
|
|
|
Purchase of premises, equipment and software |
|
|
(553,066 |
) |
|
|
(1,296,815 |
) |
Proceeds from sale of premises and equipment |
|
|
76,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,911,392 |
) |
|
|
(36,209,664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in |
|
|
|
|
|
|
|
|
Time deposits |
|
|
9,891,630 |
|
|
|
46,556,920 |
|
Other deposits |
|
|
145,272 |
|
|
|
(35,803,649 |
) |
(Decrease) increase in short-term borrowings |
|
|
13,383,246 |
|
|
|
(100,877 |
) |
(Decrease) increase in long-term borrowings |
|
|
(3,000,000 |
) |
|
|
(1,000,000 |
) |
Proceeds
from stock options exercised, including tax benefit |
|
6,250 |
|
|
11,791 |
|
(Costs) proceeds from stock offering |
|
|
|
|
|
|
(1,891 |
) |
Dividends paid |
|
|
(382,915 |
) |
|
|
(361,229 |
) |
|
|
|
|
|
|
|
|
|
|
20,043,483 |
|
|
|
9,301,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(19,098,155 |
) |
|
|
(24,884,746 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
39,628,195 |
|
|
|
39,961,380 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
20,530,040 |
|
|
$ |
15,076,634 |
|
|
|
|
|
|
|
|
4
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
2007 |
|
|
2006 |
|
|
Reconciliation of net income to net cash
provided (used) by operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,063,741 |
|
|
$ |
1,206,819 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net
cash provided (used) by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
248,936 |
|
|
|
164,422 |
|
Provision for loan losses |
|
|
206,000 |
|
|
|
296,000 |
|
Loss on sale of equipment |
|
|
7,372 |
|
|
|
|
|
Change in deferred loan fees net of costs |
|
|
(68,887 |
) |
|
|
165,381 |
|
Amortization of premiums and discounts |
|
|
3,130 |
|
|
|
1,800 |
|
Deferred income taxes |
|
|
(41,095 |
) |
|
|
(28,432 |
) |
Stock based compensation awards |
|
|
149,623 |
|
|
|
82,047 |
|
(Income) loss from investment in real estate LLC |
|
|
(256 |
) |
|
|
(77,528 |
) |
Increase (decrease) in |
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
141,257 |
|
|
|
91,126 |
|
Other liabilities |
|
|
(377,003 |
) |
|
|
463,079 |
|
Decrease (increase) in |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
(129,552 |
) |
|
|
(235,286 |
) |
Bank owned life insurance |
|
|
(227,045 |
) |
|
|
(100,042 |
) |
Other assets |
|
|
(206,467 |
) |
|
|
(5,533 |
) |
|
|
|
|
|
|
|
|
|
$ |
769,754 |
|
|
$ |
2,023,853 |
|
|
|
|
|
|
|
|
5
Old Line Bancshares, Inc. & Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. |
|
ORGANIZATION AND DESCRIPTION OF BUSINESS |
|
|
|
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. The primary business of Old Line
Bancshares, Inc. is to own all of the capital stock of the Old Line Bank. Old Line
Bancshares, Inc. also has an approximately $784,000 investment in a real estate investment
limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). |
|
|
|
Old Line Bank is a full service commercial bank operating in the suburban Maryland
(Washington, D.C. suburbs) counties of Prince Georges, Charles and northern St. Marys.
Old Line Bank offers deposit services and loans to individuals, small businesses,
associations and government entities. Other services include direct deposit of payroll and
social security checks, automatic drafts from accounts, automated teller machine services,
cash management services, safe deposit boxes, money orders and travelers cheques. Old Line
Bank also offers credit card services and on-line account access with bill payer service. |
|
|
|
Basis of Presentation and Consolidation-The accompanying consolidated financial statements
include the activity of Old Line Bancshares, Inc. and its wholly owned subsidiary, Old Line
Bank. We have eliminated all significant intercompany transactions and balances. |
|
|
|
The foregoing consolidated financial statements are unaudited; however, in the opinion of
management we have included all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the results of the interim period. We derived the
balances as of December 31, 2006 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 for the year ended December 31, 2006.
We have made no significant changes to Old Line Bancshares accounting policies as disclosed
in the Form 10-KSB. |
|
|
|
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 purchases securities, management determines if we should classify the
securities as held to maturity, available for sale or trading. We record the securities
which management has the intent and ability to hold to maturity at amortized cost which is
cost adjusted for amortization of premiums and accretion of discounts to maturity. We
classify securities which we may sell before maturity as available for sale and carry these
securities at fair value with unrealized gains and losses included in stockholders equity
on an after tax basis. Management has not identified any investment securities as trading. |
|
|
|
We record gains and losses on the sale of securities on the trade date and determine
these gains or losses using the specific identification method. We amortize premiums and
accrete discounts using the interest method. |
|
3. |
|
INCOME TAXES |
|
|
|
The provision for income taxes includes taxes payable for the current year and deferred
income taxes. We determine deferred tax assets and liabilities 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 we expect the differences to reverse. We allocate tax
expense and tax benefits to the Bank and Bancshares based on their proportional share of
taxable income. |
6
Old Line Bancshares, Inc. & Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
4. |
|
EARNINGS PER SHARE |
|
|
|
We determine basic earnings per common share by dividing net income by the weighted average
number of shares of common stock outstanding giving retroactive effect to the stock
dividends. |
|
|
|
We calculate diluted earnings per share by 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, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Weighted average number of shares |
|
|
4,254,599 |
|
|
|
4,250,099 |
|
|
|
4,254,599 |
|
|
|
4,249,496 |
|
Dilutive average number of shares |
|
|
8,193 |
|
|
|
25,870 |
|
|
|
5,869 |
|
|
|
23,023 |
|
5. |
|
STOCK-BASED COMPENSATION |
|
|
|
We account for employee stock options under the fair value method of accounting using a
Black-Scholes valuation model to measure stock-based compensation expense at the date of
grant. In the first quarter of 2006, we adopted Statement of Financial Accounting Standards
(SFAS) 123R, Share-Based Payment, under the modified prospective method. Statement 123R
requires companies to recognize compensation expense related to stock-based compensation
awards in their income statements over the period during which an individual is required to
provide service in exchange for such award. For the nine months ended September 30, 2007
and 2006, we recorded stock-based compensation expense of $149,623 and $82,047,
respectively. For the three months ended September 30, 2007 and 2006, we recorded
stock-based compensation expense of $30,333 and $23,016, respectively. |
|
|
|
Under SFAS 123R, a company may only recognize tax benefits for options that ordinarily will
result in a tax deduction when the grant is exercised (non-qualified options). For the nine
months ended September 30, 2007, we recognized an $11,887 tax benefit associated with the
portion of the expense that was related to the issuance of non-qualified options. There were
no non-qualified options included in the expense calculation during the three months ended
September 30, 2007 and 2006 and for the nine months ended September 30, 2006. |
|
|
|
We have two stock option plans under which we may issue options, the 2001 Incentive Stock
Option Plan, as amended, and the 2004 Equity Incentive Plan. Our Compensation Committee
administers the stock option plans. As the plans outline, the Compensation Committee
approves stock option grants to directors and employees, determines the number of shares,
the type of option, the option price, the term (not to exceed 10 years from the date of
issuance) and the vesting period of options issued. The Compensation Committee has approved
and we have issued grants with options vesting immediately as well as over periods of two,
three and five years. We recognize the compensation expense associated with these grants
over their respective vesting period. As of September 30, 2007, there were 156,480 shares
remaining available for future issuance under the stock option plans. |
|
|
|
The intrinsic value of the 900 options that directors and officers exercised during the nine
months ended September 30, 2007 was $5,184. Directors and officers did not exercise any
options during the three month period ended September 30, 2007. |
7
Old Line Bancshares, Inc. & Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
5. |
|
STOCK-BASED COMPENSATION (Continued) |
|
|
|
A summary of the stock option activity during the nine month period follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2007 |
|
2006 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Number |
|
average |
|
Number |
|
average |
|
|
of shares |
|
exercise price |
|
of shares |
|
exercise price |
|
Outstanding, beginning of year |
|
|
182,820 |
|
|
$ |
8.91 |
|
|
|
172,620 |
|
|
$ |
8.60 |
|
Options granted |
|
|
47,200 |
|
|
|
10.57 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(900 |
) |
|
|
4.72 |
|
|
|
(1,200 |
) |
|
|
9.83 |
|
Option forfeited |
|
|
(4,000 |
) |
|
|
11.31 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, |
|
|
225,120 |
|
|
$ |
9.23 |
|
|
|
171,420 |
|
|
$ |
8.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information related to options as of September 30, 2007 follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options |
|
Exercisable options |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Number |
|
average |
|
average |
|
Number |
|
average |
Exercise |
|
of shares at |
|
remaining |
|
exercise |
|
of shares at |
|
exercise |
price |
|
September 30, 2007 |
|
term |
|
price |
|
September 30, 2007 |
|
price |
$3.33-$4.17 |
|
|
11,700 |
|
|
|
3.25 |
|
|
$ |
3.44 |
|
|
|
11,700 |
|
|
$ |
3.44 |
|
$4.18-$5.00 |
|
|
28,800 |
|
|
|
3.22 |
|
|
|
4.67 |
|
|
|
28,800 |
|
|
|
4.67 |
|
$5.01-$10.00 |
|
|
46,620 |
|
|
|
6.89 |
|
|
|
9.74 |
|
|
|
46,620 |
|
|
|
9.74 |
|
$10.01-$11.31 |
|
|
138,000 |
|
|
|
8.61 |
|
|
|
10.50 |
|
|
|
78,133 |
|
|
|
10.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,120 |
|
|
|
7.29 |
|
|
$ |
9.23 |
|
|
|
165,253 |
|
|
$ |
8.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of outstanding options |
|
$ |
56,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of exercisable options |
|
$ |
122,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8
6. |
|
Retirement Plan |
|
|
|
Old Line Bank maintains a 401(k) profit sharing plan for employees who meet the eligibility
requirements set forth in the plan. Pursuant to the plan, which was amended in March 2003
and effective January 1, 2003, Old Line Bank matches the first 3% of employee contributions
to the plan and 50% of the next 2% of employee contributions, for a maximum potential
contribution of 4% of employee eligible compensation. This plan, which covers substantially
all employees, allows for elective employee deferrals. Old Line Banks contributions to
the plan for the nine months ended September 30, 2007 and 2006 were $97,182 and $66,656,
respectively. Old Line Banks contributions to the plan for the three months ended
September 30, 2007 and 2006 were $36,172 and $27,893, respectively. |
|
|
|
Old Line Bank also offers Supplemental Executive Retirement Plans (SERPs) to its executive
officers providing for retirement income benefits as well as pre-retirement death benefits.
