UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003.
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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
At November 4, 2003, 1,756,984.5 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.
CONSOLIDATED BALANCE SHEETS
---------------------------
As of September 30, 2003 and December 31, 2002
September 30, December 31,
2003 2002
(Unaudited)
Assets
Cash and due from banks $ 2,653,053 $1,409,172
Federal funds sold 9,885,239 5,622,983
Time deposits in other banks 700,000 600,000
Securities available for sale 14,099,250 13,387,553
Securities held to maturity - 5,351,588
Loans, less allowance for loan losses 58,387,484 43,058,786
Federal Reserve Bank stock 371,300 161,750
Atlantic Central Bankers Bank stock 12,000 12,000
Federal Home Loan Bank stock 200,000 200,000
Maryland Financial Stock 100,000 -
Bank premises and equipment 2,220,761 1,920,243
Accrued interest receivable 305,477 305,486
Deferred income taxes 67,496 -
Other assets 300,433 215,140
---------------- ---------------
$89,302,493 $72,244,701
================ ===============
Liabilities and Stockholder's Equity
Deposits
Noninterest-bearing $18,023,964 $12,614,536
Interest bearing 54,115,947 49,641,789
---------------- ---------------
Total deposits 72,139,911 62,256,325
Borrowed funds 4,000,000 4,000,000
Accrued interest payable 199,516 250,259
Income tax payable 130,781 -
Deferred income taxes - 34,021
Other liabilities 125,135 17,503
---------------- ---------------
76,595,343 66,558,108
---------------- ---------------
Stockholders' equity
Common stock, par value $.01 per share in 2003 and $10 per share in 2002;
authorized 5,000,000 shares in 2003 and 1,000,000 in 2002;
issued and outstanding 585,631.5 in 2003 and 286,631.5 in 2002 5,856 2,866,315
Surplus 12,374,509 2,600,000
Undivided profits (deficits) 384,715 127,091
---------------- ---------------
12,765,080 5,593,406
Accumulated other comprehensive income (57,930) 93,187
---------------- ---------------
12,707,150 5,686,593
---------------- ---------------
$89,302,493 $72,244,701
================ ===============
See accompanying notes to consolidated financial statements.
1
OLD LINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
For the three and nine month periods ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended, Nine Months Ended,
September 30, September 30,
2003 2002 2003 2002
------------- ------------- -------------- --------------
Interest revenue
Loans, including fees $853,377 $ 741,334 $ 2,380,330 $ 2,092,500
U.S. government agency securities 83,161 120,718 319,007 492,482
Mortgage backed securities 19,463 64,642 76,041 113,795
Tax exempt securities 24,738 7,931 63,660 10,541
Federal funds sold 27,322 34,922 64,017 80,102
Other 10,985 6,368 31,149 17,458
------------- ------------- -------------- --------------
Total interest revenue 1,019,046 975,915 2,934,204 2,806,878
------------- ------------- -------------- --------------
Interest expense
Deposits 262,159 329,638 834,063 992,902
Borrowed funds 49,067 49,067 146,134 145,769
------------- ------------- -------------- --------------
Total interest expense 311,226 378,705 980,197 1,138,671
------------- ------------- -------------- --------------
Net interest income 707,820 597,210 1,954,007 1,668,207
Provision for loan losses 48,000 42,000 126,000 108,000
------------- ------------- -------------- --------------
Net interest income after provision for loan losses 659,820 555,210 1,828,007 1,560,207
------------- ------------- -------------- --------------
Non-interest revenue
Service charges on deposit accounts 62,990 58,054 178,484 163,378
Other fees and commissions 61,620 34,791 202,008 147,626
Gain on disposal of assets - 1,471 88,359 1,471
------------- ------------- -------------- --------------
Total non-interest revenue 124,610 94,316 468,851 312,475
------------- ------------- -------------- --------------
Non-interest expenses
Salaries 323,253 264,426 890,941 734,131
Employee benefits 53,202 43,574 146,791 120,613
Occupancy 53,778 43,905 150,240 127,911
Equipment 30,788 25,289 88,433 74,008
Data processing 27,402 24,891 84,248 72,923
Other operating 190,896 124,365 442,300 358,142
------------- ------------- -------------- --------------
Total non-interest expenses 679,319 526,450 1,802,953 1,487,728
------------- ------------- -------------- --------------
Income before income taxes 105,111 123,076 493,905 384,954
Income taxes 28,884 41,100 156,024 125,600
------------- ------------- -------------- --------------
Net income $ 76,227 $ 81,976 $ 337,881 $ 259,354
============= ============= ============== ==============
Basic earnings per common share 0.04 0.10 0.27 0.30
Diluted earnings per common share 0.04 0.09 0.27 0.30
See accompanying notes to consolidated financial statements.
