e10qsb
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, 2006.
Commission file number: 000-50345
Old Line Bancshares, Inc.
(Exact name of small business issuer as specified in its charter)
|
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|
Maryland
|
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20-0154352 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
1525 Pointer Ridge Place, Bowie, Maryland 20716
Address of principal executive offices
(301) 430-2500
Issuers 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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practicable date:
At October 30, 2006, 4,250,098.5 shares of the issuers Common Stock, par value $.01 per
share, were issued and outstanding.
Transitional Small Business Disclosure Format (Check One): Yes o No þ
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Old Line Bancshares, Inc. & Subsidiary
Consolidated Balance Sheets
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September 30, |
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December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets
|
Cash and due from banks |
|
$ |
3,490,988 |
|
|
$ |
4,387,676 |
|
Federal funds sold |
|
|
11,585,646 |
|
|
|
35,573,704 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
15,076,634 |
|
|
|
39,961,380 |
|
Investment securities available for sale |
|
|
14,609,694 |
|
|
|
13,926,111 |
|
Investment securities held to maturity |
|
|
2,802,591 |
|
|
|
2,203,445 |
|
Loans, less allowance for loan losses |
|
|
137,055,283 |
|
|
|
104,249,383 |
|
Restricted equity securities at cost |
|
|
1,575,550 |
|
|
|
1,102,750 |
|
Investment in real estate, LLC |
|
|
914,964 |
|
|
|
837,436 |
|
Bank premises and equipment |
|
|
3,579,244 |
|
|
|
2,436,652 |
|
Accrued interest receivable |
|
|
739,585 |
|
|
|
504,299 |
|
Deferred income taxes |
|
|
185,933 |
|
|
|
200,663 |
|
Bank owned life insurance |
|
|
3,424,702 |
|
|
|
3,324,660 |
|
Other assets |
|
|
276,379 |
|
|
|
281,045 |
|
|
|
|
|
|
|
|
|
|
$ |
180,240,559 |
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|
$ |
169,027,824 |
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Liabilities and Stockholders Equity
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Deposits |
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|
|
|
|
|
|
Non-interest-bearing |
|
$ |
31,704,955 |
|
|
$ |
30,417,858 |
|
Interest bearing |
|
|
98,719,915 |
|
|
|
89,253,741 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
130,424,870 |
|
|
|
119,671,599 |
|
Short-term borrowings |
|
|
9,191,629 |
|
|
|
9,292,506 |
|
Long-term borrowings |
|
|
5,000,000 |
|
|
|
6,000,000 |
|
Accrued interest payable |
|
|
427,994 |
|
|
|
336,868 |
|
Income tax payable |
|
|
206,168 |
|
|
|
86,151 |
|
Other liabilities |
|
|
466,927 |
|
|
|
124,873 |
|
|
|
|
|
|
|
|
|
|
|
145,717,588 |
|
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|
135,511,997 |
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|
|
|
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|
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|
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|
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Stockholders equity |
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|
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|
Common stock, par value $0.01 per share,
authorized 15,000,000 shares in
2006 and 5,000,000 shares in 2005;
issued and outstanding 4,250,098.5
in 2006 and 4,248,898.5 in 2005 |
|
|
42,501 |
|
|
|
42,489 |
|
Additional paid-in capital |
|
|
31,828,570 |
|
|
|
31,735,627 |
|
Retained earnings |
|
|
2,837,891 |
|
|
|
1,992,301 |
|
|
|
|
|
|
|
|
|
|
|
34,708,962 |
|
|
|
33,770,417 |
|
Accumulated other comprehensive income |
|
|
(185,991 |
) |
|
|
(254,590 |
) |
|
|
|
|
|
|
|
|
|
|
34,522,971 |
|
|
|
33,515,827 |
|
|
|
|
|
|
|
|
|
|
$ |
180,240,559 |
|
|
$ |
169,027,824 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
1
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Income
(Unaudited)
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|
|
|
|
|
|
|
|
|
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|
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Three Months Ended |
|
|
Nine Months Ended |
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|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Interest revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
2,467,945 |
|
|
$ |
1,520,876 |
|
|
$ |
6,418,661 |
|
|
$ |
4,109,013 |
|
U.S. Treasury securities |
|
|
31,899 |
|
|
|
31,899 |
|
|
|
95,239 |
|
|
|
95,238 |
|
U.S. government agency securities |
|
|
65,658 |
|
|
|
58,586 |
|
|
|
183,035 |
|
|
|
177,949 |
|
Mortgage backed securities |
|
|
15,936 |
|
|
|
20,071 |
|
|
|
50,005 |
|
|
|
66,040 |
|
Tax exempt securities |
|
|
27,509 |
|
|
|
28,099 |
|
|
|
83,601 |
|
|
|
85,767 |
|
Federal funds sold |
|
|
190,922 |
|
|
|
128,607 |
|
|
|
952,888 |
|
|
|
309,596 |
|
Other |
|
|
20,556 |
|
|
|
10,365 |
|
|
|
59,303 |
|
|
|
35,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest revenue |
|
|
2,820,425 |
|
|
|
1,798,503 |
|
|
|
7,842,732 |
|
|
|
4,878,795 |
|
|
|
|
|
|
|
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|
|
|
|
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|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
786,304 |
|
|
|
489,686 |
|
|
|
2,136,419 |
|
|
|
1,228,881 |
|
Borrowed funds |
|
|
145,822 |
|
|
|
90,210 |
|
|
|
374,763 |
|
|
|
232,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
932,126 |
|
|
|
579,896 |
|
|
|
2,511,182 |
|
|
|
1,461,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
1,888,299 |
|
|
|
1,218,607 |
|
|
|
5,331,550 |
|
|
|
3,417,193 |
|
Provision for loan losses |
|
|
26,000 |
|
|
|
40,000 |
|
|
|
296,000 |
|
|
|
165,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
1,862,299 |
|
|
|
1,178,607 |
|
|
|
5,035,550 |
|
|
|
3,252,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Non-interest revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
67,339 |
|
|
|
62,237 |
|
|
|
195,693 |
|
|
|
179,740 |
|
Marine division broker origination fees |
|
|
71,828 |
|
|
|
45,111 |
|
|
|
263,611 |
|
|
|
70,168 |
|
Earnings on bank owned life insurance |
|
|
37,261 |
|
|
|
40,013 |
|
|
|
108,092 |
|
|
|
40,013 |
|
Income from investment in real estate, LLC |
|
|
77,528 |
|
|
|
|
|
|
|
77,774 |
|
|
|
|
|
Other fees and commissions |
|
|
68,100 |
|
|
|
37,527 |
|
|
|
140,838 |
|
|
|
157,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest revenue |
|
|
322,056 |
|
|
|
184,888 |
|
|
|
786,008 |
|
|
|
447,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
713,357 |
|
|
|
524,764 |
|
|
|
1,988,168 |
|
|
|
1,354,774 |
|
Employee benefits |
|
|
202,888 |
|
|
|
89,679 |
|
|
|
548,661 |
|
|
|
237,335 |
|
Occupancy |
|
|
194,081 |
|
|
|
59,563 |
|
|
|
324,808 |
|
|
|
168,544 |
|
Equipment |
|
|
61,232 |
|
|
|
27,993 |
|
|
|
125,842 |
|
|
|
81,236 |
|
Data processing |
|
|
47,824 |
|
|
|
32,299 |
|
|
|
122,532 |
|
|
|
95,382 |
|
Other operating |
|
|
315,172 |
|
|
|
212,059 |
|
|
|
886,485 |
|
|
|
617,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
1,534,554 |
|
|
|
946,357 |
|
|
|
3,996,496 |
|
|
|
2,554,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
649,801 |
|
|
|
417,138 |
|
|
|
1,825,062 |
|
|
|
1,144,920 |
|
Income taxes |
|
|
233,177 |
|
|
|
135,867 |
|
|
|
618,243 |
|
|
|
394,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
416,624 |
|
|
$ |
281,271 |
|
|
$ |
1,206,819 |
|
|
$ |
750,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.10 |
|
|
$ |
0.13 |
|
|
$ |
0.28 |
|
|
$ |
0.35 |
|
Diluted earnings per common share |
|
$ |
0.10 |
|
|
$ |
0.13 |
|
|
$ |
0.28 |
|
|
$ |
0.35 |
|
See accompanying notes to consolidated financial statements.