We accrue the present value of these benefits over the remaining number of years to the
executives retirement dates. Old Line Banks expenses for the SERPs for the nine months
ended September 30, 2007 and 2006 were $72,448, and $70,434, respectively. The SERP expense
for each of the three month periods ended September 30, 2007 and 2006 was $23,478. |
|
7. |
|
Recent Accounting Standards |
|
|
|
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No.
159 permits entities to choose to measure many financial instruments and certain other items
at fair value and amends SFAS No. 115, to, among other things, require certain disclosures
for amounts for which the fair value option is applied. Additionally, this standard
provides that an entity may reclassify held-to-maturity and available-for-sale securities to
the trading account, when the fair value option is elected for such securities, without
calling into question the intent to hold other securities to maturity in the future. This
standard is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007, or January 1, 2008. SFAS No. 159 permits early adoption as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of SFAS No. 157. We anticipate SFAS No. 159 will not
have a material impact on our consolidated results of operations or financial position. |
|
|
|
In September 2006, the Financial Accounting Standards Board (FASB) ratified the consensus
reached by the Emerging Issues Task Force (EITF) on issue No. 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangement determining whether the postretirement benefit associated with an
endorsement split-dollar life insurance arrangement is effectively settled in accordance
with FASB Statement No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions (or Opinion 12, Omnibus Opinion-1967, if the arrangement does not constitute a
plan). The Task Force concluded that for a split-dollar life insurance arrangement, an
employer should recognize a liability for future benefits in accordance with Statement 106
or Opinion 12 (depending on whether a substantive plan is deemed to exist) based on the
substantive agreement with the employee. We expect the adoption of EITF Issue No. 06-4,
which is effective for fiscal years beginning after December 15, 2007, will not have a
material impact on our consolidated results of operations or financial position. |
|
|
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides
enhanced guidance for using fair value to measure assets and liabilities. The standard
applies whenever other standards require or permit assets or liabilities to be measured at
fair value. The standard does not expand the use of fair value in any new circumstances.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We do not expect the
adoption of SFAS 157 will have a material impact on our consolidated results of operations
or financial position. |
9
Item 2. Managements 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 under the heading Information
Regarding Forward Looking Statements.
Overview
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.
Our primary business is to own all of the capital stock of Old Line Bank. We also have an
approximately $784,000 investment in a real estate investment limited liability company named
Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 50% of Pointer Ridge. Frank
Lucente, one of our directors and a director of Old Line Bank, controls 25% of Pointer Ridge and
controls the manager of Pointer Ridge. 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 has acquired the property and has completed the construction of a
commercial office building containing approximately 40,000 square feet. On July 10, 2006, we began
leasing approximately 50% of this building for our main office (moving our existing main office
from Waldorf, Maryland) and operating a branch of Old Line Bank from this address.
Summary of Recent Performance and Other Activities
We are pleased to report sound financial performance for the first nine months and the third
quarter of 2007. Net income was $328,539 or $0.08 per basic and diluted common share for the three
month period ending September 30, 2007. This was $88,085 or 21.14% lower than net income of
$416,624 or $0.10 per basic and diluted common share for the same period in 2006. Net income for
the nine month period ended September 30, 2007 was $1,063,741 or $0.25 per basic and diluted common
share. This represented a decrease of $143,078 or 11.86% compared to net income of $1,206,819 or
$0.28 per basic and diluted common share for the nine months ended September 30, 2006.
During the first nine months of 2007, the following events occurred.
|
|
|
In June, we opened our 6th branch location at 6301 Ivy Lane,
Greenbelt, Maryland. At period end, deposits in this branch totaled $10.7 million. |
|
|
|
|
We grew the loan portfolio $37.7 million or 25.07%. |
|
|
|
|
We maintained asset quality, with only one loan in the amount of $126,000
classified as non-accrual and no other loans past due more than 90 days. We
anticipate we will receive payment in full on the loan in non-accrual during the
4th quarter of 2007 or early in 2008. |
|
|
|
|
We invested an additional $4 million in bank owned life insurance which will
improve non-interest revenue and provide tax benefits. |
|
|
|
|
We grew total deposits $10.0 million or 5.89% and customer deposits in Master
Notes $9.4 million or 102%. |
|
|
|
|
As a result of high gas prices, adverse weather conditions and difficult market
conditions, the marine division experienced a $122,000 pre-tax loss during the nine
month period compared to a $30,000 pre-tax loss for the first nine months of 2006.
Because of these losses and because we do not foresee an imminent improvement in
the marine industry, in September, we closed this division and released the
employees associated with it. |
|
|
|
|
We appointed a new individual to our Board of Directors. |
10
|
|
|
We hired a new commercial lender to service the Anne Arundel County market |
|
|
|
|
We hired a new commercial lender to service the Charles County market |
We believe that it was an accomplishment to maintain earnings while incurring the expenses
associated with the opening of the Greenbelt branch during the second quarter as well as the costs
incurred from our investments in infrastructure during the 2nd and 3rd
quarters of 2006 and continued softness in the marine industry. The following summarizes the
highlights of our financial performance for the three month period ended September 30, 2007
compared to the three month period ended September 30, 2006 (figures in the table may not match
those discussed in the balance of this section due to rounding).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
(Dollars in thousands) |
|
|
2007 |
|
2006 |
|
$Change |
|
% Change |
Net income |
|
$ |
329 |
|
|
$ |
417 |
|
|
$ |
(88 |
) |
|
|
(21.10 |
)% |
Interest revenue |
|
|
3,786 |
|
|
|
2,820 |
|
|
|
966 |
|
|
|
34.26 |
|
Interest expense |
|
|
1,667 |
|
|
|
932 |
|
|
|
735 |
|
|
|
78.86 |
|
Net interest income after
provision for loan losses |
|
|
2,000 |
|
|
|
1,863 |
|
|
|
137 |
|
|
|
7.35 |
|
Non-interest revenue |
|
|
278 |
|
|
|
322 |
|
|
|
(44 |
) |
|
|
(13.66 |
) |
Non-interest expense |
|
|
1,785 |
|
|
|
1,535 |
|
|
|
250 |
|
|
|
16.29 |
|
Basic earnings per share |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
(0.02 |
) |
|
|
(20.00 |
) |
Diluted earnings per share |
|
|
0.08 |
|
|
|
0.10 |
|
|
|
(0.02 |
) |
|
|
(20.00 |
) |
11
The following outlines the highlights of our financial performance for the nine month period ended
September 30, 2007 compared to the nine month period ended September 30, 2006 (figures in the table
may not match those discussed in the balance of this section due to rounding).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
(Dollars in thousands) |
|
|
2007 |
|
2006 |
|
$Change |
|
% Change |
Net income |
|
$ |
1,064 |
|
|
$ |
1,207 |
|
|
$ |
(143 |
) |
|
|
(11.85 |
)% |
Interest revenue |
|
|
10,737 |
|
|
|
7,843 |
|
|
|
2,894 |
|
|
|
36.90 |
|
Interest expense |
|
|
4,669 |
|
|
|
2,511 |
|
|
|
2,158 |
|
|
|
85.94 |
|
Net interest income after provision
for loan losses |
|
|
5,862 |
|
|
|
5,036 |
|
|
|
826 |
|
|
|
16.40 |
|
Non-interest revenue |
|
|
915 |
|
|
|
786 |
|
|
|
129 |
|
|
|
16.41 |
|
Non-interest expense |
|
|
5,210 |
|
|
|
3,996 |
|
|
|
1,214 |
|
|
|
30.38 |
|
Average gross loans |
|
|
165,611 |
|
|
|
120,105 |
|
|
|
45,506 |
|
|
|
37.89 |
|
Average interest earning assets |
|
|
207,957 |
|
|
|
164,417 |
|
|
|
43,540 |
|
|
|
26.48 |
|
Average interest bearing deposits |
|
|
139,420 |
|
|
|
93,486 |
|
|
|
45,934 |
|
|
|
49.13 |
|
Average non-interest bearing deposits |
|
|
34,632 |
|
|
|
33,662 |
|
|
|
970 |
|
|
|
2.88 |
|
Net interest margin (1) |
|
|
3.95 |
% |
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
Return on average equity |
|
|
4.01 |
% |
|
|
4.72 |
% |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.25 |
|
|
$ |
0.28 |
|
|
$ |
(0.03 |
) |
|
|
(10.71 |
%) |
Diluted earnings per share |
|
|
0.25 |
|
|
|
0.28 |
|
|
|
(0.03 |
) |
|
|
(10.71 |
%) |
|
|
|
(1) |
|
See Reconciliation of Non-GAAP Measures |
Growth Strategy
We have based our strategic plan on the premise of enhancing stockholder value and growth
through branching and operating profits. Our short-term goals include maintaining credit quality,
creating an attractive branch network, expanding fee income, generating extensions of core banking
services and using technology to maximize stockholder value.
