UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004.
Commission file number: 000-50345
OLD LINE BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 20-0154352
- ------------------------------------------ --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2995 Crain Highway, Waldorf, Maryland 20601
-------------------------------------------
Address of principal executive offices
(301) 645-0333
-------------------------
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
At May 10, 2004, 1,776,394.5 shares of the issuer's Common Stock, par
value $.01 per share, were issued and outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 3,609,917 $ 2,477,119
Federal funds sold 8,020,498 4,002,828
Time deposits in other banks 700,000 700,000
Investment securities available for sale 16,804,813 17,381,519
Investment securities held to maturity 1,705,737 1,803,812
Loans, less allowance for loan losses 63,475,167 59,517,690
Restricted equity securities at cost 868,450 818,450
Bank premises and equipment 2,251,708 2,279,669
Accrued interest receivable 349,759 315,326
Deferred income taxes - 60,925
Other assets 171,922 178,465
------------ ------------
$ 97,957,971 89,535,803
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 20,908,938 $ 19,902,350
Interest bearing 57,445,210 49,422,727
------------ ------------
Total deposits 78,354,148 69,325,077
Borrowed funds 6,000,000 7,000,000
Accured interest payable 157,151 149,831
Income tax payable 97,459 130,675
Deferred income taxes 13,207 -
Other liabilities 131,340 102,566
------------ ------------
84,753,305 76,708,149
------------ ------------
Stockholders' equity
Common stock, par value $.01 per share in 2004 and 2003, authorized 5,000,000
shares in 2004 and 2003; issued and outstanding 1,776,394.50 in 2004 and
1,756,894.5 in 2003 17,764 $ 17,569.00
Additional paid-in-capital 12,446,229 12,362,902
Retained earnings 644,286 517,097
------------ ------------
13,108,279 12,897,568
Accumulated other comprehensive income 96,387 (69,914)
------------ ------------
13,204,666 12,827,654
------------ ------------
$ 97,957,971 $ 89,535,803
============ ============
See accompanying notes to consolidated financial statements.
1
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------ ------------
(UNAUDITED)
INTEREST REVENUE
Loans, including fees $ 904,238 $ 765,947
U.S. Treasury securities 23,518 -
U.S. government agency securities 78,281 129,469
Mortgage backed securities 33,329 26,917
Tax exempt securities 25,137 17,377
Federal funds sold 6,872 12,339
Other 14,863 10,377
------------ ------------
Total interest revenue $ 1,086,238 $ 962,426
------------ ------------
INTEREST EXPENSE
Deposits 227,069 293,114
Borrowed funds 53,333 48,534
------------ ------------
Total interest expense 280,402 341,648
------------ ------------
Net interest income 805,836 620,778
PROVISION FOR LOAN LOSSES 45,000 36,000
------------ ------------
Net interest income after provision for loan losses 760,836 584,778
------------ ------------
NONINTEREST REVENUE
Service charges on deposit accounts 59,307 56,621
Other fees and commissions 98,920 48,495
Gain on disposal of assets - 41,102
------------ ------------
Total noninterest revenue 158,227 146,218
------------ ------------
NONINTEREST EXPENSE
Salaries 318,489 269,129
Employee benefits 58,293 47,545
Occupancy 51,297 50,455
Equipment 28,350 28,062
Data processing 31,780 27,648
Other operating 156,901 121,066
------------ ------------
Total noninterest expenses 645,110 543,905
------------ ------------
Income before income taxes 273,953 187,091
Income taxes 93,607 60,550
------------ ------------
NET INCOME $ 180,346 $ 126,541
============ ============
Basic earnings per common share $ 0.10 $ 0.15
Diluted earnings per common share $ 0.10 $ 0.14
See accompanying notes to consolidated financial statements.
2
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(UNAUDITED)
Accumulated
Additional other
Common stock paid-in Retained comprehensive Comprehensive
Shares Par value capital earnings income income
----------- --------- ------------- ------------ ------------- -------------
Balance, December 31, 2003 1,756,894.5 $ 17,569 $ 12,362,902 $ 517,097 $ (69,914)
Net income - - - 180,346 - $ 180,346
Unrealized gain (loss) on securities
available for sale, net of income taxes - - - - 166,301 166,301
-------------
Comprehensive income - - - - - $ 346,647
=============
Cash dividend $.03 per share - - - (53,157) -
Stock options exercised 19,500.0 195 83,327 - -
----------- --------- ------------- ------------ -----------
March 31, 2004 1,776,394.5 $ 17,764 $ 12,446,229 $ 644,286 $ 96,387
=========== ========= ============= ============ ===========
See accompanying notes to consolidated financial statements
3
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
(Unaudited)
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 1,034,119 $ 925,523
Fees and commissions received 158,227 105,116
Interest paid (273,082) (334,150)
Cash paid to suppliers and employees (577,985) (541,248)
Income taxes paid (142,238) -
------------ ------------
199,041 155,241
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
Held to maturity (341,939) (2,051,678)
Available for sale at maturity or call (500,000) (4,788,437)
Proceeds from disposal of investment securities
Held to maturity 440,000 1,500,000
Available for sale at maturity or call 1,331,153 5,179,685
Available for sale sold - 924,181
Loans made, net of principal collected (3,983,375) (4,703,226)
Purchase of equity securities (50,000) (1,100)
Net purchase of certificates of deposit - -
Purchase of premises and equipment and software (3,847) (239,336)
Proceeds from sale of premises and equipment - -
------------ ------------
(3,108,008) (4,179,911)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits 4,656,102 497,935
Other deposits 4,372,968 10,317,834
Repurchase agreements (1,000,000) -
Proceeds from stock options exercised-2003 83,522
Dividends paid (53,157) (80,257)
------------ ------------
8,059,435 10,735,512
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,150,468 6,710,842
Cash and cash equivalents at beginning of period 6,479,947 7,032,155
------------ ------------
Cash and cash equivalents at end of period $ 11,630,415 $ 13,742,997
============ ============
See accompanying notes to consolidated financial statements.