2
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statement of Changes in Stockholders Equity
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
Common stock |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Par value |
|
|
capital |
|
|
earnings |
|
|
income (loss) |
|
|
income |
|
|
Balance, December 31, 2005 |
|
|
4,248,898.5 |
|
|
$ |
42,489 |
|
|
$ |
31,735,627 |
|
|
$ |
1,992,301 |
|
|
$ |
(254,590 |
) |
|
|
|
|
Capital Offering (2005) |
|
|
|
|
|
|
|
|
|
|
(1,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,206,819 |
|
|
|
|
|
|
$ |
1,206,819 |
|
Unrealized gain on securities available
for sale, net of income taxes of $43,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,599 |
|
|
|
68,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,275,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation awards |
|
|
|
|
|
|
|
|
|
|
82,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend $0.085 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(361,229 |
) |
|
|
|
|
|
|
|
|
Stock options exercised, including tax
benefit of $1,008 |
|
|
1,200 |
|
|
|
12 |
|
|
|
12,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 |
|
|
4,250,098.5 |
|
|
$ |
42,501 |
|
|
$ |
31,828,570 |
|
|
$ |
2,837,891 |
|
|
$ |
(185,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
3
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Interest received |
|
$ |
7,774,627 |
|
|
$ |
4,737,198 |
|
Fees and commissions received |
|
|
608,438 |
|
|
|
409,545 |
|
Interest paid |
|
|
(2,420,056 |
) |
|
|
(1,327,011 |
) |
Cash paid to suppliers and employees |
|
|
(3,413,506 |
) |
|
|
(2,504,079 |
) |
Income taxes paid |
|
|
(525,650 |
) |
|
|
(581,693 |
) |
|
|
|
|
|
|
|
|
|
|
2,023,853 |
|
|
|
733,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of investment securities |
|
|
|
|
|
|
|
|
Held to maturity |
|
|
(599,758 |
) |
|
|
|
|
Available for sale |
|
|
(1,000,000 |
) |
|
|
|
|
Proceeds from disposal of investment securities
|
|
|
|
|
|
|
|
|
Available for sale at maturity or call |
|
|
426,990 |
|
|
|
1,291,914 |
|
Loans made, net of principal collected |
|
|
(33,267,281 |
) |
|
|
(13,224,216 |
) |
Purchase of equity securities |
|
|
(472,800 |
) |
|
|
(22,800 |
) |
Investment in real estate, LLC |
|
|
|
|
|
|
(182,500 |
) |
Investment in bank owned life insurance (BOLI) |
|
|
|
|
|
|
(3,250,000 |
) |
Redemption of certificates of deposit |
|
|
|
|
|
|
300,000 |
|
Purchase of premises, equipment and software |
|
|
(1,296,815 |
) |
|
|
(183,524 |
) |
|
|
|
|
|
|
|
|
|
|
(36,209,664 |
) |
|
|
(15,271,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in |
|
|
|
|
|
|
|
|
Time deposits |
|
|
46,556,920 |
|
|
|
17,437,568 |
|
Other deposits |
|
|
(35,803,649 |
) |
|
|
6,183,431 |
|
Net change in borrowed funds |
|
|
(1,100,877 |
) |
|
|
5,262,766 |
|
Proceeds from stock options exercised |
|
|
11,791 |
|
|
|
131,098 |
|
Proceeds from (costs of) stock offering |
|
|
(1,891 |
) |
|
|
|
|
Dividends paid |
|
|
(361,229 |
) |
|
|
(161,120 |
) |
|
|
|
|
|
|
|
|
|
|
9,301,065 |
|
|
|
28,853,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(24,884,746 |
) |
|
|
14,316,577 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
39,961,380 |
|
|
|
9,320,643 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,076,634 |
|
|
$ |
23,637,220 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Reconciliation of net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,206,819 |
|
|
$ |
750,755 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net
cash provided by operating actitivities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
164,422 |
|
|
|
113,310 |
|
Provision for loan losses |
|
|
296,000 |
|
|
|
165,000 |
|
Change in deferred loan fees net of costs |
|
|
165,381 |
|
|
|
(47,814 |
) |
Amortization of premiums and discounts |
|
|
1,800 |
|
|
|
3,729 |
|
Deferred income taxes |
|
|
(28,432 |
) |
|
|
(30,569 |
) |
Stock based compensation awards |
|
|
82,047 |
|
|
|
|
|
Increase (decrease) in |
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
91,126 |
|
|
|
134,591 |
|
Other liabilities |
|
|
463,079 |
|
|
|
(109,731 |
) |
Decrease (increase) in |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
(235,286 |
) |
|
|
(97,512 |
) |
Bank owned life insurance |
|
|
(100,042 |
) |
|
|
(38,125 |
) |
Other assets |
|
|
(5,533 |
) |
|
|
(109,738 |
) |
(Income) loss from real estate investment, LLC |
|
|
(77,528 |
) |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
$ |
2,023,853 |
|
|
$ |
733,960 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
5
OLD LINE BANCSHARES, INC. & SUBSIDIARY
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. The primary business of Old Line
Bancshares, Inc. is to own all of the capital stock of Old Line Bank.