Expansion
We believe a natural evolution of a community-focused bank like Old Line Bank is to expand the
delivery channels via the branch network. We plan to expand in Prince Georges County and Anne
Arundel County, Maryland, and may expand in Charles County and contiguous northern and western
counties, such as Montgomery County and Howard County, Maryland.
In July 2006, we moved our headquarters to 1525 Pointer Ridge Place, Bowie, Maryland (from our
existing main office in Waldorf, Maryland) and we opened a new branch in this building. We hired
the majority of the staff for this branch during the 2nd quarter of 2006.
In June 2007, we opened a new branch in Greenbelt (Prince Georges County), Maryland.
Initially, we opened this branch on the 1st floor of an office building located at 6301
Ivy Lane, Greenbelt, Maryland. Upon completion of construction of a new bank building, we plan to
move this branch to the southwest corner of the intersection of Kenilworth Avenue and Ivy Lane,
Greenbelt, Maryland. In April 2007, we hired the Branch Manager for this location and hired the
remainder of the staff in May and September of 2007.
12
In 2005, we announced plans to open a new branch in College Park (Prince Georges County),
Maryland in the same building as the loan production office that houses our team of loan officers.
Our lease provides that we will lease the branch space in January 2008 when the existing branch of
a large southeastern regional bank moves from the space. We plan to hire a Branch Manager and the
staff for this location during the 4th quarter of 2007.
In July 2007, we identified a site for a second branch location in Bowie, Maryland.
Currently, the landlord is preparing a pad site. Assuming the landlord completes the preparation
of the pad site and meets all of the conditions of the lease, we plan to lease the pad site and
construct a branch. The pad site is located in the Fairwood Office Park in Bowie, Maryland. We
anticipate we will open this branch during the 2nd or 3rd quarter of 2008.
As expected, the opening of the new Bowie branch in July 2006 and the Greenbelt branch in June
2007 and the establishment of our new headquarters in July 2006 caused a $410,218 or 91.03%
increase in occupancy and equipments costs during the nine month period and a $52,532 or 20.58%
increase during the three month period. Because of the new branches, we anticipate salaries and
benefits expenses and other operating expenses will increase. We anticipate that, over time,
income generated from the branches will offset any increase in expenses.
Expansion of Commercial, Construction and Commercial Real Estate Lending
In September 2007, we hired a new Vice President of Commercial Lending for our Waldorf office.
This individuals professional background includes a twenty year career with a large, regional
financial institution where she earned successive promotions and had numerous professional
accomplishments. We believe that her experience and success in the banking industry will further
enhance Old Line Banks service and commitment to the southern Maryland market.
In April 2007, we hired a new Senior Vice President of Commercial Lending. This individual is
a skilled commercial lender who has worked in the Anne Arundel and Prince Georges County markets
for over 25 years. We believe that with his qualifications and through his long term associations
with businesses and prominent individuals, he will develop new lending and deposit opportunities
for us in these markets. Initially, he will work from our Bowie headquarters.
We hired a Senior Vice President of Commercial Lending, in August 2006, who has over 30 years
of lending experience and is a significant addition to our lending team. This individual operates
from a loan production office in Gaithersburg (Montgomery County), Maryland. This lenders
expertise and market knowledge have allowed us to expand our presence into southern Montgomery
County and the District of Columbia. We anticipate that as a result of this persons efforts, we
will continue to expand in these markets.
As we expected, the increase in personnel during the second half of 2006 and in 2007 caused an
increase in salary and benefit expenses in the third quarter of 2007 compared to the third quarter
of 2006 and for the nine month period ended September 30, 2007 compared to the same period in 2006.
These individuals also contributed to our loan and deposit growth. As a result of their efforts,
we anticipate the bank will experience continued improvement in loan growth during 2007 and beyond.
We plan to continue to identify and establish new branch locations that will support our long term
growth plans.
Old Line Marine Division
In February 2005, we established Old Line Marine as a division of Old Line Bank to serve as a
luxury boat loan broker and to originate loans for Old Line Bank.
High gasoline prices and general concerns about the economy continued to cause weakness in the
marine industry. For the three month period ended September 30, 2007, this division posted a
$56,000 pre-tax loss compared to a pre-tax loss of $16,337 during the third quarter of 2006. For
the nine month period, the division posted a pre-tax loss of approximately $122,000 versus a
pre-tax loss of $30,000 for the nine months ended September 30, 2006. Because of the losses
experienced in this division and because we do not foresee an imminent improvement in the marine
industry, in September of 2007, we closed this division and released the employees associated with
it.
13
Bank owned life insurance
We increased our investment in Bank Owned Life Insurance (BOLI) in February 2007 by $4
million. In June 2005, we purchased $3.3 million of BOLI on the lives of our executive officers,
Messrs. Cornelsen and Burnett and Ms. Rush. With the new investment made in February, we increased
the insurance on Messrs. Cornelsen and Burnett and expanded the coverage of the insurance policies
to insure the lives of several other officers of Old Line Bank. We anticipate the earnings on
these policies will pay for our employee benefit expenses as well as our obligations under our
Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with
our executive officers in January 2006.
Other Opportunities
We use the Internet and technology to augment our growth plans. Currently, we offer our
customers image technology, telephone banking and Internet banking with on-line account access and
bill payer service. We will continue to evaluate cost effective ways that technology can enhance
our management, products and services. By the end of the year, we plan to offer to selected
commercial customers the ability to remotely capture their deposits and electronically transmit
them to us. We anticipate that this service will modestly increase equipment cost, reduce courier
fees, and positively impact deposit growth. We continually evaluate new products and services that
may enhance the service we provide our customers.
We plan to take advantage of strategic opportunities presented to us via mergers occurring in
our marketplace. For example, we may purchase branches that other banks close or lease branch
space from other banks. We currently have no specific plans regarding acquisitions of existing
financial institutions or branches thereof.
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-bearing deposits and other borrowings make up the cost of funds.
Non-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, 2007 compared to three months ended September 30,
2006
Net interest income after provision for loan losses for the three months ended September 30,
2007 increased $137,315 or 7.37% to $2.0 million from $1.9 million for the same period in 2006.
The increase was primarily attributable to an increase in total average interest earning assets. A
decrease in Federal Funds, an increase in Federal Funds borrowings and deposit growth funded the
loan growth. This loan growth caused the increase in average interest earning assets.
Interest revenue increased from $2.8 million for the three months ended September 30, 2006 to
$3.8 million for the same period in 2007. Interest expense for all interest bearing liabilities
amounted to $1.7 million for the three months ended September 30, 2007 versus $932,126 for the
three months ended September 30, 2006. These changes were a result of loan and deposit growth that
originated from all areas of the bank.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
Net interest income after provision for loan losses for the nine months ended September 30,
2007 amounted to $5.9 million, which was $826,702 or 16.42% greater than the 2006 level of $5.0
million. The increase was primarily attributable to a $43.6 million increase in total average
interest earning assets to $208.0 million for the nine months ended September 30, 2007 from $164.4
million for the nine months ended September 30, 2006. Interest expense for all interest bearing
liabilities was $4.7 million for the nine months ended September 30, 2007 versus $2.5 million for
the nine months ended September 30, 2006. The increase in earnings assets and deposits was a
result of increased business development efforts from the entire Old Line Bank lending team.
Additionally, we
believe that the move to our new Bowie headquarters and the opening of the Bowie and Greenbelt
branches provided us with increased name recognition that also contributed to our growth.
14
Our net interest margin was 3.95% for the nine months ended September 30, 2007, as compared to
4.39% for the nine months ended September 30, 2006. The decrease in the net interest margin is the
result of several components. The yield on average interest-earning assets improved during the
period 52 basis points from 6.44% in 2006 to 6.96% in 2007, and average interest-earning assets
grew by $43.6 million. A 92 basis point increase of the yield on average interest-bearing
liabilities from 3.12% in 2006 to 4.04% in 2007, and a $46.6 million increase in interest bearing
liabilities offset these improvements.
The yield on average interest-earning assets improved and the cost of interest bearing
liabilities increased because of increases in market interest rates. On January 1, 2006, the prime
rate was 7.50%. By September 30, 2007, it had increased to 7.75%. The yield also improved because
loans, net of allowance comprised 78.98% of total average interest earning assets in 2007 versus
72.32% in 2006.
The increased interest rates allowed us to earn a 48 basis point higher average yield on our
federal funds and a 28 basis point higher average yield on our loan portfolio. Increases in market
interest rates and an increase in the percentage of average balances maintained in interest bearing
deposits relative to total deposits caused the cost of average interest bearing liabilities to
increase 92 basis points during the period. We expect the net interest margin will remain stable
for the rest of 2007. We will offer promotional campaigns to attract deposits or seek brokered
deposits, if required, to maintain an acceptable loan to deposit ratio.