2
Old Line Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
For the nine-months ended September 30, 2003
(Unaudited)
Accumulated
other
Common stock Undivided comprehensive Comprehensive
Shares Par value Surplus profits income income
-----------------------------------------------------------------------------
Balance, December 31, 2002 286,631.5 $2,866,315 $2,600,000 $127,091 $ 93,187
(Unaudited)
Capital Offering 299,000.0 2,990,000 3,924,050 - -
Net income - - - 337,881 - $337,881
Unrealized gain (loss) on
securities available for
sale net of income taxes - - - - (151,117) (151,117)
--------
Comprehensive income $186,764
========
Exchange of $.01 par value
shares for $10 par value shares (5,850,459) 5,850,459
Cash dividend $.09 per share - - - (80,257) -
--------- ---------- ----------- -------- ----------
September 30, 2003 585,631.5 $ 5,856 $12,374,509 $384,715 $ (57,930)
========= ========== =========== ======== ==========
See accompanying notes to consolidated financial statements
3
OLD LINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the nine-months ended September 30, 2003 and 2002
(Unaudited)
Unaudited
Nine months ended
September 30,
2003 2002
Cash flows from operating activities
Interest received $ 2,929,077 $ 2,827,075
Fees and commissions received 380,492 312,475
Interest paid (1,030,940) (1,124,846)
Cash paid to suppliers and employees (1,668,433) (1,482,419)
Income taxes paid (45,389) (50,071)
----------- -----------
564,807 482,214
----------- -----------
Cash flows from investing activities
Purchase of investment securities
Held to maturity (2,498,750) (1,351,767)
Available for sale (8,743,847) (10,057,525)
Proceeds from disposal of investment securities
Held to maturity 5,000,000 3,700,000
Available for sale at maturity or call 9,463,067 7,187,018
Available for sale sold 1,249,275 -
Loans made, net of principal collected (15,423,545) (5,819,736)
Purchase of equity securities (309,550) (3,550)
Net purchase of certificates of deposit (100,000) (2,400,000)
Purchase of premises and equipment and software (412,698) (70,766)
Proceeds from sale of premises and equipment - 10,500
----------- -----------
(11,776,048) (8,805,826)
----------- -----------
Cash flows from financing activities
Net increase (decrease) in
Time deposits 276,623 2,342,319
Other deposits 9,606,962 8,975,524
Net proceeds from stock offering 6,914,050 -
Dividends paid (80,257) (68,791)
----------- -----------
16,717,378 11,249,052
----------- -----------
Net increase (decrease) in cash and cash equivalents 5,506,137 2,925,440
Cash and cash equivalents at beginning of period 7,032,155 8,341,983
----------- -----------
Cash and cash equivalents at end of period $12,538,292 $11,267,423
=========== ===========
See accompanying notes to consolidated financial statements.
4
OLD LINE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
-----------
For the nine-months ended September 30, 2003 and 2002
(Unaudited)
Unaudited
Nine months ended
September 30,
2003 2002
Reconciliation of net income to net cash
provided by operating activities
Net income $ 337,881 $259,354
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 113,807 86,391
Provision for loan losses 126,000 108,000
Gain on disposal of securities (88,359) -
Gain on sale of equipment - (1,471)
Change in deferred loan fees net of costs (31,153) (39,802)
Amortization of premiums and discounts 26,017
Deferred income taxes (20,146) 33,081
Increase (decrease) in -
Accrued interest payable (50,743) 13,825
Other liabilities 238,413 154,801
Decrease (increase) in
Accrued interest receivable 9 59,999
Other assets (86,919) (191,964)
--------- --------
$ 564,807 $482,214
========= ========
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, 2002 have been 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 Registration Statement on Form 10-SB. There have been no
significant changes to the Company's accounting policies as disclosed in the
Registration Statement on Form 10-SB. The results shown in this interim report
are not necessarily indicative of results to be expected for the full year 2003.
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 securities are purchased, 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 may be sold 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Weighted average number of shares 1,756,894 859,895.5 1,231,180 859.895.5
Dilutive average number of shares 35,264 14,175 27,758 14,175
5. STOCK-BASED COMPENSATION
Old Line Bancshares, Inc. has adopted a stock option plan for directors
and officers and certain employees. Option prices are equal to the fair market
value of the stock on the date of grant. The total number of shares available
for options was 112,500 shares.
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:
September 30, 2003
Weighted
Number of average
Shares exercise price
------ --------------
Outstanding, beginning of year 73,500 $4.72
Options granted - -
Options exercised - -
Options expired - -
------ -----
Outstanding, end of year 73,500 $4.72
====== =====
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.
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.
This discussion and analysis provides an overview of the financial
condition and results of operations of Old Line Bancshares, Inc. and Old Line
Bank as of September 30, 2003 and December 31, 2002, and for the three and
nine-month periods ended September 30, 2003 and 2002. The discussion with
respect to time periods prior to September 15, 2003 relates solely to Old Line
Bank. 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
For the three-month period ending September 30, 2003, net income
amounted to $76,227, compared to net income of $81,976 for the same period in
the prior year. Net income for the nine month period ending September 30, 2003
was $337,881 and $259,354 for the nine month period ending September 30, 2002.
Basic and fully diluted earnings per share were $0.27 in the first nine months
of 2003, compared to $0.30 for the same period in 2002. The 897,000 additional
shares issued during the public offering in June 2003, as restated for the 200%
stock dividend paid October 10, 2003, negatively impacted earnings per share.