Old Line Bancshares also has an approximately $915,000 investment in a real estate investment
limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). Old Line
Bancshares owns 50% of Pointer Ridge. In connection with our execution of a guarantee for a
construction loan made to Pointer Ridge by an unrelated bank, in November 2005 we reconsidered our
investment in Pointer Ridge and determined that under FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN46R), Pointer Ridge was a variable interest entity, but that Old
Line Bancshares was not the primary beneficiary. Because we concluded that Old Line Bancshares was
not the primary beneficiary of Pointer Ridge under FIN46R, we did not consolidate Pointer Ridges
results and financial position with that of Old Line Bancshares. Rather, we accounted for our
investment in Pointer Ridge using the equity method.
At the suggestion of our auditors and the direction of our audit committee, in May 2006,
management requested guidance from the Securities and Exchange Commission (SEC) regarding FIN46R
and our investment in Pointer Ridge. After discussions with the SEC, we reconsidered our original
conclusions regarding our investment in Pointer Ridge. We again concluded that Pointer Ridge was a
variable interest entity under FIN46R. We also concluded that our determination in November 2005
that Old Line Bancshares was not the primary beneficiary was incorrect. Therefore, we consolidated
the results and financial position of Pointer Ridge with Old Line Bancshares for the period ended
June 30, 2006. The effect of the consolidation on our financial statements was immaterial and,
accordingly, we did not restate prior periods.
On August 25, 2006, we executed a new Indemnity and Guaranty Agreement (Guaranty Agreement)
with a new lender that was effective upon Pointer Ridges execution of an Amended Promissory Note
and Amended Deed of Trust. As required under FIN46R, we once again reconsidered our investment in
Pointer Ridge. Because the new Guaranty Agreement definitively limits Old Lines guaranty and the
variability caused by previous contracts executed by Pointer Ridge ceases to exist, we have
determined that Pointer Ridge is no longer a variable interest entity. Therefore, at September 30,
2006, we have accounted for our investment in Pointer Ridge using the equity method.
Basis of Presentation
The accompanying consolidated financial statements include the activity of Old Line
Bancshares, Inc., and its wholly owned subsidiary, Old Line Bank. We have eliminated all
significant intercompany transactions and balances in consolidation.
The foregoing consolidated financial statements are unaudited; however, in the opinion of
management, the financial statements include all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the results of the interim period. The balances as
of December 31, 2005 were derived from audited financial statements. These statements should be
read in conjunction with Old Line Bancshares financial statements and accompanying notes included
in Old Line Bancshares, Inc.s Form 10-KSB for the year ended December 31, 2005. There have been no
significant changes to the Companys accounting policies as disclosed in the Form 10-KSB.
The accounting and reporting policies of Old Line Bancshares, Inc. conform to accounting
principles generally accepted in the United States of America.
6
2. INVESTMENT SECURITIES
As Old Line Bancshares, Inc. purchases securities, management determines if the securities
should be classified as held to maturity, available for sale or trading. Securities which
management has the intent and ability to hold to maturity are recorded at amortized cost which is
cost adjusted for amortization of premiums and accretion of discounts to maturity. Securities
which management may sell before maturity are classified as available for sale and carried at fair
value with unrealized gains and losses included in stockholders equity on an after tax basis.
Management has not identified any investment securities as trading.
3. INCOME TAXES
The provision for income taxes includes taxes payable for the current year and deferred income
taxes. Deferred tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
4. EARNINGS PER SHARE
We determine basic earnings per common share by dividing net income by the weighted average
number of shares of common stock outstanding. We calculate diluted earnings per share by including
the average dilutive common stock equivalents outstanding during the period. Dilutive common
equivalent shares consist of stock options, calculated using the treasury stock method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Weighted average number of shares |
|
|
4,250,099 |
|
|
|
2,151,402 |
|
|
|
4,249,496 |
|
|
|
2,143,941 |
|
Dilutive average number of shares |
|
|
25,870 |
|
|
|
28,030 |
|
|
|
23,023 |
|
|
|
28,157 |
|
5. STOCK-BASED COMPENSATION
Old Line Bancshares, Inc. accounts for employee stock options under the fair value method of
accounting using a Black-Scholes valuation model to measure stock-based compensation expense at the
date of grant. In the first quarter of 2006, Old Line Bancshares, Inc. adopted Statement of
Financial Accounting Standards (SFAS) 123R, Share Based Payment, under the modified prospective
method. Statement 123R requires public companies to recognize compensation expense related to
stock-based compensation awards in their income statements over the period during which an employee
is required to provide service in exchange for such award. For the nine months ended September 30,
2006, we recorded stock-based compensation expense of approximately $82,000. For the three months
ended September 30, 2006, we recorded stock-based compensation expense of approximately $23,000.
There were no tax benefits associated with this expense. Under SFAS 123R, a company may only
recognize tax benefits for options that ordinarily will result in a tax deduction when the grant is
exercised (non-qualified options). There were no non-qualified options included in the expense
calculation during the three or nine months ended September 30, 2006.
Prior to the implementation of SFAS 123R, we applied APB No. 25 in accounting for stock
options. Accordingly, we did not recognize compensation expense in periods prior to the first
quarter of 2006 for stock options granted. Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) was issued in October 1995 to establish
accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123
required 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.
7
A summary of the status of the outstanding options follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
exercise price |
|
Outstanding, beginning of year |
|
|
172,620 |
|
|
$ |
8.60 |
|
Options granted |
|
|
|
|
|
|
|
|
Options exercised |
|
|
(1,200 |
) |
|
|
9.83 |
|
Options expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2006 |
|
|
171,420 |
|
|
$ |
8.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable & weighted average price |
|
|
115,047 |
|
|
$ |
7.77 |
|
|
|
|
|
|
|
|
Had we determined compensation expense and recorded it in our income statement in accordance
with the provisions of SFAS No. 123R, it would have reduced our net income and earnings per share
to the following pro forma amounts in September 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
Net income |
|
|
|
|
|
|
|
|
As reported |
|
$ |
281,271 |
|
|
$ |
750,755 |
|
Stock -based employee compensation expense |
|
|
(23,158 |
) |
|
|
(29,725 |
) |
Income tax benefit of employee compensation expense |
|
|
8,944 |
|
|
|
11,480 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
267,057 |
|
|
$ |
732,510 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.13 |
|
|
$ |
0.35 |
|
Pro forma |
|
|
0.12 |
|
|
|
0.34 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.13 |
|
|
$ |
0.35 |
|
Pro forma |
|
|
0.12 |
|
|
|
0.34 |
|
6. RECENT ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (FASB) ratified the consensus
reached by the Emerging Issues Task Force (EITF) on issue No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangement determining whether the postretirement benefit associated with an endorsement
split-dollar life insurance arrangement is effectively settled in accordance with FASB Statement
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions (or Opinion 12,
Omnibus Opinion-1967, if the arrangement does not constitute a plan). The Task Force concluded
that for a split-dollar life insurance arrangement, an employer should recognize a liability for
future benefits in accordance with Statement 106 or Opinion 12 (depending on whether a substantive
plan is deemed to exist) based on the substantive agreement with the employee. We expect the
adoption of EITF Issue No. 06-4, which is effective for fiscal years beginning after December 15,
2006, will not have a material impact on our consolidated results of operations or financial
position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides
enhanced guidance for using fair value to measure assets and liabilities. The standard applies
whenever other standards require or permit assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective
for financials statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. We do not expect the adoption of SFAS 157 will have a material
impact on our consolidated results of operations or financial position.