4
OLD LINE BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Three months ended
March 31,
2004 2003
(Unaudited)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 180,346 $ 126,541
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTITIVITIES
Depreciation and amortization 38,296 37,201
Provision for loan losses 45,000 36,000
Gain on disposal of securities - (41,102)
Gain on sale of equipment - -
Change in deferred loan fees net of costs (19,102) (26,504)
Amortization of premiums and discounts 1,416 11,851
Deferred income taxes (15,415) -
Increase (decrease) in
Accrued interest payable 7,320 7,498
Other liabilities (4,442) 66,158
Decrease (increase) in
Accrued interest receivable (34,433) (22,250)
Other assets 55 (40,152)
------------ ------------
$ 199,041 $ 155,241
============ ============
See accompanying notes to consolidated financial statements
5
OLD LINE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
ORGANIZATION
Old Line Bancshares, Inc. was incorporated under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of Old Line Bank. On
May 22, 2003, the stockholders of Old Line Bank approved an Agreement and Plan
of Reorganization and Articles of Share Exchange pursuant to which (i) Old Line
Bank would become a wholly-owned subsidiary of Old Line Bancshares, Inc., and
(ii) each outstanding share (or fraction thereof) of Old Line Bank common stock
would be converted into one share (or fraction thereof) of Old Line Bancshares,
Inc. common stock, and the former holders of Old Line Bank common stock would
become the holders of all the outstanding shares of Old Line Bancshares, Inc.
common stock. The reorganization became effective at 12:01 a.m. on September 15,
2003.
The reorganization was accounted for in a manner similar to that for a
pooling of interests. Under this accounting treatment, the net assets and
liabilities of Old Line Bank were recorded as the asset of Old Line Bancshares,
Inc. (investment in subsidiary) at book value, and the stockholders' equity
account of Old Line Bancshares, Inc. equals the stockholders' equity account of
Old Line Bank. As part of this reorganization, $500,000 was transferred from Old
Line Bank to fund the expenses associated with the holding company formation and
other anticipated holding company expenses.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the activity of
Old Line Bancshares, Inc. and its wholly owned subsidiary, Old Line Bank. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The foregoing consolidated financial statements are unaudited; however, in
the opinion of management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the results of the interim period
have been included. The balances as of December 31, 2003 were derived from
audited financial statements. These statements should be read in conjunction
with Old Line Bank's financial statements and accompanying notes included in Old
Line Bancshares, Inc.'s Form 10-KSB/A. There have been no significant changes to
the Company's accounting policies as disclosed in the Form 10-KSB/A. The results
shown in this interim report are not necessarily indicative of results expected
for the full year 2004.
The accounting and reporting policies of Old Line Bancshares, Inc. conform
to accounting principles generally accepted in the United States of America.
2. INVESTMENT SECURITIES
As Old Line Bancshares, Inc. purchases securities, management determines
if the securities should be classified as held to maturity, available for sale
or trading. Securities which management has the intent and ability to hold to
maturity are recorded at amortized cost which is cost adjusted for amortization
of premiums and accretion of discounts at maturity. Securities which management
may sell before maturity are classified as available for sale and carried 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.
6
In the second quarter of 2003, Old Line Bank sold $1 million in
investments that were previously classified as held-to-maturity. As required
under SFASB Statement No. 115, all securities previously classified as held to
maturity were reclassified as available-for-sale.
3. INCOME TAXES
The provision for income taxes includes taxes payable for the current year
and deferred income taxes. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
4. EARNINGS PER SHARE
Basic earnings per common share are determined by dividing net income by
the weighted average number of shares of common stock outstanding giving
retroactive affect to the one for two stock exchange in 2002 and the 200% stock
dividend payable to shareholders of record on September 26, 2003 and payable
October 10, 2003. Diluted earnings per share is calculated including the average
dilutive common stock equivalents outstanding during the period. Dilutive common
equivalent shares consist of stock options, calculated using the treasury stock
method.
Three Months Ended
March 31,
2004 2003
------------ ------------
Weighted average number of shares 1,763,444.5 859,894.5
Dilutive average number of shares 29,967 14,985
5. STOCK-BASED COMPENSATION
The Bank applies APB No. 25 in accounting for the stock options.
Accordingly, no compensation has been recognized for the stock options granted.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) was issued in October, 1995 to establish accounting
and reporting standards for stock-based employee compensation plans. SFAS No.
123 requires measurement of compensation expense provided by stock-based plans
using a fair value based method of accounting, and recognition of compensation
expense in the statement of income or disclosure in the notes to the financial
statements.
A summary of the status of the outstanding options follows:
March 31, 2004
Weighted
Number of average
Shares exercise price
------------ --------------
Outstanding, beginning of year 89,250 $ 5.92
Options granted -
Options exercised (19,500) 3.75
Options expired - -
------------ ------------
Outstanding, March 31, 2004 69,750 $ 6.55
============ ============
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Some of the matters discussed below include forward-looking statements.
Forward-looking statements often use words such as "believe," "expect," "plan,"
"may," "will," "should," "project," "contemplate," "anticipate," "forecast,"
"intend" or other words of similar meaning. You can also identify them by the
fact that they do not relate strictly to historical or current facts. Our actual
results and the actual outcome of our expectations and strategies could be
different from those anticipated or estimated for the reasons discussed below
and the reasons under the heading "Information Regarding Forward Looking
Statements."
GENERAL
Old Line Bancshares, Inc. was formed under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of Old Line Bank, a
Maryland commercial bank.
On May 22, 2003, the stockholders of Old Line Bank approved an Agreement
and Plan of Reorganization and Articles of Share Exchange pursuant to which (i)
Old Line Bank would become a wholly-owned subsidiary of Old Line Bancshares,
Inc., and (ii) each outstanding share (or fraction thereof) of Old Line Bank
common stock would be converted into one share (or fraction thereof) of Old Line
Bancshares, Inc. common stock, and the former holders of Old Line Bank common
stock would become the holders of all the outstanding shares of Old Line
Bancshares, Inc. common stock. The reorganization became effective at 12:01 a.m.
on September 15, 2003. The discussion contained herein with respect to time
periods prior to September 15, 2003 relates solely to Old Line Bank.
In June 2003, Old Line Bank completed a public offering of 299,000 shares
of common stock at an offering price of $25 per share. We anticipate that the
$6.9 million in net offering proceeds will provide Old Line Bank the capital to
retain higher percentages of loans that it previously participated to other
financial institutions and to support present and future growth in assets and
maintain Old Line Bank's well capitalized status with the bank regulatory
authorities. We may also use these funds for future expansion efforts including,
potentially, opening or acquiring new branch locations.
Other than owning all of the capital stock of Old Line Bank, Old Line
Bancshares, Inc. does not currently engage in any other business activity.
All share amounts and dollar amounts per share with regard to the common
stock have been adjusted, unless otherwise indicated, to reflect Old Line Bank's
one for two stock exchange in June 2002 and the 200% stock dividend paid October
10, 2003.
8
SUMMARY OF RECENT PERFORMANCE
We are pleased to report that during the quarter that ended March 31,
2004, we have made progress in accomplishing the goals outlined in our December
31, 2003 KSB/A. As we outlined in that report, during 2004 we plan to improve
earnings by:
- Increasing interest revenue through continued growth.