Although we grew the loan portfolio 35.60%, during the nine month period ended
September 30, 2003, until such time that we deploy all of the proceeds from the
offering into loans and other income producing assets versus maintaining them in
lower yielding liquid investments, we expect lower earnings per share than for
comparable historical periods. The .25% reduction in the targeted Federal Funds
rate during the three months ended September 30, 2003 negatively impacted
earnings for the three month period ended September 30, 2003 compared to the
three month period ended September 30, 2002. During the period, we completed the
formation of the holding company. The $60,000 in expenses associated with the
formation of the holding company and the costs associated with the payment of a
200% stock dividend negatively impacted earnings and earnings per share. We
anticipate improvement in earnings during the fourth quarter of the year as we
continue to deploy the offering proceeds into increased loan volume.
Return on average equity on an annualized basis during the first nine
months of 2003 decreased to 5.58% compared to a return on average equity of
6.46% for the same period in 2002. Return on average assets on an annualized
basis for the first nine months of 2003 was .57% compared to .56% for the same
period in 2002.
Total assets were $89.3 million on September 30, 2003. This represented
a $17.1 million or 23.61% increase over the December 31, 2002 level of $72.2
million.
At September 30, 2003, total loans, net of allowance, had grown to
$58.4 million, as compared to $43.1 million at December 31, 2002, representing
an increase of 35.60%. The growth in the loan portfolio began to reflect Old
Line Bank's higher lending limit, and, as a result its ability to retain a
higher portion of loans previously participated out to other financial
institutions. It also reflects the hiring of additional relationship officers,
the opening of the Clinton, Maryland branch in September 2002 and increased
business development efforts.
The allowance for loan losses was $524,131 or 0.89% of loans at
September 30, 2003, compared to $389,553 or 0.90% of loans at December 31, 2002.
For all periods presented, our non-performing loans have been immaterial.
Deposits amounted to $72.1 million at September 30, 2003, which
represents a $9.8 million or 15.88% increase from $62.3 million of total
deposits at December 31, 2002. Deposits grew as a result of increased marketing
efforts and the opening of the Clinton, Maryland branch in September 2002.
Total stockholders' equity was $12.7 million at September 30, 2003 and
$5.7 million at December 31, 2002. Stockholders' equity increased during the
first nine months of 2003 as a result of the $6.9 million received from the sale
of 299,000 additional shares of common stock in June 2003 and net income of
$337,881, offset by the payment of $80,257 in dividends in February 2003 and a
$151,117 net decrease in the carrying value of our available for sale
securities.
9
Our net interest margin was 3.57% for the first nine months of 2003, as
compared to 3.87% for the first nine months of 2002. The decline in the net
interest margin is a direct result of actions taken by the Board of Governors of
the Federal Reserve System to lower the target federal funds rate from 1.75% on
January 1, 2002, to 1.25% on January 1, 2003, and to 1% on September 30, 2003.
Many of our interest-earning assets, including many of our commercial loans,
real estate loans and home equity loans, are based on the Wall Street Journal
"Prime" rate, which is generally tied to the federal funds rate. In contrast,
our time deposits have fixed interest rates, which have not re-priced as quickly
during the declining interest rate environment. The effect on net interest
margin of declining interest rates was somewhat offset by increases in deposits
and interest earning assets during the period. During the next twelve months,
there are $14.6 million in certificates of deposit or 55.1% of our certificate
of deposit portfolio with an average interest rate of 3.35% that will mature and
will re-price to the then current market interest rate. We believe that we offer
competitive interest rates on certificates of deposit and that we will be able
to retain these deposits. If retained at our current average certificate of
deposit rate of 1.5% our interest expense would decline and our net interest
margin would increase.
We are not aware of any current recommendations by any regulatory
authorities, which, if they were implemented, would have a material effect on
our liquidity, capital resources or results of operations.
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 September 30, 2003 compared to three months ended
--------------------------------------------------------------------
September 30, 2002
- ------------------
Net interest income after provision for loan losses for the three
months ended September 30, 2003 increased 18.84% to $659,820 from $555,210 for
the same period in 2002. The increase was primarily attributable to a 28.66% or
$16.6 million increase in total average interest earning assets to $74.4 million
for the nine months ended September 30, 2003 from $57.8 million for the same
period in 2002.
Interest revenue increased from $975,915 for the three months ended
September 30, 2002 to $1.0 million for the same period in 2003. Interest expense
for all interest bearing liabilities amounted to $311,226 for the three months
ended September 30, 2003 versus $378,705 for the three months ended September
30, 2002. These changes were a result of normal business growth offset by
declines in market interest rates.
Nine months ended September 30, 2003 compared to nine months ended
------------------------------------------------------------------
September 30, 2002
- ------------------
Net interest income after provision for loan losses for the nine months
ended September 30, 2003 increased 17.16% to $1.8 million from $1.6 million for
the same period in 2002. As discussed below, this increase was due to an
increase in average interest earning assets and a decline in the average
interest rate paid on interest bearing liabilities. These increases to net
interest income were offset by decreases in the average rate earned on interest
10
bearing assets and the average interest rate paid on interest bearing
liabilities.
Interest revenue increased from $2.8 million for the nine months ended
September 30, 2002 to $2.9 million for the nine months ended September 30, 2003.
The increase was primarily attributable to a 28.66% increase in average interest
earning assets to $74.4 million for the nine month period ended September 30,
2003 over $57.8 million of total average interest earning assets for the same
period in 2002. This increase was offset by a decline in the average interest
rate earned on these assets of 5.33% for the nine month period ended September
30, 2003 compared to the average interest rate earned of 6.50% for the same
period ended September 30, 2002. This decline was due to declining market
interest rates.