8
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, and amendment of FASB Statements No. 87, 88, 106 and
132(R). This standard requires that we recognize a net liability or asset to report the funded or
unfunded status of our defined benefit pension and other post retirement benefit plans on our
balance sheet. The effective date of the recognition and disclosure provisions is for fiscal years
beginning after December 15, 2006. We do not expect that SFAS No. 158 will have a material impact
on our consolidated results of operations or financial position.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes. This guidance clarifies what criteria must be met prior to recognition of the
financial statement benefit of a position taken in a tax return. Additionally, it applies to the
recognition and measurement of income tax uncertainties resulting from a purchase business
combination. This guidance is effective for fiscal years beginning after December 15, 2006. We
anticipate FIN48 will not have a material impact on our consolidated results of operations or
financial position.
In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, Accounting
for Servicing of Financial Assets. SFAS No. 156 amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Among other requirements, SFAS
No. 156 requires an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a servicing contract. The
standard requires initial measurement of all newly-purchased or issued separately recognized
servicing assets and servicing liabilities at fair value, if practicable. Subsequent measurements
may be made using either the fair value or amortization method. Statement No. 156 is effective as
of the beginning of an entitys first fiscal year that begins after September 15, 2006 with early
adoption permitted in the quarter ended March 31, 2006. We do not anticipate this statement will
have a material effect on our consolidated results of operations or financial position.
On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments.
This standard amends the guidance in FASB Statements No. 133, Accounting for Derivative
Instruments and Hedging Activities and SFAS No. 140 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year that begins
after September 15, 2006. We do not anticipate this statement will have a material effect on our
consolidated results of operations or financial position.
9
Item 2. Managements Discussion and Analysis.
Introduction
Some of the matters discussed below include forward-looking statements. Forward-looking
statements often use words such as believe, expect, plan, may, will, should, project,
contemplate, anticipate, forecast, intend or other words of similar meaning. You can also
identify them by the fact that they do not relate strictly to historical or current facts. Our
actual results and the actual outcome of our expectations and strategies could be different from
those anticipated or estimated for the reasons discussed below and under the heading Information
Regarding Forward Looking Statements.
Overview
Old Line Bancshares, Inc. was incorporated under the laws of the State of Maryland on April
11, 2003 to serve as the holding company of Old Line Bank.
Our primary business is to own all of the capital stock of Old Line Bank. We also have an
approximately $915,000 investment in a real estate investment limited liability company named
Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 50% of Pointer Ridge. Frank
Lucente, one of our directors and a director of Old Line Bank, controls 25% of Pointer Ridge and
controls the manager of Pointer Ridge. The purpose of Pointer Ridge is to acquire, own, hold for
profit, sell, assign, transfer, operate, lease, develop, mortgage, refinance, pledge and otherwise
deal with real property located at the intersection of Pointer Ridge Road and Route 301 in Bowie,
Maryland. Pointer Ridge has acquired the property and has completed the construction of a
commercial office building containing approximately 40,000 square feet. On July 10, 2006, we began
leasing approximately 50% of this building for our main office (moving our existing main office
from Waldorf, Maryland) and operating a branch of Old Line Bank from this address.
As required under FIN46R, in June 2006, we reconsidered our investment in Pointer Ridge and
determined that Pointer Ridge is a variable interest entity and that Old Line Bancshares is the
primary beneficiary. We therefore consolidated the results and financial position of Pointer Ridge
with Old Line Bancshares in June 2006.
On August 25, 2006, we executed a new Indemnity and Guaranty Agreement (Guaranty Agreement)
with a new lender that was effective upon Pointer Ridges execution of an Amended Promissory Note
and Amended Deed of Trust. As required under FIN46R, we once again reconsidered our investment in
Pointer Ridge. Because the new Guaranty Agreement definitively limits Old Lines guaranty and the
variability caused by previous contracts executed by Pointer Ridge ceases to exist, we have
determined that Pointer Ridge is no longer a variable interest entity. Therefore, at September 30,
2006, we have accounted for our investment in Pointer Ridge using the equity method.
10
Summary of Recent Performance and Other Activities
We are pleased to report that the three and nine month periods ended September 30, 2006 were,
we believe, productive and successful periods as we worked to effectively and profitably use the
$19.2 million in proceeds received from the stock offering in October 2005. In addition to meeting
many of our financial objectives for the three and nine month periods, we made progress in several
key areas that we believe will allow us to continue to grow and maximize shareholder value.
|
|
|
On July 10, 2006, we moved to our new headquarters location in Bowie, Maryland. |
|
|
|
|
In July, we opened our fifth branch location in Bowie, Maryland. |
|
|
|
|
In July, we hired a new Vice President of Business Development. |
|
|
|
|
In August, we hired a new Vice President of Commercial
Lending. |
|
|
|
|
While our staff and Board of Directors continued to develop and establish significant
customer relationships, the College Park loan production office continued to make a
significant contribution to our loan and deposit growth. |
|
|
|
|
As a result of increased gas prices, the marine division experienced a slow quarter, and
on a year to date basis has an approximately $7,000 loss before taxes, while we continued
to expand its geographic market focus. We anticipate this division will have a modest,
positive impact on net income for the year. |
During the nine month period ended September 30, 2006, total loans, net of allowance, grew
$32.9 million to $137.1 million, as compared to $104.2 million at December 31, 2005, representing
an increase of 31.57%. The allowance for loan losses was $1.3 million or 0.91% of loans at
September 30, 2006, compared to $954,706 or 0.91% of loans at December 31, 2005. We ended the
quarter with no loans 90 days past due or non-performing. The deposit portfolio grew to $130.4
million, a $10.7 million or 8.94% increase from December 31, 2005.
In the first quarter of 2006, we adopted Statement of Financial Accounting Standards 123R,
Share Based Payment, under the modified prospective method. Statement 123R requires public
companies to recognize compensation expense related to stock-based compensation awards in their
income statements over the period during which an employee is required to provide service in
exchange for such award. For the three months ended September 30, 2006, we recorded stock-based
compensation expense of approximately $23,000 and we recorded approximately $82,000 of stock-based
compensation expense for the nine month period ended September 30, 2006.