- Reducing interest expense by growing core deposits and non-interest
bearing deposits with increased business development and promotional
campaigns.
- Reducing other operating expenses relative to revenues with reductions in
security costs and legal and organization expenses.
As a result of our continued focus on business development and expense
management, along with Old Line Bank's higher legal lending limit and the hiring
of an additional loan officer, during the period ended March 31, 2004, we
accomplished the following:
- Improved net income 42.52% from $126,541 for the quarter ended March 31,
2003 to $180,346 for the quarter ended March 31, 2004.
- Increased interest revenue $123,812 or 12.86% from $962,246 at March 31,
2003 to $1.1 million at March 31, 2004.
- Decreased interest expense for all interest bearing liabilities to
$280,402 for the three months ended March 31, 2004 versus $341,648 for the
three months ended March 31, 2003.
- Improved the net interest margin from 3.77% at March 31, 2003 to 3.91% at
March 31, 2004.
- Increased non interest revenue $12,009 or 8.21% to $158,226 for the three
months ended March 31, 2004 over the 2003 amount of $146,218.
- Grew Old Line Bank's deposit base $9.1 million or 13.13% to $78.4 million
over the December 31, 2003 level of $69.3 million.
- Grew interest bearing deposits $8.0 million or 16.19% to $57.4 million
from $49.4 million at December 31, 2003.
- Grew the loan portfolio, net of allowance, unearned fees and origination
costs $4.0 million or 6.72% to $63.5 million at March 31, 2004 from $59.5
million at December 31, 2003.
- Maintained asset quality with no loans past due more than 90 days at March
31, 2004, a ratio of non performing assets to total assets at March 31,
2004 of 0.00%, and a ratio of net chargeoffs to average loans outstanding
during the period of 0.005% compared to 0.007% for the period ended
December 31, 2003.
- Increased the allowance for loan losses to .93% of gross loans at March
31, 2003 compared to 0.91% at December 31, 2003.
- Increased shareholder's equity from $12.8 million at December 31, 2003 to
$13.2 million at March 31, 2003.
- Paid a $0.03 quarterly dividend payment on March 15, 2004 to shareholders
of record as of March 1, 2004.
As a result of the 897,000 additional shares issued during the public
offering in June 2003, the hiring of a loan officer in March 2003 and a credit
officer in March 2004, our increased customer base, new services offered to our
customers and the increased costs associated with SEC filings and Nasdaq fees,
we experienced the following:
- An increase of $101,205 or 18.61% in non-interest expense from $543,905 to
$645,110 for the three months ended March 31, 2003 versus March 31, 2004.
9
- An increase of $49,360 or 18.34% in salaries from $269,129 for the quarter
ended March 31, 2003 to $318,489 for the quarter ended March 31, 2004.
- A decrease in earnings per share from $0.15 and $0.14 basic and fully
diluted, respectively for the period ended March 31, 2003 to $0.10 basic
and fully diluted for the period ended March 31, 2004.
- A decrease in return on average equity on an annualized basis during the
first three months of 2004 to 5.53% compared to a return on average equity
on an annualized basis of 9.10% for the same period in 2003.
As we look ahead at the remainder of the year, our loan backlog remains
strong. We anticipate our loans will continue to grow and we will continue to
realize improved earnings over the prior year.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between income on interest earning
assets and the cost of funds supporting those assets. Earning assets are
comprised primarily of loans, investments, and federal funds sold; interest on
interest-bearing deposits and other borrowings make up the cost of funds.
Non-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 March 31, 2004 compared to three months ended March 31,
2003
Net interest income after provision for loan losses for the three months
ended March 31, 2004 increased 30.11% to $760,836 from $584,778 for the same
period in 2003. The increase was primarily attributable to a 24.67% or $16.7
million increase in total average interest earning assets to $84.4 million for
the three months ended March 31, 2004 from $67.7 million for the same period in
2003.
Interest revenue increased from $962,426 for the three months ended March
31, 2003 to $1.1 million for the same period in 2004. Interest expense for all
interest bearing liabilities amounted to $280,402 for the three months ended
March 31, 2004 versus $341,648 for the three months ended March 31, 2003. As
discussed below and outlined in detail in the Rate/Volume Analysis, these
changes were a result of normal business growth offset by declines in the
interest rates.
Our net interest margin was 3.91% for the first three months of 2004, as
compared to 3.77% for the first three months of 2003. The increase in the net
interest margin is primarily the result of a $16.6 million or 36.73% increase in
average gross loans outstanding to $61.8 million at March 31, 2004 compared to
$45.2 million at March 31, 2003. This increase along with a $2.9 million
increase in average interest bearing deposits to $52.2 million with an average
interest rate of 1.74% from $49.3 million at March 31, 2003 with an average
interest rate of 2.41% and a $5.9 million increase in non interest-bearing
deposits, improved the interest margin.
The following table illustrates average balances of total interest earning
assets and total interest bearing liabilities for the periods indicated, showing
the average distribution of assets, total liabilities, stockholders' equity and
related income, expense and corresponding weighted average yields and rates. The
average balances used in this table and other statistical data were calculated
using average daily balances.