Because of the three loan officers in the College Park loan production office, increased
recognition in the Prince Georges County market, the new loan officers in Charles and Anne Arundel
Counties, the addition of the Bowie and Greenbelt branches, the loan production office in
Gaithersburg, the new addition to the Board of Directors and with continued growth in deposits, we
anticipate that we will continue to grow earning assets during the remainder of 2007. We believe
that the anticipated growth in earning assets, the change in the composition of earning assets as
more funds are deployed to loans and the relatively low cost of funds will result in an increase in
our net interest income, although there is no assurance that this will be the case.
15
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, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances, Interest and Yields |
|
Nine Months Ended September 30, |
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
balance |
|
|
Interest |
|
|
Yield |
|
|
balance |
|
|
Interest |
|
|
Yield |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold(1) |
|
$ |
26,200,812 |
|
|
$ |
1,049,652 |
|
|
|
5.36 |
% |
|
$ |
26,705,161 |
|
|
$ |
974,827 |
|
|
|
4.88 |
% |
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,344 |
|
|
|
23 |
|
|
|
1.31 |
|
Investment securities(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
3,747,278 |
|
|
|
93,664 |
|
|
|
3.34 |
|
|
|
4,000,226 |
|
|
|
99,852 |
|
|
|
3.34 |
|
U.S. Government agency |
|
|
7,771,329 |
|
|
|
242,011 |
|
|
|
4.16 |
|
|
|
7,573,041 |
|
|
|
191,901 |
|
|
|
3.39 |
|
Mortgage-backed securities |
|
|
1,303,726 |
|
|
|
38,447 |
|
|
|
3.94 |
|
|
|
1,697,716 |
|
|
|
50,005 |
|
|
|
3.94 |
|
Municipal securities |
|
|
3,227,878 |
|
|
|
121,146 |
|
|
|
5.02 |
|
|
|
3,356,967 |
|
|
|
118,512 |
|
|
|
4.72 |
|
Other |
|
|
1,459,307 |
|
|
|
63,365 |
|
|
|
5.81 |
|
|
|
2,177,359 |
|
|
|
59,992 |
|
|
|
3.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
17,509,518 |
|
|
|
558,633 |
|
|
|
4.27 |
|
|
|
18,805,309 |
|
|
|
520,262 |
|
|
|
3.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
41,160,713 |
|
|
|
2,591,531 |
|
|
|
8.42 |
|
|
|
24,300,076 |
|
|
|
1,518,251 |
|
|
|
8.35 |
|
Mortgage |
|
|
103,742,840 |
|
|
|
5,804,009 |
|
|
|
7.48 |
|
|
|
73,430,485 |
|
|
|
4,017,572 |
|
|
|
7.32 |
|
Installment |
|
|
20,707,507 |
|
|
|
815,036 |
|
|
|
5.26 |
|
|
|
22,374,134 |
|
|
|
882,838 |
|
|
|
5.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
165,611,060 |
|
|
|
9,210,576 |
|
|
|
7.44 |
|
|
|
120,104,695 |
|
|
|
6,418,661 |
|
|
|
7.15 |
|
Allowance for loan losses |
|
|
1,364,252 |
|
|
|
|
|
|
|
|
|
|
|
1,200,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of allowance |
|
|
164,246,808 |
|
|
|
9,210,576 |
|
|
|
7.50 |
|
|
|
118,904,377 |
|
|
|
6,418,661 |
|
|
|
7.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1) |
|
|
207,957,138 |
|
|
|
10,818,861 |
|
|
|
6.96 |
|
|
|
164,417,191 |
|
|
|
7,913,773 |
|
|
|
6.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing cash |
|
|
3,836,934 |
|
|
|
|
|
|
|
|
|
|
|
3,865,350 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
4,168,379 |
|
|
|
|
|
|
|
|
|
|
|
2,674,295 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
9,736,622 |
|
|
|
|
|
|
|
|
|
|
|
5,545,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets(1) |
|
$ |
225,699,073 |
|
|
|
|
|
|
|
|
|
|
$ |
176,502,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
8,668,562 |
|
|
$ |
43,283 |
|
|
|
0.67 |
|
|
$ |
8,073,031 |
|
|
$ |
43,375 |
|
|
|
0.72 |
|
Money market and NOW |
|
|
26,441,171 |
|
|
|
423,018 |
|
|
|
2.14 |
|
|
|
21,625,775 |
|
|
|
228,937 |
|
|
|
1.42 |
|
Other time deposits |
|
|
104,310,045 |
|
|
|
3,782,738 |
|
|
|
4.85 |
|
|
|
63,787,628 |
|
|
|
1,864,107 |
|
|
|
3.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
139,419,778 |
|
|
|
4,249,039 |
|
|
|
4.07 |
|
|
|
93,486,434 |
|
|
|
2,136,419 |
|
|
|
3.06 |
|
Borrowed funds |
|
|
14,955,868 |
|
|
|
420,122 |
|
|
|
3.76 |
|
|
|
14,287,889 |
|
|
|
374,763 |
|
|
|
3.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
154,375,646 |
|
|
|
4,669,161 |
|
|
|
4.04 |
|
|
|
107,774,323 |
|
|
|
2,511,182 |
|
|
|
3.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
34,631,504 |
|
|
|
|
|
|
|
|
|
|
|
33,662,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,007,150 |
|
|
|
|
|
|
|
|
|
|
|
141,436,735 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,233,502 |
|
|
|
|
|
|
|
|
|
|
|
912,341 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
35,458,421 |
|
|
|
|
|
|
|
|
|
|
|
34,152,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
225,699,073 |
|
|
|
|
|
|
|
|
|
|
$ |
176,502,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (1) |
|
|
|
|
|
|
|
|
|
|
2.92 |
|
|
|
|
|
|
|
|
|
|
|
3.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and Net interest margin (1) |
|
|
|
|
|
$ |
6,149,700 |
|
|
|
3.95 |
% |
|
|
|
|
|
$ |
5,402,591 |
|
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
|
3) |
|
Non-accruing loans for the periods ended September 30, 2007 and 2006
were $126,440 and $0, respectively. |
16
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. We have allocated the change in
interest revenue, interest expense and net interest income due to both volume and rate
proportionately to the rate and volume variances.
Rate/Volume Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended September 30, |
|
|
|
2007 compared to 2006 |
|
|
|
Variance due to: |
|
|
|
Total |
|
|
Rate |
|
|
Volume |
|
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold(1) |
|
$ |
74,825 |
|
|
$ |
97,516 |
|
|
$ |
(22,691 |
) |
Interest bearing deposits |
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
Investment Securities(1) |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
(6,188 |
) |
|
|
178 |
|
|
|
(6,366 |
) |
U.S. Government agency |
|
|
50,110 |
|
|
|
46,161 |
|
|
|
3,949 |
|
Mortgage-backed securities |
|
|
(11,558 |
) |
|
|
81 |
|
|
|
(11,639 |
) |
Municipal securities |
|
|
2,634 |
|
|
|
8,070 |
|
|
|
(5,436 |
) |
Other |
|
|
3,373 |
|
|
|
30,065 |
|
|
|
(26,692 |
) |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
1,073,280 |
|
|
|
15,721 |
|
|
|
1,057,559 |
|
Mortgage |
|
|
1,786,437 |
|
|
|
121,570 |
|
|
|
1,664,867 |
|
Installment |
|
|
(67,802 |
) |
|
|
(2,908 |
) |
|
|
(64,894 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest revenue (1) |
|
|
2,905,088 |
|
|
|
316,454 |
|
|
|
2,588,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
|
(92 |
) |
|
|
(3,645 |
) |
|
|
3,553 |
|
Money market and NOW |
|
|
194,081 |
|
|
|
146,392 |
|
|
|
47,689 |
|
Other time deposits |
|
|
1,918,631 |
|
|
|
645,531 |
|
|
|
1,273,100 |
|
Borrowed funds |
|
|
45,359 |
|
|
|
30,386 |
|
|
|
14,973 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,157,979 |
|
|
|
818,664 |
|
|
|
1,339,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(1) |
|
$ |
747,109 |
|
|
$ |
(502,210 |
) |
|
$ |
1,249,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest revenue is presented on a fully taxable equivalent
(FTE) basis. 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 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 Banks market area), regulatory guidance, peer statistics,
managements 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. We add back recoveries on loans previously charged
to the allowance.
17
The provision for loan losses was $120,000 for the three months ended September 30, 2007, as
compared to $26,000 for the three months ended September 30, 2006, an increase of $94,000 or
361.54%. After completing the analysis outlined below, during the three month period ended
September 30, 2007, we increased the provision for loan losses primarily because of the $16.7
million (9.74%) growth in the loan portfolio from June 30, 2007 to September 30, 2007, the
composition of these loans, and because we added new lenders who began to originate loans during
the 3rd quarter. Although we have not experienced any change in the quality of the
loans in the portfolio, this growth and the two new lenders we hired this year add a higher degree
of uncertainty to the calculation. Based on our analysis, we determined that it was prudent to
increase our provision during the quarter.
The provision for the nine month period was $206,000. This represented a $90,000 or 30.41%
decline as compared to the nine months ended September 30, 2006. For the nine months ended
September 30, 2007, we decreased the provision for loan losses because for over seven years we have
had minimal past dues and charge-offs. After completing the analysis outlined below, we determined
during the nine month period that we had no significant changes in economic factors, personnel,
policies or practices during the period that would directly impact the quality of the loan
portfolio and warrant a higher provision. We further determined that we have completed two years
of experience with the majority of our new lending personnel and a higher legal lending limit and
have not experienced any change in our delinquency patterns.