The following outlines the highlights of our financial performance for the three month period
ended September 30, 2006 compared to the three month period September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2006 |
|
2005 |
|
$ Change |
|
% Change |
Income Statement Data (000s): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
417 |
|
|
$ |
281 |
|
|
$ |
136 |
|
|
|
48.40 |
% |
Interest revenue |
|
|
2,820 |
|
|
|
1,799 |
|
|
|
1,021 |
|
|
|
56.75 |
% |
Interest expense |
|
|
932 |
|
|
|
580 |
|
|
|
352 |
|
|
|
60.69 |
% |
Net interest income after
provision for loan losses |
|
|
1,862 |
|
|
|
1,179 |
|
|
|
683 |
|
|
|
57.93 |
% |
Non-interest revenue |
|
|
322 |
|
|
|
185 |
|
|
|
137 |
|
|
|
74.05 |
% |
Non-interest expense |
|
|
1,535 |
|
|
|
946 |
|
|
|
589 |
|
|
|
62.26 |
% |
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic |
|
|
0.10 |
|
|
|
0.13 |
|
|
|
(0.03 |
) |
|
|
(23.08 |
%) |
Earnings per share, diluted |
|
|
0.10 |
|
|
|
0.13 |
|
|
|
(0.03 |
) |
|
|
(23.08 |
%) |
11
The following outlines the highlights of our financial performance for the nine month period ended
September 30, 2006 compared to the nine month period ended September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2006 |
|
2005 |
|
Change |
|
% Change |
Income Statement Data (000s): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,207 |
|
|
$ |
751 |
|
|
$ |
456 |
|
|
|
60.72 |
% |
Interest revenue |
|
|
7,843 |
|
|
|
4,879 |
|
|
|
2,964 |
|
|
|
60.75 |
% |
Interest expense |
|
|
2,511 |
|
|
|
1,462 |
|
|
|
1,049 |
|
|
|
71.75 |
% |
Net interest income after
provision for loan losses |
|
|
5,036 |
|
|
|
3,252 |
|
|
|
1,784 |
|
|
|
54.86 |
% |
Non-interest revenue |
|
|
786 |
|
|
|
448 |
|
|
|
338 |
|
|
|
75.45 |
% |
Non-interest expense |
|
|
3,996 |
|
|
|
2,555 |
|
|
|
1,441 |
|
|
|
56.40 |
% |
Average interest earning assets |
|
|
164,417 |
|
|
|
119,104 |
|
|
|
45,313 |
|
|
|
38.04 |
% |
Average gross loans |
|
|
120,105 |
|
|
|
87,286 |
|
|
|
32,819 |
|
|
|
37.60 |
% |
Average interest bearing deposits |
|
|
93,486 |
|
|
|
74,471 |
|
|
|
19,015 |
|
|
|
25.53 |
% |
Average non interest bearing deposits |
|
|
33,662 |
|
|
|
26,524 |
|
|
|
7,138 |
|
|
|
26.91 |
% |
Interest Margin (1) |
|
|
4.39 |
% |
|
|
3.90 |
% |
|
|
|
|
|
|
|
|
Return on average equity |
|
|
4.72 |
% |
|
|
7.29 |
% |
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic |
|
$ |
0.28 |
|
|
$ |
0.35 |
|
|
|
(0.07 |
) |
|
|
(20.00 |
%) |
Earnings per share, diluted |
|
|
0.28 |
|
|
|
0.35 |
|
|
|
(0.07 |
) |
|
|
(20.00 |
%) |
|
|
|
(1) |
|
Interest Margin is presented on a fully taxable equivalent (FTE) basis. The FTE basis
adjusts for the tax favored status of certain types of securities. Management believes
providing this information on a FTE basis provides investors with a more accurate picture of
our interest margin and we believe it to be the preferred industry measurement of these
calculations. See Reconciliation of Non-GAAP Measures. |
Bank Owned Life Insurance
On January 3, 2006, we entered into Salary Continuation Agreements and Supplemental Life
Insurance Agreements with Mr. Cornelsen, Mr. Burnett and Ms. Rush and started accruing for a
related annual expense. Under these agreements, and in accordance with the conditions specified
therein, benefits accrue over time from the date of the agreement until the executive reaches the
age of 65. Upon full vesting of the benefit, the executives will be paid the following annual
amounts for 15 years: Mr. Cornelsen $131,607; Mr. Burnett $23,177; and Ms. Rush $56,658.
Under the Supplemental Life Insurance Agreements, Old Line Bank is obligated to cause the payment
of death benefits to the executives designated beneficiaries in the following amounts: Mr.
Cornelsen $717,558; Mr. Burnett $410,556 and Ms. Rush $827,976. Old Line Bank has funded these
obligations through the purchase of Bank Owned Life Insurance.
We designed these agreements to provide Mr. Cornelsen, Mr. Burnett and Ms. Rush supplemental
retirement benefits to the benefits received from their 401(k) plan and to retain these individuals
and reward them for their contribution to the development and management of the Company.
Non-interest expense from these agreements during the three and nine months ended
September 30, 2006 was $23,478 and $70,434, respectively.
Public Offering
On October 21, 2005, we closed our public offering in which we sold 2,096,538 shares of common
stock at a per share purchase price of $9.75. Our proceeds, after underwriters commissions and
expenses, were $19.2 million. We used
substantially all of the net offering proceeds to provide additional capital to Old Line Bank
to support its growth and expansion. The additional capital increased Old Line Banks legal
lending limit to approximately $4.2 million. During the first nine months of 2006, we began to
deploy these funds into new loans. We invested the remainder in liquid assets, specifically
federal funds. While the additional capital has had and should continue to positively impact
interest revenue
12
and net interest income, we anticipate the increase in the number of shares will
continue to have a negative impact on earnings per share until we can deploy these proceeds into
loans.
Growth Strategy
We have based our strategic plan on the premise of enhancing stockholder value and growth
through branching and operating profits. Our short-term goals include maintaining credit quality,
creating an attractive branch network, expanding fee income, generating extensions of core banking
services and using technology to maximize stockholder value.
Expansion
We believe a natural evolution of a community-focused bank like Old Line Bank is to expand the
delivery channels via the branch network. We are planning to expand in Prince Georges County and
Anne Arundel County, Maryland, and may expand in Charles County and contiguous northern and western
counties, such as Montgomery County and Howard County, Maryland.