Interest expense for all interest bearing liabilities amounted to
$1.0 million for the nine months ended September 30, 2003, which was $158,474
lower than the $1.1 million for the nine months ended September 30, 2002. This
decrease was a result of the decline in the average interest rate paid on
interest bearing liabilities to 2.37% for the nine month period ended September
30, 2003 compared to the average interest rate paid on interest bearing
liabilities of 3.28% for the nine month period ended September 30, 2002. This
decline in the average rate was offset by an increase in the average interest
bearing liabilities to $55.2 million for the nine month period ended September
30, 2003 compared to $46.4 million for the nine month period ended September 30,
2002.
The following table illustrates average balances of total interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the average distribution of assets, total liabilities, stockholders'
equity and related income, expense and corresponding weighted average yields and
rates. The average balances used in this table and other statistical data were
calculated using average daily balances.
11
Average Balances, Interest, and Yields
Consolidated
For the Nine Months Ended For the Nine Months Ended
September 30, 2003 September 30, 2002
Federal Funds Sold $8,025,942 $ 64,017 1.07 % $ 6,274,791 $ 80,102 1.71 %
Interest Bearing Deposits 605,128 14,645 3.24 109,890 1,586 1.93
Investment Securities
U.S. Agency 11,349,622 319,007 3.76 12,025,696 492,482 5.48
Mortgage Backed 2,748,656 76,041 3.70 2,572,476 113,795 5.91
State and Municipal 2,631,717 95,295 4.84 397,603 15,198 5.11
Other 429,463 16,503 5.14 370,478 15,873 5.73
---------------- ---------------- -------- ---------------- --------------- -------
Total Investment Securities 1,2 17,159,458 506,846 3.95 15,366,253 637,348 5.55
Loans:
Commercial 6,183,865 383,668 8.30 5,827,360 403,699 9.26
Mortgage 25,127,873 1,173,220 6.24 16,641,246 924,869 7.43
Installment 17,774,440 823,442 6.19 13,934,597 763,932 7.33
---------------- ---------------- -------- ---------------- --------------- -------
Total Loans 49,086,178 2,380,330 6.48 36,403,203 2,092,500 7.69
Allowance for Loan Losses (458,573) (313,215)
---------------- ----------------
Total Loans, net of allowance3 48,627,605 2,380,330 6.54 36,089,988 2,092,500 7,75
---------------- ---------------- -------- ---------------- --------------- -------
Total interest-earning assets 74,418,133 2,965,838 5.33 57,840,922 2,811,536 6.50
---------------- ---------------- -------- ---------------- --------------- -------
Noninterest bearing cash 2,069,010 1,779,971
Premises and Equipment 2,099,619 1,725,903
Other Assets 1,103,454 760,269
---------------- ---------------- -------- ---------------- --------------- -------
Total Assets $79,690,216 $2,965,838 4.98 % $62,107,065 $ 2,811,536 6.05 %
================ ================ ======== ================ =============== ========
Liabilities and Stockholders' Equity:
Interest-bearing Deposits
Savings $12,499,427 $ 52,524 0.56 $10,074,733 $ 67,402 0.89
Money market and NOW 12,107,766 52,653 0.58 7,636,606 51,811 0.91
Other time deposits 26,570,051 728,887 3.67 24,700,586 873,689 4.73
---------------- ---------------- -------- ---------------- --------------- --------
Total interest-bearing deposits 51,177,244 834,064 2.18 42,411,925 992,902 3.13
Borrowed Funds 4,049,451 146,134 4.82 4,010,989 145,769 4.86
---------------- ---------------- -------- ---------------- --------------- --------
Total interest-bearing liabilities 55,226,695 980,198 2.37 46,422,914 1,138,671 3.28
Noninterest bearing deposits 15,521,909 10,040,974
---------------- ---------------- -------- ---------------- --------------- --------
70,748,604 980,198 1.85 56,463,888 1,138,671 2.70
Other Liabilities 838,913 275,770
Stockholder's Equity 8,102,699 5,367,407
---------------- ----------------
Total Liabilities and Stockholder's
Equity $ 79,690,216 $62,107,065
================ ================
Net interest spread 2.96 % 3.21 %
---------------- -------- --------------- ---------
Net interest income $1,985,640 3.57 % $ 1,672,865 3.86 %
================ ======== =============== =========
- ---------------------------
1 Interest on tax-exempt securities is reported on a fully taxable equivalent
basis. Interest on tax-exempt securities is presented on a fully taxable
equivalent (FTE) basis utilizing an effective federal and state tax rate of 34%.
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.
12
The following table describes the impact on our interest income and expense
resulting from changes in average balances and average rates for the periods
indicated. The change in interest income due to both volume and rate is reported
with the rate variance.