10
AVERAGE BALANCES, INTEREST, AND YIELDS
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
----------- ----------- ----------- ----------- ----------- -----------
ASSETS:
Federal Funds Sold $ 2,853,600 $ 6,938 0.98% $ 4,004,913 $ 12,339 1.25%
Interest bearing deposits 700,000 4,915 2.82 600,000 4,812 3.25
Investment Securities (1) (2)
U.S. Treasury 3,251,810 24,657 3.00 - -
U.S. Agency 9,092,708 82,073 3.57 12,645,398 129,469 4.10
Mortgage-backed securities 3,344,649 33,329 3.94 3,092,910 26,917 3.48
Tax exempt securities 3,100,548 39,630 5.06 2,141,012 25,814 4.82
Other 840,428 10,093 4.75 373,763 5,565 5.96
----------- ----------- ---- ----------- ----------- ----
Total investment securities 19,630,143 189,782 3.82 18,253,083 187,765 4.17
----------- ----------- ---- ----------- ----------- ----
Loans: (3)
Commercial 8,058,165 141,968 7.07 6,088,266 130,707 8.71
Mortgage 34,169,234 487,048 5.72 21,409,891 347,956 6.59
Installment 19,551,128 275,222 5.65 17,712,480 287,284 6.58
----------- ----------- ---- ----------- ----------- ----
Total gross loans 61,778,527 904,238 5.87 45,210,637 765,947 6.87
Allowance for loan losses 575,463 412,816
----------- ----------- ---- ----------- ----------- ----
Total loans, net of allowance 61,203,064 904,238 5.93 44,797,821 765,947 6.93
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets 84,386,807 1,105,873 5.23 67,655,817 970,863 5.82
----------- ----------- ---- ----------- ----------- ----
Noninterest-bearing cash 2,438,126 1,851,183
Premises and equipment 2,268,651 1,961,261
Other assets 983,134 936,100
----------- ----------- ---- ----------- ----------- ----
Total Assets $90,076,718 $ 1,105,873 4.92% $72,404,361 $ 970,863 5.44%
----------- ----------- ---- ----------- ----------- ----
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits
Savings and Now deposits $10,790,962 $ 13,214 0.49% 12,205,457 $ 18,153 0.60%
Money market and super NOW 14,058,348 16,465 0.47 10,488,631 16,647 0.64
Other time deposits 27,360,391 197,390 2.89 26,573,388 258,314 3.94
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing deposits 52,209,701 227,069 1.74 49,267,476 293,114 2.41
Borrowed funds 5,393,407 53,333 3.97 4,150,000 48,534 4.74
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities 57,603,108 280,402 1.95 53,417,476 341,648 2.59
Non interest-bearing deposits 19,019,570 13,140,379
----------- ----------- ---- ----------- ----------- ----
76,622,678 280,402 1.47 66,557,855 341,648 2.08
Other liabilities 403,491 285,681
Stockholders' equity 13,050,549 5,560,825
----------- -----------
Total liabilities and
stockholders' equity $90,076,718 $72,404,361
=========== ===========
NET INTEREST SPREAD 3.28% 3.23
----------- -----------
NET INTEREST INCOME $ 825,471 3.91% $ 629,215 3.77%
=========== ==== =========== ====
(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) We had no non-accruing loans for the periods presented.
11
The following table describes the impact on our interest income and expense
resulting from changes in average balances and average rates for the periods
indicated. The change in interest income due to both volume and rate is
allocated between the rate and volume amounts based on the magnitude of each
amount.
RATE/VOLUME VARIANCE ANALYSIS
Three months ended March 31,
2004 compared to 2003
Variance due to:
Total Rate Volume
---------- ---------- ----------
EARNING ASSETS:
Federal Funds Sold $ (5,401) (2,317) $ (3,084)
Interest bearing deposits 103 (397) 500
Investment Securities
U.S. Treasury 24,657 - 24,657
U.S. Agency (47,396) (14,936) (32,460)
Mortgage backed 6,412 3,968 2,444
Tax exempt securities 13,816 1,381 12,435
Other 4,528 (879) 5,407
Loans: -
Commercial 11,261 (15,675) 26,936
Mortgage 139,092 (39,580) 178,672
Installment (12,062) (45,423) 33,361
---------- ---------- ----------
Total interest revenue 135,010 (113,858) 248,868
---------- ---------- ----------
INTEREST-BEARING LIABILITIES
Savings and NOW deposits (4,939) (3,026) (1,913)
Money market and supernow (182) 647 (829)
Other time deposits (60,924) (68,541) 7,617
Other borrowed funds 4,799 (5,683) 10,482
---------- ---------- ----------
Total interest expense (61,246) (76,603) 15,357
---------- ---------- ----------
NET INTEREST INCOME $ 196,256 $ (37,255) $ 233,511
========== ========== ==========
Interest revenue is presented on a fully taxable equivalent (FTE)
basis. The FTE basis adjusts for the tax favored status of these
types of securities. Management believes providing this information
on a FTE basis provides investors with a more accurate picture of
our net interest spread and net interest income and we believe it to
be the preferred industry measurement of these calculations. See
"Reconciliation of Non-GAAP Measures."
PROVISION FOR LOAN LOSSES
Originating loans involves a degree of risk that credit losses will occur
in varying amounts according to, among other factors, the type of loans being
made, the credit-worthiness of the borrowers over the term of the loans, the
quality of the collateral for the loan, if any, as well as general economic
12
conditions. We charge the provision for loan losses to earnings to maintain the
total allowance for loan losses at a level considered by management to represent
its best estimate of the losses known and inherent in the portfolio that are
both probable and reasonable to estimate, based on, among other factors, prior
loss experience, volume and type of lending conducted, estimated value of any
underlying collateral, economic conditions (particularly as such conditions
relate to Old Line Bank's market area), regulatory guidance, peer statistics,
management's judgment, past due loans in the loan portfolio, loan charge-off
experience and concentrations of risk (if any). We charge losses on loans
against the allowance when we believe that collection of loan principal is
unlikely. Recoveries on loans previously charged off are added back to the
allowance.
The provision for loan losses was $45,000 for the three months ended March
31, 2004, as compared to $36,000 for the three months ended March 31, 2003, an
increase of $9,000 or 25.00%. The increase was primarily the result of growth in
loan balances outstanding in all segments of the portfolio as well as a change
in the composition of the portfolio.
Historically, we have experienced loan losses in the consumer loan
portfolio, specifically indirect automobile loans. We have exited that business
and have reduced that element of the portfolio by $3.5 million during the past
three years to an outstanding balance of $47,956 at March 31, 2004 as compared
to a balance of $204,036 at March 31, 2003.
As we have decreased indirect automobile loans, we have simultaneously
increased our mortgage loans, specifically commercial real estate loans, both as
a percentage of loans in the loan portfolio and in total dollar value. From
March 31, 2003 to March 31, 2004, the dollar value of our commercial real estate
loans increased from $18.9 million to $30.6 million, and the percentage of
commercial real estate loans to total loans increased from 39.39% to 47.87%.
Because commercial real estate loans generally have higher loan balances
and greater credit risk than indirect automobile loans, the loss estimates for
these types of loans are generally greater than the loss estimates for indirect
automobile loans. As a result, the reduction in the indirect automobile loan
portfolio was more than offset by increased provisions allocated to the mortgage
loan portfolio as a result of the increase in commercial real estate loans. We
expect that this trend will continue.
The adequacy of the allowance for loan losses is reviewed at least
quarterly. Our review includes evaluation of impaired loans as required by SFAS
No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure. Also incorporated in determining the adequacy of the allowance is
guidance contained in the Securities and Exchange Commissions SAB No. 102, Loan
Loss Allowance Methodology and Documentation; and the Federal Financial
Institutions Examination Council's Policy Statement on Allowance for Loan and
Lease Losses Methodologies and Documentation for Banks and Savings Institutions.