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; the Federal Financial Institutions Examination Councils Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and
Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease
Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal
Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and
Office of Thrift Supervision.
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 loan 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 borrowers financial condition,
cash flow and ongoing financial viability; the collateral securing the loan; the borrowers
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.
18
We also identify and make any necessary allocation adjustments for any specific concentrations
of credit in a loan category that in managements 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 consider qualitative or environmental factors that are
likely to cause estimated credit losses associated with our existing portfolio to differ from
historical loss experience. These factors include, but are not limited to, changes in lending
policies and procedures, changes in the nature and volume of the loan portfolio, changes in the
experience, ability and depth of lending management and the effect of other external factors such
as competition and legal and regulatory requirements on the level of estimated credit losses in our
existing portfolio.
In the event that our review of the adequacy of the allowance results in any unallocated
amounts, we reallocate such amounts to our loan categories based on the percentage that each
category represents to total gross loans. We have risk management practices designed to ensure
timely identification of changes in loan risk profiles. However, undetected losses inherently
exist within the portfolio. We believe that the allocation of the unallocated portion of the
reserve in the manner described above is appropriate.
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, 2007, we had one non-accrual loan in the amount of
$126,400. With the exception of this loan, we had no loans 90 days or more past due at September
30, 2007 and 2006. We also had no impaired loans at September 30, 2007 and 2006.
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 0.78% of gross loans at September 30, 2007 and 0.85%
at December 31, 2006. We have no exposure to foreign countries or foreign borrowers. Based on
our analysis and the satisfactory historical performance of the loan portfolio, we believe this
allowance appropriately reflects the inherent risk of loss in our portfolio.
19
The following table represents an analysis of the allowance for loan losses for the periods
indicated:
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Balance, beginning of period |
|
$ |
1,280,396 |
|
|
$ |
954,706 |
|
|
$ |
954,706 |
|
Provision for loan losses |
|
|
206,000 |
|
|
|
296,000 |
|
|
|
339,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
(15,772 |
) |
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
Installment |
|
|
(5,896 |
) |
|
|
(2,685 |
) |
|
|
(2,685 |
) |
|
|
|
|
|
|
|
|
|
|
Total chargeoffs |
|
|
(5,896 |
) |
|
|
(2,685 |
) |
|
|
(18,457 |
) |
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
Installment |
|
|
352 |
|
|
|
5,055 |
|
|
|
5,147 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
352 |
|
|
|
5,055 |
|
|
|
5,147 |
|
|
|
|
|
|
|
|
|
|
|
Net (chargeoffs) recoveries |
|
|
(5,544 |
) |
|
|
2,370 |
|
|
|
(13,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,480,852 |
|
|
$ |
1,253,076 |
|
|
$ |
1,280,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to gross loans |
|
|
0.78 |
% |
|
|
0.91 |
% |
|
|
0.85 |
% |
Ratio of net-chargeoffs during period to
average loans outstanding during period |
|
|
(0.00 |
%) |
|
|
(0.00 |
%) |
|
|
0.01 |
% |
The following table provides a breakdown of the allowance for loan losses:
Allocation of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
Amount |
|
|
Category |
|
|
Amount |
|
|
Category |
|
|
Amount |
|
|
Category |
|
Installment & others |
|
$ |
12,200 |
|
|
|
0.59 |
% |
|
$ |
7,578 |
|
|
|
0.61 |
% |
|
$ |
8,939 |
|
|
|
0.45 |
% |
Boat |
|
|
124,244 |
|
|
|
9.78 |
|
|
|
130,926 |
|
|
|
15.46 |
|
|
|
169,093 |
|
|
|
14.29 |
|
Mortgage |
|
|
958,367 |
|
|
|
62.96 |
|
|
|
659,495 |
|
|
|
63.34 |
|
|
|
869,101 |
|
|
|
61.55 |
|
Commercial |
|
|
386,041 |
|
|
|
26.67 |
|
|
|
455,077 |
|
|
|
20.59 |
|
|
|
233,263 |
|
|
|
23.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,480,852 |
|
|
|
100.00 |
% |
|
$ |
1,253,076 |
|
|
|
100.00 |
% |
|
$ |
1,280,396 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Non-interest Revenue
Three months ended September 30, 2007 compared to three months ended September 30,
2006
Non-interest revenue totaled $277,883 for the three months ended September 30, 2007, a
decrease of $44,173 or 13.72% from the 2006 amount of $322,056. Non-interest revenue for the three
months ended September 30, 2007 and September 30, 2006 included fee income from service charges on
deposit accounts, broker origination fees from the marine division, earnings on bank owned life
insurance, income from our investment in real estate LLC (Pointer Ridge) and other fees and
commissions.
The following table outlines the changes in non-interest revenue for the three month periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Service charges on deposit accounts |
|
$ |
76,579 |
|
|
$ |
67,339 |
|
|
$ |
9,240 |
|
|
|
13.72 |
% |
Marine division broker origination fees |
|
|
49,260 |
|
|
|
71,828 |
|
|
|
(22,568 |
) |
|
|
(31.42 |
) |
Earnings on bank owned life insurance |
|
|
91,492 |
|
|
|
37,261 |
|
|
|
54,231 |
|
|
|
145.54 |
|
Income (loss) on investment in real
estate LLC |
|
|
(3,512 |
) |
|
|
77,528 |
|
|
|
(81,040 |
) |
|
|
(104.53 |
) |
Gain (loss) on disposal of assets |
|
|
(7,372 |
) |
|
|
|
|
|
|
(7,372 |
) |
|
|
|
|
Other fees and commissions |
|
|
71,436 |
|
|
|
68,100 |
|
|
|
3,336 |
|
|
|
4.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue |
|
$ |
277,883 |
|
|
$ |
322,056 |
|
|
$ |
(44,173 |
) |
|
|
(13.72) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts increased due to increases in the number of customers and
the services they used. Because of high gasoline prices and general concerns about the economy,
the marine industry experienced declining sales during the third quarter of 2007. This caused a
decline in broker origination fees during the third quarter. Earnings on bank owned life insurance
increased primarily because we invested an additional $4 million in February 2007. Pointer Ridge
began leasing its building to tenants in July 2006. During its first quarter of operations it
posted minimal expenses. As a result of increased costs associated with leasing and operating the
building, it experienced a loss during the three months ended September 30, 2007. Other fees and
commissions increased $3,366 primarily because in April 2007 we started leasing the Waldorf office
space that we vacated in July 2006.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
The following table outlines the changes in non-interest revenue for the nine month periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Service charges on deposit accounts |
|
$ |
220,497 |
|
|
$ |
195,693 |
|
|
$ |
24,804 |
|
|
|
12.67 |
% |
Marine division broker origination fees |
|
|
262,218 |
|
|
|
263,611 |
|
|
|
(1,393 |
) |
|
|
(0.53 |
) |
Earnings on bank owned life insurance |
|
|
248,130 |
|
|
|
108,092 |
|
|
|
140,038 |
|
|
|
129.55 |
|
Income (loss) on investment in real
estate LLC |
|
|
256 |
|
|
|
77,774 |
|
|
|
(77,518 |
) |
|
|
(99.67 |
) |
Gain (loss) on disposal of assets |
|
|
(7,372 |
) |
|
|
|
|
|
|
(7,372 |
) |
|
|
|
|
Other fees and commissions |
|
|
191,105 |
|
|
|
140,838 |
|
|
|
50,267 |
|
|
|
35.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue |
|
$ |
914,834 |
|
|
$ |
786,008 |
|
|
$ |
128,826 |
|
|
|
16.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts increased due to increases in the number of customers and
the services they use. Because of high gasoline prices, inclement weather and general concerns
about the economy, the marine industry experienced declining sales during 2007. Earnings on bank
owned life insurance increased because we invested an additional $4 million in February 2007.
Pointer Ridge began leasing its building to tenants in July 2006 and it had minimal expenses in
2006. In 2007, expenses associated with operating the building increased. As a result, Pointer
Ridges profitability declined in 2007. Other fees and commissions increased $50,267 primarily
because in April 2007, we began leasing the Waldorf office space that we vacated in July 2006 and
because of increases in miscellaneous and loan income received from the increased volume of
closings on loans and letters of credit.
21
Because of the new lenders we have hired and the new Bowie and Greenbelt branches that we have
opened, we expect that customer relationships will continue to grow during the remainder of 2007.
We anticipate this growth will cause an increase in service charges on deposit accounts. As a
result of our decision to cease operations in the marine division, we will have minimal fee income
from the marine division in the 4th quarter of 2007. We believe the demand in the
commercial real estate market will remain stable and we will have an additional number of
opportunities to provide financing of these facilities. Therefore, other loan fees which are
included in other fees and commissions should remain constant. We expect our earnings on bank
owned life insurance will continue to increase during the remainder of 2007 primarily because of
the additional $4 million investment in February 2007. We anticipate the income from Pointer Ridge
will stabilize during the remainder of the year and will produce break-even profitability. As a
result, we expect our earnings in Pointer Ridge during 2007, if any, will be nominal.