Rate/Volume Variance Analysis
Nine months ended September 30,
2003 compared to 2002 Variance due to:
(Dollars in Thousands)
Total Rate Volume
----- ---- ------
Interest Earning Assets:
Interest bearing deposits $ 13,059 $ 3,501 $ 9,558
Federal funds sold (16,085) (46,030) 29,945
Investment Securities
U.S. Agency (173,475) (136,426) (37,049)
Mortgage backed (37,754) (48,166) 10,412
State, county, municipals 80,097 (34,066) 114,163
Other 630 (2,750) 3,380
Loans:
Commercial (20,031) (53,043) 33,012
Mortgage 248,351 (382,205) 630,556
Installment 59,510 (221,950) 281,460
------- --------- ----------
Total interest revenue 154,302 (921,135) 1,075,437
------- --------- ----------
Interest Bearing Liabilities:
Savings and NOW deposits (14,878) (36,458) 21,580
Money market and super NOW 842 (39,846) 40,688
Other time deposits (144,802) (233,228) 88,426
Other borrowed funds 365 (1,504) 1,869
------- --------- ----------
Total interest expense (158,473) (311,036) 152,563
------- --------- ----------
Net interest income $ 312,775 ($610,099) $922,874
======= ========= ==========
Interest on tax-exempt securities is presented on a fully taxable
equivalent (FTE) basis utilizing an effective federal and state tax
rate of 34%. 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
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 $126,000 for the nine months ended
September 30, 2003, as compared to $108,000 for the nine months ended September
30, 2002, an increase of $18,000 or 16.67%.
13
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 96.55% or $3.4 million during
the past three years to an outstanding balance of $115,814 at September 30, 2003
as compared to a balance of $389,403 at September 30, 2002. Also, during the
nine-months ended September 30, 2002, substantially all of the charge-offs were
related to indirect automobile loans.
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
September 30, 2002 to September 30, 2003, the dollar value of our commercial
real estate loans increased from $14.7 million to $27.5 million, and the
percentage of commercial real estate loans to total loans increased from 36.98%
to 46.91%.
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.
The evaluation of the adequacy of the allowance for loan losses is
based upon loan categories except for delinquent loans and loans for which
management has knowledge about possible credit problems of the borrower or
knowledge of problems with loan collateral, which are evaluated separately and
assigned loss amounts based upon the evaluation. Loss ratios are applied to each
category of loan other than commercial loans (including letters of credit and
unused commitments), where the loans are further divided by risk rating and loss
ratios are applied by risk rating, to determine estimated loss amounts.
Categories of loans are 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.
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) are determined 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, the risk rating may be
reviewed 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. The risk rating for all
commercial loans in excess of $250,000 is reviewed at least annually. Loans with
a risk
14
rating of five or greater are evaluated separately and assigned loss amounts
based upon the evaluation. For loans with risk ratings between one and four,
loss ratios are determined 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 0.89% of total loans at
September 30, 2003 and 0.90% of total loans at December 31, 2002. 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.
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,
------------ ------------
2003 2002 2002
-------------------------------------------------
Balance, beginning of period $ 389,553 $ 268,806 $ 268,806
Provision for loan losses 126,000 108,000 144,000
-------- -------- --------
Chargeoffs:
Commercial -- -- --
Mortgage -- -- --
Consumer (4,039) (24,343) (35,748)
-------- -------- --------
Total chargeoffs (4,039) (24,343) (35,748)
Recoveries:
Commercial -- -- --
Mortgage -- -- --
Consumer 12,617 9,053 12,495
-------- -------- --------
Total recoveries 12,617 9,053 12,495
-------- -------- --------
Net chargeoffs 8,578 (15,193) (23,253)
Balance, end of period $ 524,131 $ 361,516 $ 389,553
======== ======== ========
Allowance for loan losses to total loans .89% .91% .90%
Ratio of net-chargeoffs during period to
average loans outstanding during period (.018%) .042% .062%
15
The following table provides a breakdown of the allowance for loan losses.
Allocation of Allowance for Loan Losses
September 30, 2003 December 31,
------------------ ------------
2003 2002 2002
---- ---- ----
% of Loans % of Loans % of Loans
in Each in Each in Each
Amount Category Amount Category Amount Category
-------- -------- --------- ---------- -------- ----------
Installment & others $ 12,043 1.63% $ 31,969 3.43% $ 29,512 3.08%
Boat 137,317 30.98 98,603 33.43 114,282 35.43
Mortgage 282,189 56.19 157,738 47.12 172,277 47.27
Commercial 92,581 11.20 73,206 16.02 73,482 14.22
-------- -------- --------- ---------- -------- ----------
Total $524,130 100.00% $361,516 100.00% $389,553 100.00%
======== ======== ========= ========== ======== ==========
Non-interest Revenue
Three months ended September 30, 2003 compared to three months ended
--------------------------------------------------------------------
September 30, 2002
- ------------------
Non-interest revenue for the three months ended September 30, 2003
included primarily construction loan fees, fee income from service charges on
deposit accounts, mortgage origination fees from a third party processor, credit
card fees and ATM fees. Non-interest revenue totaled $124,610 for the three
months ended September 30, 2003, an increase of $30,294 or 32.12% over the 2002
amount of $94,316. The increase was primarily the result of increased mortgage
origination fees (part of "other fees and commissions" on the balance sheet)
caused by the continued low interest rate environment which caused an increase
in re-financings on residential mortgages brokered to a third party processor.
As the re-financing market continues to slow, we anticipate these fees will
decline in the fourth quarter. Increased loan fees in other categories may
offset a portion of this decline.