We base the evaluation of the adequacy of the allowance for loan losses
upon loan categories. We categorize loans as installment and other consumer
loans (other than boat loans), boat loans, mortgage loans (commercial real
estate, residential real estate and real estate construction) and commercial
loans. We apply loss ratios to each category of 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.
13
We determine loss ratios for installment and other consumer loans (other
than boat loans), boat loans and mortgage loans (commercial real estate,
residential real estate and real estate construction) based upon a review of
prior 18 months delinquency trends for the category, the three year loss ratio
for the category, peer group loss ratios and industry standards.
With respect to commercial loans, management assigns a risk rating of one
through eight to each loan at inception, with a risk rating of one having the
least amount of risk and a risk rating of eight having the greatest amount of
risk. For commercial loans of less than $250,000, we may review the risk rating
annually based on, among other things, the borrower's financial condition, cash
flow and ongoing financial viability; the collateral securing the loan; the
borrower's industry and payment history. We review the risk rating for all
commercial loans in excess of $250,000 at least annually. We evaluate loans with
a risk rating of five or greater separately and assign loss amounts based upon
the evaluation. For loans with risk ratings between one and four, we determine
loss ratios based upon a review of prior 18 months delinquency trends, the three
year loss ratio, peer group loss ratios and industry standards.
We also identify and make any necessary allocation adjustments for any
specific concentrations of credit in a loan category that in management's
estimation increase the risk inherent in the category. If necessary, we will
also make an adjustment within one or more loan categories for economic
considerations in our market area that may impact the quality of the loans in
the category. For all periods presented, there were no specific adjustments made
for concentrations of credit or economic considerations. We will not create a
separate valuation allowance unless a loan is considered impaired under SFAS No.
114 and SFAS No. 118. For all periods presented, there were no impaired loans.
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 0.93% of gross loans at March 31,
2004 and 0.89% of gross loans at March 31, 2003. Old Line Bank has no exposure
to foreign countries or foreign borrowers. Management believes that the
allowance for loan losses is adequate for each period presented.
14
The following table represents an analysis of the allowance for loan
losses for the periods indicated:
ALLOWANCE FOR LOAN LOSSES
Three Months Ended Year Ended
March 31, December 31,
------------------------- ------------
2004 2003 2003
Balance, beginning of period $ 547,690 $ 389,553 $ 389,553
Provision for loan losses 45,000 36,000 162,000
---------- ---------- ------------
Chargeoffs:
Commercial - - -
Mortgage - - -
Consumer (5,556) (746) (16,554)
---------- ---------- ------------
Total chargeoffs (5,556) (746) (16,554)
Recoveries:
Commercial - - -
Mortgage - - -
Consumer 2,591 1,600 12,691
---------- ---------- ------------
Total recoveries 2,591 1,600 12,691
---------- ---------- ------------
Net chargeoffs (2,965) 854 (3,863)
Balance, end of period $ 589,725 $ 426,407 $ 547,690
========== ========== ============
Allowance for loan losses to gross loans 0.93% 0.89% 0.91%
Ratio of net-chargeoffs during period to
average loans outstanding during period (0.005%) 0.002% (0.007%)
15
The following table provides a breakdown of the allowance for loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
MARCH 31, DECEMBER 31,
2004 2003 2003
----------------------- ----------------------- -----------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
---------- ----------- ---------- ----------- ---------- -----------
Installment &
others $ 8,695 1.09% $ 18,011 2.50% 9,840 1.29%
Boat 140,919 29.25 127,406 35.36 141,826 31.04
Mortgage 304,161 55.77 199,299 48.84 278,329 53.89
Commercial 135,950 13.89 81,691 13.30 117,695 13.78
---------- ------ ---------- ------ ---------- ------
TOTAL $ 589,725 100.00% $ 426,407 100.00% $ 547,690 100.00
========== ====== ========== ====== ========== ======
NON-INTEREST REVENUE
Three months ended March 31, 2004 compared to three months ended March 31,
2003
Non-interest revenue for the three months ended March 31, 2004 included
primarily construction loan fees, fee income from service charges on deposit
accounts, mortgage origination fees from a third party processor, credit card
fees and ATM fees. Non-interest revenue totaled $158,227 for the three months
ended March 30, 2004, an increase of $12,009 or 8.21% over the 2003 amount of
$146,218. The increase was primarily the result of an $18,977 increase in
construction loan fees (part of "other fees and commissions" on the income
statement) that occurred as a result of establishment of new relationships with
local builders and the continued low interest rate environment which caused an
increase in construction of single family residences. There was also a $38,071
increase in other loan fees resulting from increased commitment fees. These
increases were offset by a $41,101 decline in gain on disposal of assets. We
anticipate we will continue to improve fee income during the year as a result of
the addition of new customer relationships with local builders unless there is a
significant rise in interest rates that may cause a reduction in the
construction of single family residences.
NON-INTEREST EXPENSE
Three months ended March 31, 2004 compared to three months ended March 31,
2003
Non-interest expense for the three months ended March 31, 2004 was
$645,110 versus $543,905 for the same period in 2003. The $101,205 or 18.61%
increase was attributable to increased data processing costs incurred with the
increased volume of customers and new services we began offering, expenses
associated with SEC and public filings and Nasdaq fees incurred by the holding
company. Salary and benefit expenses were $60,108 higher due to the hiring of a
new lending officer in March 2003, a new credit officer in March 2004, annual
payroll increases and a change in our method of accruing for annual bonus
payments. Although these payments remain discretionary, in September 2003, we
began accruing for this annual expense on a twelve month basis. Historically, we
had accrued for these bonuses during the last quarter of the year. During the
three month period ended March 31, 2004, we incurred approximately $10,000 in
expenses associated with filing fees and Nasdaq listing fees for the
16
holding company (included in other operating expenses). Old Line Bancshares,
Inc. did not exist in the quarter ended March 31, 2003 and therefore, did not
incur similar expenses during 2003.
INCOME TAXES
Three months ended March 31, 2004 compared to three months ended March 31,
2003
Income tax expense was $93,607 (34.17%) of pre-tax income for the three
months ended March 31, 2004 as compared to $60,550 (32.36% of pre-tax net
income) for the same period in 2003.
NET INCOME
Three months ended March 31, 2004 compared to three months ended March 31,
2003
Net income was $180,346 or $0.10 basic and diluted earnings per common
share for the three month period ending March 31, 2004, an increase of $53,805
or 42.52% compared to net income of $126,541 for the same period in 2003. The
increase in net income was the result of a $176,058 (30,11%) increase in net
interest income after provision for loan losses and a $12,009 (8.21%) increase
in non interest revenue that was offset by a $101,205 (18.61%) increase in non
interest expense and a $33,057 increase in income tax expense for the period as
compared to the same period in 2003.