Non-interest Expense
Three months ended September 30, 2007 compared to three months ended September 30,
2006
Non-interest expense for the three months ended September 30, 2007 was $1.8 million versus
$1.5 million for the same period in 2006. The following chart outlines the changes in non-interest
expenses for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Salaries |
|
$ |
851,056 |
|
|
$ |
713,357 |
|
|
$ |
137,699 |
|
|
|
19.30 |
% |
Employee benefits |
|
|
236,253 |
|
|
|
202,888 |
|
|
|
33,365 |
|
|
|
16.45 |
|
Occupancy |
|
|
241,648 |
|
|
|
194,081 |
|
|
|
47,567 |
|
|
|
24.51 |
|
Equipment |
|
|
66,197 |
|
|
|
61,232 |
|
|
|
4,965 |
|
|
|
8.11 |
|
Data processing |
|
|
51,293 |
|
|
|
47,824 |
|
|
|
3,469 |
|
|
|
7.25 |
|
Other operating |
|
|
338,654 |
|
|
|
315,172 |
|
|
|
23,482 |
|
|
|
7.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
$ |
1,785,101 |
|
|
$ |
1,534,554 |
|
|
$ |
250,547 |
|
|
|
16.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and benefit expenses increased because of general salary increases and because of the
new staff for the Greenbelt branch, two new loan officers, and additions to corporate and branch
staff. Stock based compensation expense also contributed to the increase and was approximately
$7,000 higher during the 3rd quarter of 2007 than the 3rd quarter of 2006 because there were more
vested options outstanding to an increased number of directors and employees.
Occupancy expense increased because of the new Greenbelt branch opened in June 2007. Data
processing increased because of the new locations, new services provided by our data processor, and
contractual increases. Other operating expenses increased primarily because marine division
origination costs increased during the period.
22
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
Non-interest expense for the nine months ended September 30, 2007 was $5.2 million as compared
to $4.0 million for the same period in 2006. The following chart outlines the changes in
non-interest expenses for the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Salaries |
|
$ |
2,406,093 |
|
|
$ |
1,988,168 |
|
|
$ |
417,925 |
|
|
|
21.02 |
% |
Employee benefits |
|
|
749,518 |
|
|
|
548,661 |
|
|
|
200,857 |
|
|
|
36.61 |
|
Occupancy |
|
|
676,269 |
|
|
|
324,808 |
|
|
|
351,461 |
|
|
|
108.21 |
|
Equipment |
|
|
184,599 |
|
|
|
125,842 |
|
|
|
58,757 |
|
|
|
46.69 |
|
Data processing |
|
|
165,385 |
|
|
|
122,532 |
|
|
|
42,853 |
|
|
|
34.97 |
|
Other operating |
|
|
1,027,878 |
|
|
|
886,485 |
|
|
|
141,393 |
|
|
|
15.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
$ |
5,209,742 |
|
|
$ |
3,996,496 |
|
|
$ |
1,213,246 |
|
|
|
30.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and benefit expenses increased because of general salary increases and because of the
new staff for the Bowie and Greenbelt branches, three new loan officers, the new business
development officer we hired in July 2006 (who remained with us until July 2007) and additions to
corporate and branch staff. Stock based compensation expense also contributed to the increase and
was $67,576 higher during the nine month period ended September 30, 2007 than the nine month period
ended September 30, 2006 because there were more vested options outstanding to an increased number
of directors and employees.
Occupancy expense increased because of the new corporate headquarters, the addition of the new
Bowie branch in July 2006 and the new Greenbelt branch in June 2007. Data processing increased
because of the new locations, new services provided by our data processor, and contractual
increases. Other operating expenses increased because of increases in janitorial, business
development, travel, advertising, stationery, office, security and marine division origination
expenses.
For the remainder of 2007, we anticipate non-interest expenses will decrease. Although we
will incur increased rent expense related to the new Greenbelt location that will also increase
operational expenses, during the 3rd quarter we closed the marine division and will
realize cost reductions from the cessation of its operation. We also reduced staffing levels
during the period that we expect will provide additional savings. The stock based compensation
expense will also decline during the 4th quarter and we anticipate continued increases
in interest income through loan growth.
Income Taxes
Three months ended September 30, 2007 compared to three months ended September 30,
2006
Income tax expense was $163,857 (33.28% of pre-tax income) for the three months ended
September 30, 2007 as compared to $233,177 (35.88% of pre-tax income) for the same period in 2006.
The decrease in the effective tax rate is primarily due to a $54,231 increase in income from the
bank owned life insurance which is tax exempt.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
Income tax expense was $503,603 (32.13% of pre-tax income) for the nine months ended September
30, 2007 compared to $618,243 (33.88% of pre-tax income) for the same period in 2006. The decrease
in the effective tax rate is primarily due to the tax-exempt income generated by the bank owned
life insurance and the $11,887 tax benefit associated the portion of the stock compensation expense
that was related to the issuance of non-qualified options.
23
Net Income
Three months ended September 30, 2007 compared to three months ended September 30,
2006
Net income was $328,539 or $0.08 per basic and diluted common share for the three month period
ending September 30, 2007 compared to net income of $416,624 or $0.10 per basic and diluted common
share for the same period in 2006.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
Net income was $1,063,741 or $0.25 per basic and diluted common share for the nine month
period ending September 30, 2007, a decrease of $143,078 or 11.86% compared to net income of
$1,206,819 or $0.28 per basic and diluted common share for the same period in 2006. The decrease
in net income was the result of an $826,702 increase in net interest income after provision for
loan losses, a $114,640 decrease in income taxes, and a $128,826 increase in non-interest revenue,
offset by a $1.2 million increase in non-interest expense for the period compared to the same
period in 2006. Earnings per share decreased on a basic and diluted basis because of lower
earnings in 2007.
Analysis of Financial Condition
Investment Securities
Our 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, Federal Home Loan Bank stock,
Maryland Financial Bank stock and Atlantic Central Bankers Bank stock. The portfolio provides a
source of liquidity, collateral for repurchase agreements as well as a means of diversifying our
earning asset portfolio. While we generally intend to hold the investment portfolio assets until
maturity, we classify a significant portion 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. We invest 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, 2007 amounted to $14.7 million, a decrease of $2.2
million, or 13.02%, from the December 31, 2006 amount of $16.9 million. Available for sale
investment securities decreased to $12.4 million at September 30, 2007 from $14.1 million at
December 31, 2006. The decrease in the available for sale investment portfolio occurred because
some of these assets matured and we purchased federal funds or deployed the proceeds into loans.
Held to maturity securities at September 30, 2007 declined to $2.3 million from the $2.8 million
balance on December 31, 2006 because of maturing investments during the period. The carrying value
of available for sale securities included net unrealized losses of $134,325 at September 30, 2007
(reflected as unrealized losses of $82,448 in stockholders equity after deferred taxes) as
compared to net unrealized losses of $280,092 ($171,921 net of taxes) as of December 31, 2006. In
general, the decrease in unrealized losses was a result of the maturity of securities, declining
interest rates and a shortening of the remaining term until maturity. As required under SFAS No.
115, we have evaluated securities with unrealized losses for an extended period of time and
determined that these losses are temporary because, at this point in time, we expect to hold them
until maturity. As the maturity date moves closer and/or interest rates decline, the unrealized
losses in the portfolio will decline or dissipate.
Investment in real estate LLC
As discussed above, Old Line Bancshares also has a 50% ownership or $783,648 investment in
Pointer Ridge, a real estate investment limited liability company. In July 2006, we moved our
main office facility from Waldorf, Maryland to the building owned by Pointer Ridge at 1525 Pointer
Ridge Place, Bowie, Maryland in Prince Georges County and established a branch in this facility.
24
Frank Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank, controls 25% of
Pointer Ridge and controls the manager of Pointer Ridge. On June 6, 2006, we executed leases for
2,557 square feet on the 1st floor of the building for a new branch office, 5,449 square
feet on the 3rd floor and 11,053 square feet on the 4th floor of this
building for our new headquarters. The leases which commenced on July 1, 2006, are for thirteen
years, with two, five-year renewal options. The leases are full service leases and payment terms
include the cost of taxes, insurance and maintenance with basic monthly payments of $41,967 and 3%
annual increases in base rents plus adjustment for increased taxes, insurances and maintenance.
Loan Portfolio
Loans secured by real estate or luxury boats comprise the majority of the loan portfolio. Old
Line Banks loan customers are generally located in the greater Washington, D.C. metropolitan area.
The loan portfolio, net of allowance, unearned fees and origination costs, increased $37.7
million or 25.07% to $188.1 million at September 30, 2007 from $150.4 million at December 31, 2006.
Commercial business loans increased by $14.6 million (40.55%), commercial real estate loans
(generally owner-occupied) increased by $16.1 million (21.90%), residential real estate loans
(generally home equity and fixed rate home improvement loans) decreased by $297,000 (2.61%), real
estate construction loans (primarily commercial real estate construction) increased by $10.1
million (121.75%) and installment loans decreased by $2.7 million (12.16%) from their respective
balances at December 31, 2006.
During the first nine months and third quarter of 2007, we saw loan and deposit growth
generated from our entire team of lenders, branch personnel and board of directors. We anticipate
the entire team will continue to focus their efforts on business development during the remainder
of 2007 and continue to grow the loan portfolio.