As outlined previously, Old Line Bancshares, Inc. owns a 50% equity investment in Pointer
Ridge Office Investment, LLC. In April 2005, Pointer Ridge executed a contract with Waverly
Construction Inc. (Waverly), an unrelated party, to begin construction of an approximately 40,000
square foot commercial office building at the property at a cost of $4,108,000. Waverly completed
construction of the building and we moved to our new headquarters in July 2006.
In August 2004, we announced plans to open a branch in Crofton, Maryland in Anne Arundel
County, located at 1641 Route 3 North, Crofton, Maryland approximately 10 miles north of Pointer
Ridge, the new Bowie, Maryland office. We planned to open that branch in the fourth quarter of
2005 or the first quarter of 2006. However, the owner of the property experienced engineering
delays related to the construction of the facility that delayed Anne Arundel Countys issuance of a
building permit. The owner has received a building permit from Anne Arundel County. As a result
of various delays, the owner has not yet started construction. He has advised us that he expects
construction will begin in the near future. Assuming he begins construction prior to year end
2006, we expect the branch will open in the second or third quarter of 2007.
We plan to open a new branch in College Park (Prince Georges County), Maryland in the same
building as the loan production office that houses our team of loan officers (see Expansion of
Commercial, Construction, and Commercial Real Estate Lending below). Our lease provides that we
will lease the branch space in January 2008 when the existing branch of a large southeastern
regional bank moves from the space.
Because of the new branches and the recent move of our headquarters to Bowie, we anticipate
salary and benefit expenses and other non-interest expenses will increase. We anticipate that,
over time, income generated from the new branches will offset any increase in expenses.
Expansion of Commercial, Construction and Commercial Real Estate Lending
In August 2005, we added a team of three experienced, highly skilled loan officers to our
staff. Each of these individuals has over 25 years of commercial banking experience and they were
employed by a large southeastern regional bank with offices in the suburban Maryland market prior
to joining us. These individuals have worked in our market area for approximately 18 years, have
worked together as a team for over 14 years and have a history of successfully generating a high
volume of commercial, construction and commercial real estate loans. This team operates from our
College Park, Maryland loan production office.
In July 2006, we hired a new Vice President of Business Development who was formerly Executive
Director of the Prince Georges County Chamber of Commerce. This individual works from our Bowie
main office.
We expect this individuals expertise and market knowledge will allow us to continue to
enhance our presence in the Prince Georges County market and beyond.
13
In August 2006, we hired a new Vice President of Commercial Lending who has over 30 years of
lending experience and is a significant addition to our lending team. We anticipate this lenders
expertise and market knowledge will allow us to expand our presence into southern Montgomery County
and the District of Columbia.
The addition of these individuals has caused an increase in salary and benefit expenses and an
increase in rent expense. During the fourth quarter of 2005 and the first nine months of 2006, the
College Park team developed and established several new customer relationships for us that had a
positive impact on deposit and loan growth. Because of their efforts and the efforts of the rest
of our team, the loan pipeline remains strong and we anticipate that we will experience continued
improvement in loan growth during the remainder of 2006 and beyond. The additional capital from
the offering should allow us to leverage our balance sheet to support the anticipated loan growth.
Old Line Marine Division
In February 2005, we established Old Line Marine as a division of Old Line Bank to serve as a
recreational boat loan broker and to originate loans for Old Line Bank. We hired a veteran in the
marine lending industry with over 27 years of experience to head this division. Since that time, we
have hired three additional sales representatives. Currently, we have sales representatives in
Annapolis, Maryland, Virginia Beach, Virginia and Wilmington, North Carolina. These
representatives service the market from New York to Florida. Prior to joining us, each of these
individuals operated as brokers in these markets. We conduct secondary market activity in our
marine division as a broker and we earn a fee. In addition to increasing our non-interest income,
we expect to capitalize on our relationships with high net worth individuals through loans we
originate through this division. We anticipate this division will have a modest, positive impact
on net income for the year.
Other Opportunities
We continually evaluate new products and services that may enhance the services we provide our
customers. In February 2006, we began accepting brokered certificates of deposit through the
Promontory Interfinancial Network. Through this deposit matching network and its certificate of
deposit account registry service (CDARS), we obtained the ability to offer our customers access to
FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we
place funds through CDARS on behalf of a customer, we receive matching deposits through the
network.
Results of Operations
Net Interest Income
Net interest income is the difference between income on interest earning assets and the cost
of funds supporting those assets. Earning assets are comprised primarily of loans, investments,
and federal funds sold. Interest-bearing deposits and other borrowings make up the cost of funds.
Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix
of earning assets and funding sources along with changes in associated interest rates determine
changes in net interest income.
Three months ended September 30, 2006 compared to three months ended September 30,
2005
Net interest income after provision for loan losses for the three months ended September 30,
2006 increased $683,692 or 58.01% to $1.9 million from $1.2 million for the same period in 2005.
The increase was primarily attributable to an increase in total average interest earning assets.
The proceeds from the capital offering together with loan growth caused the increase in average
interest earning assets.
Interest revenue increased from $1.8 million for the three months ended September 30, 2005 to
$2.8 million for the same period in 2006. Interest expense for all interest bearing liabilities
amounted to $932,126 for the three months ended September 30, 2006 versus $579,896 for the three
months ended September 30, 2005. These changes
were the result of normal business growth and a 200 basis point increase in the prime rate
during the period from 6.25% on July 1, 2005 to 8.25% on September 30, 2006.
14
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
Net interest income after provision for loan losses for the nine months ended September 30,
2006 amounted to $5.0 million, which was $1.7 million or 51.52% greater than the 2005 level of $3.3
million. The increase was primarily attributable to a 38.04% or $45.3 million increase in total
average interest earning assets to $164.4 million for the nine months ended September 30, 2006 from
$119.1 million for the nine months ended September 30, 2005. The proceeds from the capital
offering together with loan growth caused the increase in average interest earning assets.
Interest revenue increased from $4.9 million for the nine months ended September 30, 2005 to
$7.8 million for the nine months ended September 30, 2006. Interest expense for all interest
bearing liabilities amounted to $2.5 million in the first nine months of 2006, which was $1.0
million higher than the first nine months 2005 level of $1.5 million. As discussed below and
outlined in detail in the Rate/Volume Analysis, these changes were the result of substantial
increases in earning assets and increasing market interest rates. The increase in earning assets
was directly attributable to the increased legal lending limit, the addition of the three new loan
officers in the College Park loan production office and increased business development efforts.
Our net interest margin was 4.39% for the nine months ended September 30, 2006, as compared to
3.90% for the nine months ended September 30, 2005. The increase in the net interest margin is the
result of several components. The yield on average interest-earning assets improved during the
period 90 basis points from 5.54% in 2005 to 6.44% in 2006, and average interest-earning assets
grew by $45.3 million. An 85 basis point increase of the yield on average interest-bearing
liabilities from 2.27% in 2005 to 3.12% in 2006, and a $21.8 million increase in interest bearing
liabilities partially offset these improvements.