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
Old Line Bank's portfolio consists primarily of U.S. government agency
securities, securities issued by states, counties and municipalities,
mortgage-backed securities, and certain equity securities, including Federal
Reserve Bank Stock and Federal Home Loan Bank Stock. The portfolio provides a
source of liquidity, collateral for repurchase agreements as well as a means of
diversifying Old Line Bank's earning asset portfolio. While we generally intend
to hold the investment portfolio assets until maturity, we classify the majority
(90.79%) of the portfolio as available for sale. We account for securities so
classified at fair value and report the unrealized appreciation and depreciation
as a separate component of stockholders' equity, net of income tax effects. We
account for securities classified in the held to maturity category at amortized
cost. Old Line Bank invests in securities for the yield they produce and not to
profit from trading the securities. There are no trading securities in the
portfolio.
The investment portfolio at March 31, 2004 amounted to $18.5 million, a
decrease of $674,776, or 3.52%, from the amount at December 31, 2003. The
decrease in the investment portfolio occurred because these assets matured or
were called and we deployed the proceeds into loans and federal funds for future
loan fundings. The carrying value of available for sale securities includes
unrealized appreciation of $146,116 at March 31, 2004 (reflected as unrealized
appreciation of $96,387 in stockholders' equity after deferred taxes) as
compared to net unrealized depreciation of $109,732 ($69,914 net of taxes) as of
December 31, 2003. In general, this decline was the result of recognizing gains
on the sale of investment securities, the reclassification of the held to
maturity securities to available for sale as a result of the sale during the
second quarter of 2003 of $1.0 million in investments that were previously
classified as held-to-maturity (as required by SFASB Statement No. 115), the
maturity of securities or the fact that some of the securities were called.
17
LOAN PORTFOLIO
The loan portfolio, net of allowance, unearned fees and origination costs
increased $4.0 million or 6.72% to $63.5 million at March 31, 2004 from $59.5
million at December 31, 2003. This growth was attributable to increased business
development efforts as well as our ability to retain a higher dollar amount of
loans. Commercial business loans increased by $615,882 (7.46%), commercial real
estate loans (generally owner-occupied) increased by $3.7 million (13.81%),
residential real estate loans (generally home equity and fixed rate home
improvement loans) increased by $270,130 (7.42%), real estate construction loans
decreased by $632,992 (35.93%) and installment loans increased by $21,146 (.11%)
from their respective balances at December 31, 2003.
Loans secured by real estate or luxury boats comprise the majority of the
loan portfolio. Old Line Bank's loan customers are generally located in the
greater Washington, D.C. metropolitan area.
As anticipated, the increase in our legal lending limit from $910,000 to
$1,888,000 that occurred as a result of the capital offering in June 2003 and
earnings have allowed us to retain a higher percentage of loans that we
previously participated to other financial institutions. Considering our current
backlog of approved loans, we anticipate that loan growth will continue during
the second quarter.
The following table summarizes the composition of the loan portfolio by
dollar amount and percentages:
LOAN PORTFOLIO
(Dollars in thousands)
March 31 December 31,
2004 % 2003 %
Real Estate
Commercial $ 30,567 47.87 $ 26,859 44.87
Construction 1,128 1.77 1,762 2.94
Residential 3,912 6.13 3,641 6.08
Commercial 8,867 13.89 8,251 13.78
Installment 19,376 30.34 19,355 32.33
----------- ------ ------------ ------
63,850 100.00 59,868 100.00
----------- ====== ------------ ======
Allowance for loan losses 590 547
Net deferred loan fees and (costs) (215) (197)
----------- ------------
375 350
----------- ------------
$ 63,475 $ 59,518
=========== ============
ASSET QUALITY
Management performs reviews of all delinquent loans and relationship
officers are charged with working with customers to resolve potential credit
issues in a timely manner. Management generally classifies loans as non-accrual
when collection of full principal and interest under the original terms of the
loan is not expected or payment of principal or interest has become 90 days past
due. Classifying a loan as non-accrual results in Old Line Bank no longer
accruing interest on such loan and reversing any interest previously accrued but
not collected. We will generally restore a non-accrual loan to accrual status
when delinquent principal and interest payments are brought current and we
expect to collect future monthly principal and interest payments. Old Line Bank
recognizes interest on non-accrual loans only when
18
received. As of March 31, 2004 and December 31, 2003, Old Line Bank did not have
any non-accrual loans. As of March 31, 2004 and December 31, 2003, the balance
on accruing loans that were past due more than 90 days was $0.
We classify any property acquired as a result of foreclosure on a
mortgage loan as "real estate owned" and record it at the lower of the unpaid
principal balance or fair value at the date of acquisition and subsequently
carry the loan at the lower of cost or net realizable value. We charge any
required write-down of the loan to its net realizable value against the
allowance for credit losses at the time of foreclosure. We charge to expense any
subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank
generally requires an appraisal of the property and, thereafter, appraisals of
the property on at least an annual basis and external inspections on at least a
quarterly basis. As of March 31, 2004 and December 31, 2003, Old Line Bank held
no real estate acquired as a result of foreclosure.
Old Line Bank applies the provisions of Statement of Financial
Accounting Standards No. 114 ("SFAS No. 114"), "Accounting by Creditors for
Impairment of a Loan," as amended by Statement of Financial Accounting Standards
No. 118 ("SFAS No. 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure." SFAS No. 114 and SFAS No. 118 require
that impaired loans, which consist of all modified loans and other loans for
which collection of all contractual principal and interest is not probable, be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
an impairment is recognized through a valuation allowance and corresponding
provision for credit losses. Old Line Bank considers consumer loans as
homogenous loans and thus does not apply the SFAS No. 114 impairment test to
these loans. We write off impaired loans when collection of the loan is
doubtful.
We had no impaired or restructured loans as of March 31, 2004 or
December 31, 2003.
DEPOSITS
We seek deposits within our market area by paying competitive interest
rates, offering high quality customer service and using technology to deliver
deposit services effectively. At March 31, 2004, the deposit portfolio had grown
to $78.4 million, a $9.1 million or 13.13% increase over the December 31, 2003
level of $69.3 million. We have seen growth in several key categories over the
period. Demand deposits, NOW, money market and certificates of deposit have all
grown while savings have remained stable. Our deposit base expanded due to
increased commercial relationships and additional personnel. Although deposit
growth remained strong during the period, balances in real estate settlement
accounts remained flat as the pace of re-financings continued to slow with the
increase in interest rates.