The following table summarizes the composition of the loan portfolio by dollar amount and
percentages:
Loan Portfolio
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
89,605 |
|
|
|
47.35 |
% |
|
$ |
73,511 |
|
|
|
48.54 |
% |
Construction |
|
|
18,452 |
|
|
|
9.75 |
|
|
|
8,321 |
|
|
|
5.49 |
|
Residential |
|
|
11,094 |
|
|
|
5.86 |
|
|
|
11,391 |
|
|
|
7.52 |
|
Commercial |
|
|
50,476 |
|
|
|
26.67 |
|
|
|
35,914 |
|
|
|
23.71 |
|
Installment |
|
|
19,615 |
|
|
|
10.37 |
|
|
|
22,330 |
|
|
|
14.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,242 |
|
|
|
100.00 |
% |
|
|
151,467 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(1,481 |
) |
|
|
|
|
|
|
(1,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan (fees) and costs |
|
|
300 |
|
|
|
|
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
188,061 |
|
|
|
|
|
|
$ |
150,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality
Management performs reviews of all delinquent loans and directs relationship officers to work
with customers to resolve potential credit issues in a timely manner. Management generally
classifies loans as non-accrual when it does not expect collection of full principal and interest
under the original terms of the loan or payment of principal or interest has become 90 days past
due. Classifying a loan as non-accrual results in our 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 the borrower brings delinquent principal and interest
payments current and we expect to collect future monthly principal and interest payments. We
recognize interest on non-accrual loans only when received. There was one non-accrual loan in the
amount of $126,440 at September 30, 2007. We anticipate we will receive full payment of this loan
in the 4th quarter of 2007 or early in 2008. There were no non-accrual loans on
December 31, 2006.
25
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
loan 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. As of September 30, 2007 and December 31, 2006, we held no real estate
acquired as a result of foreclosure.
We apply 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 loans effective interest rate, or at the loans 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, we recognize impairment through
a valuation allowance and corresponding provision for loan 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.
As of September 30, 2007 and December 31, 2006, we had no impaired or restructured loans.
Bank owned life insurance
We
increased our investment in Bank Owned Life Insurance (BOLI) in February 2007 by $4.0 million. In June 2005, we purchased $3.3 million of BOLI on the lives of our executive
officers, Messrs. Cornelsen and Burnett and Ms. Rush. With the new investment made in February, we
increased the insurance on Messrs. Cornelsen and Burnett and expanded the coverage of the insurance
policies to insure the lives of several other officers of Old Line Bank. We anticipate the
earnings on these policies will pay for our employee benefit expenses as well as our obligations
under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered
into with our executive officers in January 2006. As a result of this additional $4 million
investment and increased earnings, during the first nine months of 2007, the cash surrender value
of the insurance policies increased by $4.2 million.
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, 2007, the deposit portfolio had grown to $179.7 million, a $10.0 million or
5.89% increase over the December 31, 2006 level of $169.7 million. Non-interest bearing deposits
declined $7.0 million during the period to $31.0 million from $38.0 million primarily due to a
decline in balances in commercial checking accounts that was primarily caused by the decline in the
real estate market and the transfer of funds to interest bearing accounts. Interest-bearing
deposits grew $17.0 million to $148.7 million from $131.7 million. The majority of the growth in
interest-bearing deposits was in money market and certificates of deposit. Money market accounts
grew from $29.4 million at December 31, 2006 to $38.9 million at September 30, 2007. Certificates
of deposit grew $9.9 million or 10.44% to $104.7 million from $94.8 million. The growth in these
deposits was offset by a $3.6 million decline in savings accounts. Certificates of deposit and
money market accounts grew due to new customer relationships and the transfer of funds from savings
accounts.
26
In the first quarter of 2006, we began acquiring brokered certificates of deposit through the
Promontory Interfinancial Network. Through this deposit matching network and its certificate of
deposit account registry service (CDARS), we obtained the ability to offer our customers access to
FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we
place funds through CDARS on behalf of a customer, we receive matching deposits through the
network. At September 30, 2007, we had $19.0 million in CDARS compared to $15.8 million at
December 31, 2006. At September 30, 2007, we had $5.0 million in brokered certificates of deposit
a $5.1 million decrease from the December 31, 2006, balance of $10.1 million.
During the nine and three months ended September 30, 2007, we saw growth in total deposits
because of the opening of the Greenbelt branch in June 2007, the opening of the Bowie branch in
July 2006 and the successful business development efforts of our branch staff, lending personnel
and Board of Directors. We did experience a shift in deposits from non-interest bearing, money
market and savings accounts to interest bearing certificates of deposit and to our commercial sweep
service (outlined below) as our customers began looking for higher yields. This coupled with the
continued slow down in real estate settlements caused a lower level of balances on deposit in
non-interest bearing accounts. We expect the balances in non-interest bearing accounts will
improve during the remainder of the year.
Borrowings
Old Line Bank has available lines of credit, including overnight federal funds and repurchase
agreements from its correspondent banks totaling $27.8 million as of September 30, 2007. Old Line
Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta (FHLB)
that totaled $71.8 million at September 30, 2007 and $53.8 million at December 31, 2006. Of this,
we had borrowed $4.0 million at September 30, 2007 and $5 million as of December 31, 2006.
Short-term borrowings consisted of short-term promissory notes issued to Old Line Banks
customers, federal funds purchased and advances from the FHLB. Old Line Bank offers its commercial
customers an enhancement to the basic non-interest bearing demand deposit account. This service
electronically sweeps excess funds from the customers account into an interest bearing Master Note
with Old Line Bank. These Master Notes re-price daily and have maturities of 270 days or less. At
September 30, 2007, Old Line Bank had $18.6 million outstanding in these short term promissory
notes with an average interest rate of 2.34%. At December 31, 2006, Old Line Bank had $7.2 million
outstanding with an average interest rate of 3.46%. At September 30, 2007, Old Line Bank had $4
million in overnight federal funds with the FHLB. On December 31, 2006, Old Line Bank had $2
million outstanding in short term advances from the FHLB. On July 16, 2006, Old Line Bank borrowed
$2 million from the FHLB at an interest rate of 5.65% monthly. We paid this balance in full on
January 16, 2007.
At September 30, 2007 we had no long term borrowings. On December 31, 2006, long term
borrowings were one advance from the FHLB. On July 20, 2006, Old Line Bank borrowed $3.0 million
and paid interest at 5.328% each January, April, July and October. The balance was due in full on
July 20, 2009. The FHLB exercised its one-time option to terminate the transaction and required
payment in full on July 20, 2007. The FHLB exercised its one-time option to terminate the
transaction on July 20, 2007 and we paid the borrowings in full on that date.
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
A principal objective of Old Line Banks 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 banks 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 Banks asset/liability policys 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. Management makes
adjustments to the mix of assets and liabilities periodically in an effort to achieve
dependable, steady growth in net interest income regardless of the behavior of interest rates in
general.
27
As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee
examines the extent to which Old Line Banks 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 amount of 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.
Old Line Bank currently has a negative gap over the short term, which suggests that the net
yield on interest earning assets may decrease during periods of rising interest rates. However, a
simple interest rate gap analysis by itself may not be an accurate indicator of how changes in
interest rates will affect net interest income. Changes in interest rates may not uniformly affect
income associated with interest-earning assets and costs associated with interest-bearing
liabilities. 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 rates, 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 $29.8 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 available for sale 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. On
September 30, 2007, we had $3.3 million in cash and due from banks, and $17.2 million in federal
funds sold and overnight investments. As of December 31, 2006, we had $5.1 million in cash and due
from banks, and $34.5 million in federal funds sold and other overnight investments. As we
continue to deploy these proceeds into loans, we anticipate these balances will decline.
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 Banks inability to meet anticipated or unexpected liquidity needs.
Capital
Our stockholders equity amounted to $35.7 million at September 30, 2007 and $34.8 million at
December 31, 2006. We are considered well capitalized under the risk-based capital guidelines
adopted by the Federal Reserve. Stockholders equity increased during the nine month period
because of net
income of $1.1 million, plus the $155,873 adjustment for stock based compensation awards and
proceeds from stock options exercised, and the $89,473 unrealized gain in available for sale
securities less the $382,915 in dividends paid in March, June and September.
28
Contractual Obligations, Commitments, Contingent Liabilities, and 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 include commitments to extend
credit, lines of credit and standby letters of credit. 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 liquidity risk. These
commitments do not represent unusual risks and management does not anticipate any losses which
would have a material effect on Old Line Bancshares, Inc. Old Line Bancshares, Inc. also has
operating lease obligations.
Old Line Bancshares, Incs guaranty obligation made in connection with Pointer Ridges
mortgage loan, outlined below, also creates off-balance sheet risk, as further described below.
Outstanding
loan commitments and lines and letters of credit at September 30, 2007 and December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
(Dollars in thousands) |
|
Commitments to extend credit and available credit lines: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
17,527 |
|
|
$ |
13,095 |
|
Real estate-undisbursed development and construction |
|
|
31,622 |
|
|
|
27,295 |
|
Real estate-undisbursed home equity lines of credit |
|
|
5,102 |
|
|
|
4,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,251 |
|
|
$ |
44,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
955 |
|
|
$ |
1,515 |
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Old Line Bancshares, Inc. generally
requires collateral to support financial instruments with credit risk on the same basis as it does
for on-balance sheet instruments. The collateral is based on managements credit evaluation of the
counter party. Commitments generally have interest rates fixed at current market rates, expiration
dates or other termination clauses and may require payment of a fee. Available credit lines
represent the unused portion of lines of credit previously extended and available to the customer
so long as there is no violation of any contractual condition. These lines generally have variable
interest rates. Since many of the commitments are expected to expire without being drawn upon, and
since it is unlikely that customers will draw upon their lines of credit in full at any time, the
total commitment amount or line of credit amount does not necessarily represent future cash
requirements. Each customers credit-worthiness is evaluated on a case-by-case basis. We are not
aware of any loss that we would incur by funding our commitments or lines of credit.