Nine months ended September 30, 2003 compared to nine months ended
------------------------------------------------------------------
September 30, 2002
- ------------------
Non-interest revenue consisted primarily of gains on securities sales,
fee income from service charges on deposit accounts, mortgage origination fees
from a third party processor, credit card fees and ATM fees. Non-interest
revenues amounted to $468,851 for the nine months ended September 30, 2003, an
increase of $156,376 or 50.04% over the 2002 level of $312,475. In general, the
increase resulted from realized gains on the sale of securities of $88,359
during the first nine months of 2003 compared to $1,471 in 2002. Other fees and
commission increased $54,382 during the first nine months of 2003 as compared to
the same period of 2002. Other fees and commissions increased due to an increase
in new construction loans and an increase in mortgage origination fees. Mortgage
origination fees increased for the same reasons discussed above.
Non-interest Expense
Three months ended September 30, 2003 compared to three months ended
--------------------------------------------------------------------
September 30, 2002
- ------------------
Non-interest expense for the three months ended September 30, 2003 was
$679,319 versus $526,450 for the same period in 2002. The $152,689 or 29.04%
increase was attributable to the opening of the Clinton, Maryland branch in
September 2002, the addition of a new lending officer in January 2003, and
expenses incurred during the period with the establishment of the holding
company. Salary and benefit expenses were $68,455 higher due to the hiring of a
new lending officer in January 2003 and annual payroll increases. We also
incurred salaries for the entire three month period for the Clinton, Maryland
branch staff as compared to a partial staffing expense in the same period in
2002. In the third quarter of 2003, we incurred approximately $60,000 in
expenses associated with the establishment of the holding company and payment of
a 200% stock dividend. We anticipate
16
that we will incur additional expenses in the fourth quarter of 2003 related to
the holding company as well as on our efforts to list or common stock on the
Nasdaq small cap market.
Nine months ended September 30, 2003 compared to nine months ended
------------------------------------------------------------------
September 30, 2002
- ------------------
Non-interest expense in the first nine months of 2003 amounted to $1.8
million compared to the 2002 level of $1.5 million. The 21.19% increase is
directly related to the opening of the Clinton, Maryland branch in September
2002, the addition of a new lending officer in January 2003 and the expenses
associated with the formation of the holding company in September 2003. The
largest component of non-interest expense is salaries and benefits. Salary and
benefits expense for the nine months ended September 30, 2003 was $1.0 million
or $182,988 higher than the September 30, 2002 level of $854,744 due to the
additional staffing required for the Clinton, Maryland branch, the addition of a
new lending officer in January 2003 and annual payroll increases. Occupancy and
furniture and equipment costs totaled $238,673 through September 30, 2003, or
$36,754 over the 2002 level of $201,919. This increase occurred due to the
increased leasing and depreciation expenses for the Clinton, Maryland branch.
Other operating expenses increased $84,158 primarily as a result of
approximately $60,000 in expenses related to the formation of the holding
company and costs associated with payment of the 200% stock dividend. Data
processing increased $11,325 during the period as a result of an increase in the
number of customer accounts.
Income Taxes
Three months ended September 30, 2003 compared to three months ended
--------------------------------------------------------------------
September 30, 2002
- ------------------
Income tax expense was $28,884 (27.48%) of pre-tax income for the three
months ended September 30, 2003 as compared to $41,100 (33.39% of pre-tax net
income) for the same period in 2002.
Nine months ended September 30, 2003 compared to nine months ended
-------------------------------------------------------------------
September 30, 2002
- ------------------
Income tax expense was $156,024 (31.59% of pre-tax income) for the nine
months ended September 30, 2003 as compared to $125,600 (32.63% of pre-tax net
income) for the same period in 2002.
Net Income
Three months ended September 30, 2003 compared to three months ended
--------------------------------------------------------------------
September 30, 2002
- ------------------
Net income was $76,227 or $0.04 basic and diluted earnings per common
share for the three month period ending September 30, 2003, a decrease of $5,749
or 7.01% compared to net income of $81,976 for the same period in 2002. The
decrease in net income was the result of a $104,610 increase in net interest
income after provision for loan losses and a $30,294 increase in non interest
revenue that were offset by a $152,869 increase in non interest expense and a
$12,216 reduction in income tax expense for the period relative to the same
period in 2002.
Nine months ended September 30, 2003 compared to nine months ended
------------------------------------------------------------------
September 30, 2002
- ------------------
Net income was $337,881 or $0.27 basic and diluted earnings per common
share for the nine month period ending September 30, 2003, an increase of
$78,527 or 30.28%, compared to net income of $259,354 for the same period during
2002. The increase in net income was the result of increases in net interest
income of $285,800 and non-interest income of $156,376, offset by increases in
the provision of loan losses of $18,000, income tax expense of $30,424 and
non-interest expense of $315,225.
17
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 all of the
portfolio as available for sale. We account for securities so classified at fair
value and report the unrealized appreciation and depreciation as a separate
component of stockholders' equity, net of income tax effects. We account for
securities classified in the held to maturity category at amortized cost. Old
Line Bank invests in securities for the yield they produce and not to profit
from trading the securities. There are no trading securities in the portfolio.