As a general practice, we do not purchase brokered deposits. During the
periods reported, we had no brokered deposits. As market conditions warrant and
balance sheet needs dictate, we may participate in the wholesale certificates of
deposit market.
BORROWINGS
Old Line Bank has available lines of credit, including overnight
federal funds and repurchase agreements from its correspondent banks totaling
$8.5 million as of March 31, 2004. Old Line Bank has an additional secured line
of credit from the Federal Home Loan Bank of $14.7 million at March 31, 2004 of
which we have borrowed $6 million as outlined below. At March 31, 2004, Old Line
Bank had $0 outstanding in overnight federal funds. As of March 31, 2004, Old
Line Bank had borrowed $6.0 million from the Federal Home Loan Bank. Old Line
Bank borrowed $4.0 million of the $6.0 million in January
19
2001, currently pays interest only at 4.80%, and must repay the $4.0 million in
January 2011. In February 2004, Old Line Bank borrowed an additional $2 million
from the Federal Home Loan Bank, Old Line Bank pays interest only, currently at
1.79%, and must repay the $2.0 million in February 2009. Old Line Bank may not
prepay the loans prior to maturity without incurring a significant prepayment
penalty.
INTEREST RATE SENSITIVITY ANALYSIS AND INTEREST RATE RISK MANAGEMENT
A principal objective of Old Line Bank's asset/liability management
policy is to minimize exposure to changes in interest rates by an ongoing review
of the maturity and re-pricing of interest-earning assets and interest-bearing
liabilities. The Asset and Liability Committee of the Board of Directors
oversees this review.
The Asset and Liability Committee establishes policies to control
interest rate sensitivity. Interest rate sensitivity is the volatility of a
bank's earnings resulting from movements in market interest rates. Management
monitors rate sensitivity in order to reduce vulnerability to interest rate
fluctuations while maintaining adequate capital levels and acceptable levels of
liquidity. Monthly financial reports supply management with information to
evaluate and manage rate sensitivity and adherence to policy. Old Line Bank's
asset/liability policy's goal is to manage assets and liabilities in a manner
that stabilizes net interest income and net economic value within a broad range
of interest rate environments. Adjustments to the mix of assets and liabilities
are made periodically in an effort to achieve dependable, steady growth in net
interest income regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and
Liability Committee examines the extent to which Old Line Bank's assets and
liabilities are interest rate sensitive and monitors the interest rate
sensitivity gap. An interest rate sensitive asset or liability is one that,
within a defined time period, either matures or experiences an interest rate
change in line with general market rates. The interest rate sensitivity gap is
the difference between interest-earning assets and interest-bearing liabilities
scheduled to mature or re-price within such time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of declining
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. If re-pricing of assets and liabilities were equally flexible
and moved concurrently, the impact of any increase or decrease in interest rates
on net interest income would be minimal.
Old Line Bank currently has a positive gap over the short term, which
suggests that the net yield on interest earning assets may increase during
periods of rising interest rates. However, a simple interest rate "gap" analysis
by itself may not be an accurate indicator of how net interest income will be
affected by changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities may not be
affected uniformly by changes in interest rates. In addition, the magnitude and
duration of changes in interest rates may have a significant impact on net
interest income. Although certain assets and liabilities may have similar
maturities or periods of re-pricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market interest rates,
while interest rates on other types may lag behind changes in general market
rates. In the event of a change in interest rate, prepayment and early
withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest rate increase.
20
LIQUIDITY
Our overall asset/liability strategy takes into account our need to
maintain adequate liquidity to fund asset growth and deposit runoff. Our
management monitors the liquidity position daily in conjunction with Federal
Reserve guidelines. We have credit lines unsecured and secured available from
several correspondent banks totaling $8.5 million. Additionally, we may borrow
funds from the Federal Home Loan Bank of Atlanta. We can use these credit
facilities in conjunction with the normal deposit strategies, which include
pricing changes to increase deposits as necessary. We can also sell or pledge
investment securities to create additional liquidity. From time to time we may
sell or participate out loans to create additional liquidity as required.
Additional sources of liquidity include funds held in time deposits and cash
from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks and
federal funds sold. As of March 31, 2004, we had $3.6 million in cash and due
from banks and $8.0 million in federal funds sold and other overnight
investments compared to $2.5 million in cash and due from banks and $4.0 million
in Federal Funds sold at December 31, 2003.
Old Line Bank has sufficient liquidity to meet its loan commitments as
well as fluctuations in deposits. We usually retain maturing certificates of
deposit as we offer competitive rates on certificates of deposit. Management is
not aware of any demands, trends, commitments, or events that would result in
Old Line Bank's inability to meet anticipated or unexpected liquidity needs.
CAPITAL
Our stockholders' equity amounted to $13.2 million at March 31, 2004
and $12.8 million at December 31, 2003. We are considered "well capitalized"
under the risk-based capital guidelines adopted by the Federal Reserve.
Stockholders' equity increased during the period as a result of net income of
$180,346, the $166,301 unrealized gain on securities, $83,552 in proceeds after
tax adjustment for stock options exercised less the $53,157 dividend paid in
March.
OFF-BALANCE SHEET ARRANGEMENTS
Old Line Bancshares, Inc. is a party to financial instruments with
off-balance sheet risk in the normal course of business. These financial
instruments primarily may include commitments to extend credit, lines of credit
and standby letters of credit. In addition, Old Line Bancshares, Inc. also has
operating lease obligations. Old Line Bancshares, Inc. uses these financial
instruments to meet the financing needs of its customers. These financial
instruments involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. These do not represent unusual risks and management does not
anticipate any losses which would have a material effect on Old Line Bancshares,
Inc.
21
Outstanding loan commitments and lines and letters of credit at March
31, 2004 and December 31, 2003 are as follows:
MARCH 31, December 31,
2004 2003
---------------------------
(DOLLARS IN THOUSANDS)
Commitments to extend credit and available credit lines:
Commercial $ 3,351 $ 1,395
Real estate-undisbursed development and construction 3,807 3,931
Real estate-undisbursed home equity lines of credit 2,987 2,686
---------- ------------
$ 10,145 $ 8,012
========== ============
Standby letters of credit $ 495 $ 317
========== ============
We are not aware of any loss we would incur by funding our commitments
or lines of credit. Commitments for real estate development and construction,
which totaled $3.8 million, or 37.53% of the $10.1 million, are generally
short-term and turn over rapidly, satisfying cash requirements with principal
repayments and from sales of the properties financed.
RECONCILIATION OF NON-GAAP MEASURES
Below is a reconciliation of the FTE adjustments and the GAAP basis
information presented in this report.