The yield on average interest-earning assets improved and the cost of interest bearing
liabilities increased because of increases in market interest rates. On January 1, 2006, the prime
rate was 7.25%. By September 30, 2006, it had increased to 8.25%. On January 1, 2005, it was
5.25% and on September 30, 2005 it was 6.75%.
These increased interest rates allowed us to earn a 186 basis point higher average yield on
our federal funds and an 86 basis point higher average yield on our loan portfolio. The increased
market interest rates and the introduction of the CDARS product in February 2006 caused the cost of
average interest bearing liabilities to increase 85 basis points during the period. We expect
further improvement in our net interest margin during the balance of 2006 because of anticipated
increases in the federal funds and prime rates and because we expect the volume of and rates on
loans to grow at a faster rate than the volume of and rates on interest bearing liabilities. We
will offer promotional campaigns to attract deposits throughout the remainder of the year or seek
brokered deposits, if required, to maintain an acceptable loan to deposit ratio.
Because of the addition of the three new loan officers in the College Park loan production
office, increased recognition in the Prince Georges County market and with continued growth in
deposits, we anticipate that we will continue to grow earning assets during the rest of 2006. We
believe that the anticipated growth in earning assets, the change in the composition of earning
assets as more funds are deployed to loans and the relatively low cost of funds will result in an
increase in our net interest income, although there is no assurance that this will be the case.
15
The following table illustrates average balances of total interest earning assets and total
interest bearing liabilities for the periods indicated, showing the average distribution of assets,
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.
Average Balances, Interest, and Yields
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Interest |
|
|
Yield |
|
|
Balance |
|
|
Interest |
|
|
Yield |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold(1) |
|
$ |
26,705,161 |
|
|
$ |
974,827 |
|
|
|
4.88 |
% |
|
$ |
13,850,355 |
|
|
$ |
313,225 |
|
|
|
3.02 |
% |
Interest-bearing deposits |
|
|
2,344 |
|
|
|
23 |
|
|
|
1.31 |
|
|
|
76,557 |
|
|
|
2,124 |
|
|
|
3.71 |
|
Investment Securities (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
4,000,226 |
|
|
|
99,852 |
|
|
|
3.34 |
|
|
|
4,000,425 |
|
|
|
99,851 |
|
|
|
3.29 |
|
U.S. Agency |
|
|
7,573,041 |
|
|
|
191,901 |
|
|
|
3.39 |
|
|
|
7,445,985 |
|
|
|
186,569 |
|
|
|
3.30 |
|
Mortgage-backed securities |
|
|
1,697,716 |
|
|
|
50,005 |
|
|
|
3.94 |
|
|
|
2,246,288 |
|
|
|
66,040 |
|
|
|
3.88 |
|
Tax exempt securities |
|
|
3,356,967 |
|
|
|
118,512 |
|
|
|
4.72 |
|
|
|
3,478,804 |
|
|
|
120,792 |
|
|
|
4.58 |
|
Other |
|
|
2,177,359 |
|
|
|
59,992 |
|
|
|
3.68 |
|
|
|
1,575,085 |
|
|
|
33,855 |
|
|
|
2.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
18,805,309 |
|
|
|
520,262 |
|
|
|
3.70 |
|
|
|
18,746,587 |
|
|
|
507,107 |
|
|
|
3.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
24,300,076 |
|
|
|
1,518,251 |
|
|
|
8.35 |
|
|
|
12,513,568 |
|
|
|
696,310 |
|
|
|
7.44 |
|
Mortgage |
|
|
73,430,485 |
|
|
|
4,017,572 |
|
|
|
7.32 |
|
|
|
52,328,109 |
|
|
|
2,535,338 |
|
|
|
6.48 |
|
Installment & other consumer |
|
|
22,374,134 |
|
|
|
882,838 |
|
|
|
5.28 |
|
|
|
22,443,906 |
|
|
|
877,365 |
|
|
|
5.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans |
|
|
120,104,695 |
|
|
|
6,418,661 |
|
|
|
7.15 |
|
|
|
87,285,583 |
|
|
|
4,109,013 |
|
|
|
6.29 |
|
Allowance for loan losses |
|
|
1,200,318 |
|
|
|
|
|
|
|
|
|
|
|
854,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of allowance |
|
|
118,904,377 |
|
|
|
6,418,661 |
|
|
|
7.22 |
|
|
|
86,430,910 |
|
|
|
4,109,013 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1) |
|
|
164,417,191 |
|
|
|
7,913,773 |
|
|
|
6.44 |
|
|
|
119,104,409 |
|
|
|
4,931,469 |
|
|
|
5.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing cash |
|
|
3,865,350 |
|
|
|
|
|
|
|
|
|
|
|
3,071,170 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
2,674,295 |
|
|
|
|
|
|
|
|
|
|
|
2,381,604 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
5,545,193 |
|
|
|
|
|
|
|
|
|
|
|
2,302,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
176,502,029 |
|
|
|
|
|
|
|
|
|
|
$ |
126,860,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
8,073,031 |
|
|
|
43,375 |
|
|
|
0.72 |
% |
|
$ |
9,828,092 |
|
|
|
37,567 |
|
|
|
0.51 |
% |
Money market and NOW |
|
|
21,625,775 |
|
|
|
228,937 |
|
|
|
1.42 |
|
|
|
19,640,443 |
|
|
|
99,197 |
|
|
|
0.68 |
|
Other time deposits |
|
|
63,787,628 |
|
|
|
1,864,107 |
|
|
|
3.91 |
|
|
|
45,002,498 |
|
|
|
1,092,117 |
|
|
|
3.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
93,486,434 |
|
|
|
2,136,419 |
|
|
|
3.06 |
|
|
|
74,471,033 |
|
|
|
1,228,881 |
|
|
|
2.21 |
|
Borrowed funds |
|
|
14,287,889 |
|
|
|
374,763 |
|
|
|
3.51 |
|
|
|
11,544,262 |
|
|
|
232,721 |
|
|
|
2.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
107,774,323 |
|
|
|
2,511,182 |
|
|
|
3.12 |
|
|
|
86,015,295 |
|
|
|
1,461,602 |
|
|
|
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits |
|
|
33,662,412 |
|
|
|
|
|
|
|
|
|
|
|
26,524,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,436,735 |
|
|
|
|
|
|
|
|
|
|
|
112,539,600 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
912,341 |
|
|
|
|
|
|
|
|
|
|
|
546,346 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
34,152,953 |
|
|
|
|
|
|
|
|
|
|
|
13,774,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
176,502,029 |
|
|
|
|
|
|
|
|
|
|
$ |
126,860,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread(1) |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
3.27 |
% |
Net interest income(1) |
|
|
|
|
|
$ |
5,402,591 |
|
|
|
4.39 |
% |
|
|
|
|
|
$ |
3,469,867 |
|
|
|
3.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
16
The following table describes the impact on our interest income and expense resulting from
changes in average balances and average rates for the periods indicated. We report the change in
interest income due to both volume and rate with the rate variance.