The investment portfolio at September 30, 2003 amounted to $14.0
million, a decrease of $4.6 million, or 24.76%, from the amount at December 31,
2002. As the result of the sale of $1 million in held to maturity securities in
the second quarter of 2003, all securities held to maturity were reclassified as
available for sale. This caused an increase in securities available for sale to
$14.0 million at September 30, 2003 from $13.4 million at December 31, 2002 and
a decline in held to maturity securities to $0 from $5.4 million. The decrease
in the investment portfolio occurred because we sold some of these assets or
they matured or were called and we deployed the proceeds into loans. The
carrying value of available for sale securities includes unrealized depreciation
of $91,296 at September 30, 2003 (reflected as unrealized depreciation of
$57,930 in stockholders' equity after deferred taxes) as compared to net
unrealized appreciation of $141,192 ($93,187 net of taxes) as of December 31,
2002. In general, this decline was the result of recognizing gains on the sale
of investment securities, the reclassification of the held to maturity
securities, the maturity of securities or the fact that some of the securities
were called.
Loan Portfolio
The loan portfolio, net of allowance, unearned fees and origination
costs increased $15.3 million or 35.60% to $58.3 million at September 30, 2003
from $43.1 million at December 31, 2002. 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 $417,184 (6.78%),
commercial real estate loans (generally owner-occupied) increased by $10.8
million (64.93%), residential real estate loans (generally home equity and fixed
rate home improvement loans) increased by $685,312 (23.76%), real estate
construction loans increased by $999,159 (113.72%) and installment loans
increased by $2.5 million (14.90%) from their respective balances at December
31, 2002.
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.
We anticipate the increase in our legal lending limit from $910,000 to
$1,970,000 that occurred as a result of the capital offering will continue to
allow us to retain a higher percentage of loans that we previously participated
to other financial institutions. In 2002, we participated out approximately $7
million in loans that we originated because they would have exceeded our legal
lending limit. We believe that the ability to retain all or a portion of these
types of loans will continue to contribute to growth in the loan portfolio. We
anticipate that loan growth in the fourth quarter will continue albeit at a
slower rate due to anticipated payoffs of approximately $2 million in commercial
real estate mortgages from scheduled paydowns and where a Borrower has advised
the Bank that he is selling the property.
18
The following table summarizes the composition of the loan portfolio by
dollar amount and percentages:
Loan Portfolio
(Dollars in thousands)
September 30 December 31,
2003 % 2002 %
Real Estate
Commercial $27,539 46.91 $16,698 38.58
Construction 1,877 3.20 879 2.03
Residential 3,570 6.08 2,884 6.66
Commercial 6,573 11.20 6,156 14.22
Installment 19,149 32.61 16,666 38.51
------ ------ ------ -------
58,708 100.00 43,283 100.00
------ ====== ------ =======
Allowance for loan losses 524 390
Net deferred loan fees and (costs) (203) (166)
------ ------
321 224
------ ------
$58,387 $43,059
======= =======
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 received. As of September 30,
2003 and December 31, 2002, Old Line Bank did not have any non-accrual loans. As
of September 30, 2003 and December 31, 2002, the balance on accruing loans that
were past due more than 90 days was $0 and $643, respectively.
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 September 30, 2003 and December 31, 2002, 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
19
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 September 30, 2003 or
December 31, 2002.
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, 2003, the deposit portfolio had
grown to $72.1 million, a $9.8 million or 15.88% increase over the December 31,
2002 level of $62.3 million. We have seen growth in several key categories over
the period. Demand deposits, NOW, savings accounts, money market and
certificates of deposit have all grown. The addition of the Clinton branch in
September 2002 and additional personnel expanded our deposit base. Although
deposit growth remained strong during the period, balances in real estate
settlement accounts declined as the pace of re-financings began to slow with the
recent 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 may obtain advances from the Federal Home Loan Bank of
Atlanta upon the security of the common stock it owns in that bank and certain
of its loans and investment securities, provided that certain standards related
to creditworthiness have been met. These advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Federal Home Loan Bank of Atlanta advances are generally made to
permit increased lending.
At September 30, 2003, Old Line Bank was permitted to borrow up to
$13.39 million from the Federal Home Loan Bank of Atlanta. As of that date, Old
Line Bank had borrowed $4.0 million from the Federal Home Loan Bank of Atlanta.
Old Line Bank borrowed the $4.0 million from the Federal Home Loan Bank in
January 2001, currently pays interest only at 4.80%, and must repay the $4.0
million in January 2011. Old Line Bank may not prepay the loan 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.
20
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 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 net interest income will be
affected by changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities may not be
affected uniformly by changes in interest rates. In addition, the magnitude and
duration of changes in interest rates may have a significant impact on net
interest income. Although certain assets and liabilities may have similar
maturities or periods of re-pricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market interest rates,
while interest rates on other types may lag behind changes in general market
rates. In the event of a change in interest rate, prepayment and early
withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest rate increase.