THREE MONTHS ENDED MARCH 31, 2004
Federal Funds Investment Interest Total Net Interest Net Interest
Sold Securities Earning Assets Assets Income Spread
GAAP Interest income $ 6,872 $ 170,213 $ 1,086,238 $ 1,086,238 $ 805,836
Tax Equivalent adjustment 66 19,569 19,635 19,635 19,635
--------- ----------- -------------- ------------- ------------
Tax Equivalent interest income $ 6,938 $ 189,782 $ 1,105,873 $ 1,105,873 $ 825,471
========= =========== ============== ============= ============
GAAP Interest yield 0.97% 3.43% 5.15% 4.82% 3.82% 3.20%
Taxable Equivalent adjustment 0.01% 0.39% 0.08% 0.10% 0.09% 0.09%
--------- ----------- -------------- ------------- ------------ ------------
Tax Equivalent interest yield 0.98% 3.82% 5.23% 4.92% 3.91% 3.29%
========= =========== ============== ============= ============ ============
22
THREE MONTHS ENDED MARCH 31, 2003
Federal Funds Investment Interest Total Net Interest Net Interest
Sold Securities Earning Assets Assets Income Spread
------------- ---------- -------------- ----------- ------------ ------------
GAAP Interest income $ 12,339 $ 179,328 $ 962,426 $ 962,426 $ 620,778
Tax Equivalent adjustment - 8,437 8,437 8,437 8,437
------------- ---------- -------------- ----------- ------------
Tax Equivalent interest income $ 12,339 $ 187,765 $ 970,863 $ 970,863 $ 629,215
============= ========== ============== =========== ============
GAAP Interest yield 1.25% 3.98% 5.77% 5.39% 3.72% 3.18%
Taxable Equivalent adjustment 0.00% 0.19% 0.05% 0.05% 0.05% 0.05%
------------- ---------- -------------- ----------- ------------ ------------
Tax Equivalent interest yield 1.25% 4.17% 5.82% 5.44% 3.77% 3.23%
============= ========== ============== =========== ============ ============
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and follow general
practices within the industry in which we operate. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments are necessary when
assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried on the financial statements at fair value
warrants an impairment write-down or valuation reserve to be established, or
when an asset or liability needs to be recorded contingent upon a future event.
Carrying assets and liabilities at fair value inherently results in more
financial statement volatility. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based either
on quoted market prices or are provided by other third-party sources, when
available.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, management has identified the determination of the provision for loan
losses as the accounting area that requires the most subjective or complex
judgments, and as such could be most subject to revision as new information
becomes available.
Management has significant discretion in making the judgments inherent
in the determination of the provision and allowance for loan losses, including
in connection with the valuation of collateral and the financial condition of
the borrower, and in establishing loss ratios and risk ratings. The
establishment of allowance factors is a continuing exercise and allowance
factors may change over time, resulting in an increase or decrease in the amount
of the provision or allowance based upon the same volume and classification of
loans.
Changes in allowance factors or in management's interpretation of those
factors will have a direct impact on the amount of the provision, and a
corresponding effect on income and assets. Also, errors in management's
perception and assessment of the allowance factors could result in the allowance
not being adequate to cover losses in the portfolio, and may result in
additional provisions or charge-offs, which
23
would adversely affect income and capital. For additional information regarding
the allowance for loan losses, see the "Provision for Loan Losses" section of
this financial review.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information contained in Part I of this
Quarterly Report on Form 10-QSB, the discussion in Part I of this Quarterly
Report on Form 10-QSB contains certain forward-looking statements.
Forward-looking statements often use words such as "believe," "expect," "plan,"
"may," "will," "should," "project," "contemplate," "anticipate," "forecast,"
"intend" or other words of similar meaning. You can also identify them by the
fact that they do not relate strictly to historical or current facts.
The statements presented herein with respect to, among other things,
Old Line Bancshares, Inc.'s plans, objectives, expectations and intentions,
including statements regarding profitability, liquidity, allowance for loan
losses, interest rate sensitivity, market risk and financial and other goals are
forward looking. These statements are based on Old Line Bancshares, Inc.'s
beliefs, assumptions and on information available to Old Line Bancshares, Inc.
as of the date of this filing, and involve risks and uncertainties. These risks
and uncertainties include, among others, those discussed in this Quarterly
Report on Form 10-QSB; the dependence on key personnel; the composition of the
loan portfolio; fluctuations in market rates of interest and the effect on loan
and deposit pricing, adverse changes in the overall national economy as well as
adverse economic conditions in Old Line Bancshares, Inc.'s specific market area;
competitive factors within the financial services industry; changes in
regulatory requirements and/or restrictive banking legislation; Old Line
Bancshares, Inc.'s lending limit; sufficiency of the allowance for loan losses;
market value of the investment portfolio and Old Line Bancshares, Inc.'s
expansion strategy. For a more complete discussion of some of these risks and
uncertainties see the discussion under the caption "Factors Affecting Future
Results" in Old Line Bancshares, Inc.'s Registration Statement on Form 10-SB.
Old Line Bancshares, Inc.'s actual results could differ materially from
those discussed herein and you should not put undue reliance on any
forward-looking statements. All forward-looking statements speak only as of the
date of this filing, and Old Line Bancshares, Inc. undertakes no obligation to
make any revisions to the forward-looking statements to reflect events or
circumstances after the date of this filing or to reflect the occurrence of
unanticipated events.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report on Form
10-QSB, Old Line Bancshares, Inc.'s Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of Old Line Bancshares, Inc.'s disclosure
controls and procedures. Based upon that evaluation, Old Line Bancshares, Inc.'s
Chief Executive Officer and Chief Financial Officer concluded that Old Line
Bancshares, Inc.'s disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by Old Line Bancshares, Inc. in
the reports that it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
In addition, there were no changes in Old Line Bancshares, Inc.'s
internal controls over financial reporting (as defined in Rule 13a-15 or Rule
15d-15) under the Securities Act of 1934, as amended) during the quarter ended
March 31, 2004, that have materially affected, or are reasonably likely to
materially affect, Old Line Bancshares, Inc.'s internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
Form 8-K filed, dated February 9, 2004, Items 5, 7 and 12.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Old Line Bancshares, Inc.
Date: May 14, 2004 By: /s/ James W. Cornelsen
--------------------------------------------
James W. Cornelsen, President
(Principal Executive Officer)
Date: May 14, 2004 By: /s/ Christine M. Rush
--------------------------------------------
Christine M. Rush, Chief Financial Officer
(Principal Accounting and Financial Officer)
26