Commitments for real estate development and construction, which totaled $31.6 million, or
58.29% of the $54.3 million, are generally short-term and turn over rapidly with principal
repayment from permanent financing arrangements upon completion of construction or from sales of
the properties financed.
Standby letters of credit are conditional commitments issued to guarantee the performance of a
customer to a third party. Our exposure to credit loss in the event of nonperformance by the
customer is the contract amount of the commitment. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers.
29
On August 25, 2006, Pointer Ridge entered into a loan agreement with an unrelated bank,
pursuant to which the bank agreed to make a mortgage loan to Pointer Ridge in a principal amount of
$6.6 million to finance the commercial office building at 1525 Pointer Ridge Place, Bowie,
Maryland. We lease approximately half of this building for our main office and operate a branch of
Old Line Bank from this address. Old Line Bancshares, Inc. has a 50% ownership in Pointer Ridge
and we record this investment on the equity method.
The Amended Promissory Note provides that the loan will accrue interest from the date of the
Amended Promissory Note through September 5, 2016 at a rate of 6.28% (Initial Term Interest
Rate). After September 5, 2016, the interest rate will adjust to the greater of (i) the Initial
Term Interest Rate plus 200 basis points or (ii) the Treasury Rate (as defined in the Amended
Promissory Note) plus 200 basis points.
Payments on the Amended Promissory Note began October 5, 2006. For the first 12 months,
Pointer Ridge paid to the lender an installment of interest only. Commencing with the
13th payment and continuing until August 5, 2036, Pointer Ridge will pay equal monthly
payments of principal and interest based on a 30-year amortization. There is a prepayment penalty
if Pointer Ridge prepays the loan prior to September 5, 2016. At September 30, 2007, Pointer Ridge
had borrowed $6.6 million under the Amended Promissory Note.
On August 25, 2006, Old Line executed a new Guaranty Agreement with the lender that was
effective upon Pointer Ridges execution of the Amended Promissory Note and Amended Deed of Trust.
Pursuant to the terms of the guaranty, Old Line has guaranteed the payment to the lender of up to
50% of the loan amount plus any costs incurred by the lender resulting from any acts, omissions or
alleged acts or omissions arising out of or relating to: (1) the misapplication or misappropriation
by Pointer Ridge of any or all money collected, paid or received; (2) rents, issues, profits and
revenues of all or any portion of the property located at 1525 Pointer Ridge Place, Bowie, Maryland
(the Security Property) received or applicable to a period after the occurrence of any Event of
Default which are not applied to pay, first (a) real estate taxes and other charges which, if
unpaid, could result in liens superior to that of the Amended Deed of Trust and (b) premiums on
insurance policies required under the loan documents, and, second, the other ordinary and necessary
expenses of owning and operating the Security Property; (3) waste committed on the Security
Property or damage to the Security Property as a result of intentional misconduct or gross
negligence or the removal of all or any portion of the Security Property in violation of the terms
of the loan documents; (4) fraud or material misrepresentation or failure to disclose a material
fact; (5) the filing of any petition for bankruptcy; or (6) Pointer Ridges failure to maintain its
status as a single purpose entity as required by the loan documents.
We do not believe that we will incur any obligations under the guaranty. If we were to become
obligated under the guaranty, we do not believe that it would have any material effect on our
liquidity or capital resources.
30
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, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds |
|
|
Investment |
|
|
Interest |
|
|
Net Interest |
|
|
Net Interest |
|
|
|
Sold |
|
|
Securities |
|
|
Earning Assets |
|
|
Income |
|
|
Spread |
|
GAAP interest income |
|
$ |
1,025,129 |
|
|
$ |
501,708 |
|
|
$ |
10,737,413 |
|
|
$ |
6,068,252 |
|
|
|
|
|
Tax equivalent adjustment |
|
|
24,523 |
|
|
|
56,925 |
|
|
|
81,448 |
|
|
|
81,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest
income |
|
$ |
1,049,652 |
|
|
$ |
558,633 |
|
|
$ |
10,818,861 |
|
|
$ |
6,149,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP interest yield |
|
|
5.23 |
% |
|
|
3.83 |
% |
|
|
6.90 |
% |
|
|
3.90 |
% |
|
|
2.86 |
% |
Taxable equivalent adjustment |
|
|
0.13 |
% |
|
|
0.44 |
% |
|
|
0.06 |
% |
|
|
0.05 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest yield |
|
|
5.36 |
% |
|
|
4.27 |
% |
|
|
6.96 |
% |
|
|
3.95 |
% |
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Federal Funds |
|
|
Investment |
|
|
Interest |
|
|
Net Interest |
|
|
Interest |
|
|
|
Sold |
|
|
Securities |
|
|
Earning Assets |
|
|
Income |
|
|
Spread |
|
GAAP interest income |
|
$ |
952,888 |
|
|
$ |
471,183 |
|
|
$ |
7,842,732 |
|
|
$ |
5,331,550 |
|
|
|
|
|
Tax equivalent adjustment |
|
|
21,939 |
|
|
|
49,079 |
|
|
|
71,041 |
|
|
|
71,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest
income |
|
$ |
974,827 |
|
|
$ |
520,262 |
|
|
$ |
7,913,773 |
|
|
$ |
5,402,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP interest yield |
|
|
4.77 |
% |
|
|
3.35 |
% |
|
|
6.38 |
% |
|
|
4.33 |
% |
|
|
3.26 |
% |
Taxable equivalent adjustment |
|
|
0.11 |
% |
|
|
0.35 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest yield |
|
|
4.88 |
% |
|
|
3.70 |
% |
|
|
6.44 |
% |
|
|
4.39 |
% |
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of financial position
and operating results in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more significant impact on
a financial institutions performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as the price of goods
and services, and may frequently reflect government policy initiatives or economic factors not
measured by price index. As discussed above, we strive to manage our interest sensitive assets and
liabilities in order to offset the effects of rate changes and inflation.
31
Application of Critical Accounting Policies
We prepare our financial statements 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.
We base these estimates, assumptions, and judgments 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. We
base the fair values and the information used to record valuation adjustments for certain assets
and liabilities on quoted market prices or from information other third-party sources provide, 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 managements 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 managements 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 would adversely affect income and capital. For additional
information regarding the allowance for loan losses, see Provision for Loan Losses.
Information Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of
the Securities Exchange Act of 1933, as amended and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act). We may also include forward-looking statements in other
statements that we make. All statements that are not descriptions of historical facts are
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 revenue and
expenses, earnings, sources of liquidity, the allowance for loan losses, expected loan and asset
growth, payment of non-performing loans, interest rate sensitivity, changes in our net interest
margin, market risk, financial and other goals and plans, the expected costs and benefits of new
facilities and personnel, anticipated new hires, expected openings of new branches and market
expansion, earnings on BOLI, and customer growth are forward looking. Old Line Bancshares, Inc.
bases these statements on our beliefs, assumptions and on information available to us as of the
date of this filing, which involves risks and uncertainties.
32
These risks and uncertainties
include, among others those discussed in this report; the ability of Old Line Bancshares, Inc. to
retain key personnel; the ability of Old Line Bancshares, Inc. to successfully implement its growth
and expansion strategy; risk of loan losses; that the allowance for loan losses may not be
sufficient; that
changes in interest rates and monetary policy could adversely affect Old Line Bancshares,
Inc.; that changes in regulatory requirements and/or restrictive banking legislation may adversely
affect Old Line Bancshares, Inc.; that the market value of investments could negatively impact
stockholders equity; risks associated with Old Line Bancshares, Inc.s lending limit; increased
expenses due to stock benefit plans; expenses associated with operating as a public company;
potential conflicts of interest associated with the interest in Pointer Ridge; and changes in
economic, competitive, governmental, regulatory, technological and other factors which may affect
Old Line Bancshares, Inc. specifically or the banking industry generally. For a more complete
discussion of some of these risks and uncertainties see Factors Affecting Future Results in Old
Line Bancshares, Inc.s Annual Report on Form 10-KSB for the year ended December 31, 2006.
Old Line Bancshares, Inc.s actual results and the actual outcome of our expectations and
strategies could differ materially from those anticipated or estimated because of these risks and
uncertainties 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 update the forward-looking statements to reflect factual assumptions,
circumstances or events that have changed after we have made the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain
financial instruments. Due to the nature of our operations, only interest rate risk is significant
to our consolidated results of operations or financial position. For information regarding our
Quantitative and Qualitative Disclosure about Market Risk, see Interest Rate Sensitivity Analysis
and Interest Rate Risk Management in Part I, Item 2 of this Form 10-Q.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, 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 as defined in Rule 13a-15(e)
under the Exchange Act. 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 as of September 30, 2007. 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 Exchange Act, is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms.
In addition, there were no changes in Old Line Bancshares, Inc.s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended
September 30, 2007, that have materially affected, or are reasonably likely to materially affect,
Old Line Bancshares, Inc.s internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in our Annual
Report on Form 10-KSB for the year ended December 31, 2006.
33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
|
31.1 |
|
Rule 13a-14(a) Certification of Chief Executive Officer |
|
|
31.2 |
|
Rule 13a-14(a) Certification of Chief Financial Officer |
|
|
32 |
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Old Line Bancshares, Inc.
|
|
Date November 6, 2007 |
By: |
/s/ James W. Cornelsen
|
|
|
|
James W. Cornelsen, |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Date: November 6, 2007 |
By: |
/s/ Christine M. Rush
|
|
|
|
Christine M. Rush, |
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer) |
|
35