Liquidity
Our overall asset/liability strategy takes into account our need to
maintain adequate liquidity to fund asset growth and deposit runoff. Our
management monitors the liquidity position daily in conjunction with Federal
Reserve guidelines. We have credit lines unsecured and secured available from
several correspondent banks totaling $4.5 million. Additionally, we may borrow
funds from the Federal Home Loan Bank of Atlanta. The credit facilities can be
used in conjunction with the normal deposit strategies, which include pricing
changes to increase deposits as necessary. We can also sell or pledge investment
securities to create additional liquidity. From time to time we may sell or
participate out loans to create additional liquidity as required. Additional
sources of liquidity include funds held in time deposits and cash from the
investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks and
federal funds sold. As of September 30, 2003, we had $2.7 million in cash and
due from banks and $9.9 million in federal funds sold and other overnight
investments compared to $1.4 million in cash and due from banks and $9 million
in Federal Funds sold at December 31, 2002. The $6.9 million in net offering
proceeds significantly increased our liquidity.
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.
21
Capital
Nine months ended September 30, 2003 (Dollars in thousands) Our
stockholders' equity amounted to $12.7 million at September 30, 2003 and $5.7
million at December 31, 2002. We are considered "well capitalized" under the
risk-based capital guidelines adopted by the Federal Reserve.
Reconciliation of Non-GAAP Measures
Below is a reconciliation of the FTE adjustments and the GAAP basis
information presented in this report.
Investment Interest Total Net Interest Net Interest
Securities Earning Assets Assets Income Spread
GAAP Interest income $ 475 $ 2,934 $ 2,934 $ 1,954
Tax Equivalent Adjustment 31 31 31 31
----- ----- ----- -----
Tax equivalent interest income 506 2,965 2,965 1,985
GAAP Interest yield 3.70% 5.27% 4.92% 3.51% 2.90%
Taxable Equivalent adjustment 0.25% 0.06% 0.05% 0.06% 0.06%
Tax equivalent interest yield 3.95% 5.33% 4.98% 3.57% 2.96%
Nine months ended September 30, 2002
(Dollars in thousands)
Investment Interest Total Net Interest Net Interest
Securities Earning Assets Assets Income Spread
GAAP Interest income 632 2,806 2,806 1,667
Tax Equivalent Adjustment 5 5 5 5
----- ----- ----- -----
Tax equivalent interest income 637 2,811 2,811 1,672
GAAP Interest yield 5.51% 6.49% 6.04% 3.85% 3.21%
Taxable Equivalent adjustment 0.04% 0.01% 0.01% 0.01% 0.00%
Tax equivalent interest yield 5.55% 6.50% 6.05% 3.86% 3.21%
22
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.
The most significant accounting policies followed by Old Line
Bancshares, Inc. are presented in Note 1 to the financial statements and Note 1
to the audited financial statements included as part of our Registration
Statement on Form 10-SB. These policies, along with the disclosures presented in
the other financial statement notes and in this financial review, provide
information on how significant assets and liabilities are valued in the
financial statements and how those values are determined. 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.
The provision for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio. Determining the amount of
the provision for loan losses is considered a critical accounting estimate
because it requires significant judgment and the use of estimates related to the
amount and timing of expected future cash flows on impaired loans, estimated
losses on pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents the
largest asset type on the balance sheets. Note 1 to the financial statements and
Note 1 to the audited financial statements included as part of our Registration
Statement on Form 10-SB describe the methodology used to determine the provision
for loan losses and a discussion of the factors driving changes in the amount of
the provision for loan losses is included in the "Provision for Loan Losses"
section of this financial review.
23
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.
24
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 Old Line Bancshares, Inc.'s disclosure
controls and procedures. Based upon that evaluation, Old Line Bancshares, Inc.'s
Chief Executive Officer and Chief Financial Officer concluded that Old Line
Bancshares, Inc.'s disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by Old Line Bancshares, Inc. in
the reports that it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
In addition, there were no changes in Old Line Bancshares, Inc.'s
internal controls over financial reporting (as defined in Rule 13a-15 or Rule
15d-15) under the Securities Act of 1934, as amended) during the quarter ended
September 30, 2003, that have materially affected, or are reasonably likely to
materially affect, Old Line Bancshares, Inc.'s internal control over financial
reporting.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable
(c) Recent Sales of Unregistered Securities
Effective September 15, 2003, Old Line Bancshares, Inc. issued
585,631.5 shares of its common stock to the former holders of the common stock
of Old Line Bank, and such holders became the stockholders of Old Line
Bancshares, Inc. Also, effective September 15, 2003, Old Line Bancshares, Inc.
acquired the 585,631.5 shares of the outstanding common stock of Old Line Bank
formerly held by the now stockholders of Old Line Bancshares, Inc. As a result
of this transaction, Old Line Bank became a wholly owned subsidiary of Old Line
Bancshares, Inc. Old Line Bancshares, Inc. did not receive any consideration in
connection with the reorganization. Shares issued by Old Line Bancshares, Inc.
in the reorganization were issued in reliance upon the exemption from
registration found in Section 3(a)(12) of the Securities Act of 1933, as
amended. In September 2003, the Board of Directors declared a 200% stock
dividend to all shareholders of record of Old Line Banchsares, Inc. with a
payable date of October 10, 2003.
(d) Not applicable.
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.
None.
26
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Old Line Bancshares, Inc.
Date: November 6, 2003 By: /s/ James W. Cornelsen
-------------------------------------------
James W. Cornelsen, President
(Principal Executive Officer)
Date: November 6, 2003 By: /s/ Christine M. Rush
-------------------------------------------
Christine M. Rush, Chief Financial Officer
(Principal Accounting and Financial Officer)
27