Rate/Volume Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2006 compared to 2005 |
|
|
|
Variance due to: |
|
|
|
Total |
|
|
Rate |
|
|
Volume |
|
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold (1) |
|
$ |
661,602 |
|
|
$ |
367,206 |
|
|
$ |
294,396 |
|
Interest bearing deposits |
|
|
(2,101 |
) |
|
|
(13 |
) |
|
|
(2,088 |
) |
Investment Securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
U.S. Agency |
|
|
5,332 |
|
|
|
2,152 |
|
|
|
3,180 |
|
Mortgage-backed securities |
|
|
(16,035 |
) |
|
|
|
|
|
|
(16,035 |
) |
Tax exempt securities |
|
|
(2,280 |
) |
|
|
(6,512 |
) |
|
|
4,232 |
|
Other |
|
|
26,137 |
|
|
|
13,212 |
|
|
|
12,925 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
821,941 |
|
|
|
156,946 |
|
|
|
664,995 |
|
Mortgage |
|
|
1,482,234 |
|
|
|
445,263 |
|
|
|
1,036,971 |
|
Installment & other consumer |
|
|
5,473 |
|
|
|
8,240 |
|
|
|
(2,767 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest revenue (1) |
|
|
2,982,304 |
|
|
|
986,495 |
|
|
|
1,995,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
|
5,808 |
|
|
|
12,596 |
|
|
|
(6,788 |
) |
Money market and NOW |
|
|
129,740 |
|
|
|
119,502 |
|
|
|
10,238 |
|
Other time deposits |
|
|
771,990 |
|
|
|
310,439 |
|
|
|
461,551 |
|
Borrowed funds |
|
|
142,042 |
|
|
|
85,866 |
|
|
|
56,176 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
1,049,580 |
|
|
|
528,403 |
|
|
|
521,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(1) |
|
$ |
1,932,724 |
|
|
$ |
458,092 |
|
|
$ |
1,474,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest revenue is presented on a fully taxable equivalent (FTE) basis.
The FTE basis adjusts for the tax favored status of these types of securities.
Management believes providing this information on a FTE basis provides investors
with a more accurate picture of our net interest spread and net interest income and
we believe it to be the preferred industry measurement of these calculations. See
Reconciliation of Non-GAAP Measures. |
Provision for Loan Losses
Originating loans involves a degree of risk that loan losses will occur in varying amounts due
to, among other factors, the type of loans being made, the credit-worthiness of the borrowers over
the term of the loans, the
quality of the collateral for the loan, if any, as well as general economic conditions. We
charge the provision for loan losses to earnings to maintain the total allowance for loan losses at
a level considered by management to represent its best estimate of the losses known and inherent in
the portfolio that are both probable and reasonable to estimate, based on, among other factors,
prior loss experience, volume and type of lending conducted, estimated value of any underlying
collateral, economic conditions (particularly as such conditions relate to Old Line Banks market
area), regulatory guidance, peer statistics, managements judgment, past due loans in the loan
portfolio, loan charge off experience and concentrations of risk (if any). We charge losses on
loans against the allowance when we believe that collection of loan principal is unlikely. We add
back recoveries on loans previously charged off to the allowance.
The provision for loan losses decreased $14,000 or 35.00% to $26,000 for the three months
ended September 30, 2006 versus $40,000 for the three months ended September 30, 2005. During the
quarter, we decreased the provision for loan losses due to recoveries during the year, and slower
loan growth.
17
The provision for loan losses was $296,000 for the nine months ended September 30, 2006,
as compared to $165,000 for the nine months ended September 30, 2005, an increase of $131,000 or
79.39%. 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 to a lower
percentage of boat loans and a higher percentage of commercial mortgages and commercial loans.
Historical experience in the banking industry indicates commercial mortgages and commercial loans
have a higher probability of loss than boat loans.
We review the adequacy of the allowance for loan losses at least quarterly. Our review
includes an 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 (the SEC) SAB No. 102, Loan Loss
Allowance Methodology and Documentation, and the Federal Financial Institutions Examination
Councils 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.
We determine loss ratios for installment and other consumer loans (other than boat loans),
boat loans and mortgage loans (commercial real estate, residential real estate and real estate
construction) based upon a review of prior 18 months delinquency trends for the category, the three
year loss ratio for the category, peer group loss ratios and industry standards.
With respect to commercial loans, management assigns a risk rating of one through eight to
each loan at inception, with a risk rating of one having the least amount of risk and a risk rating
of eight having the greatest amount of risk. For commercial loans of less than $250,000, we may
review the risk rating annually based on, among other things, the borrowers financial condition,
cash flow and ongoing financial viability, the collateral securing the loan, the borrowers
industry and payment history. We review the risk rating for all commercial loans in excess of
$250,000 at least annually. We evaluate loans with a risk rating of five or greater separately and
assign loss amounts based upon the evaluation. For loans with risk ratings between one and four,
we determine loss ratios based upon a review of prior 18 months delinquency trends, the three year
loss ratio, peer group loss ratios and industry standards.
We also identify and make any necessary allocation adjustments for any specific concentrations
of credit in a loan category that in managements estimation increase the risk inherent in the
category. If necessary, we will also make an adjustment within one or more loan categories for
economic considerations in our market area that may impact the quality of the loans in the
category. For all periods presented, there were no specific adjustments made for concentrations of
credit or economic considerations.
In the event that our review of the adequacy of the allowance results in any unallocated
amounts, we reallocate such amounts to our loan categories based on the percentage that each
category represents to total gross loans. We have risk management practices designed to ensure
timely identification of changes in loan risk profiles. However, undetected losses inherently
exist within the portfolio. We believe that the allocation of the unallocated portion of the
reserve in the manner described above is appropriate.
We will not create a separate valuation allowance unless we consider a loan impaired under
SFAS No. 114 and SFAS No. 118. For all periods presented, we had 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
18
determination with respect to the allowance for loan losses, recognizing that the
determination is inherently subjective. 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 0.91% of total loans at September 30, 2006, 0.91% at
December 31, 2005 and 0.96% at September 30, 2005. We have 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, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Balance, beginning of period |
|
$ |
954,706 |
|
|
$ |
744,862 |
|
|
$ |
744,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
296,000 |
|
|
|
165,000 |
|
|
|
204,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
Installment & other consumer |
|
|
(2,685 |
) |
|
|
(135 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
|
|
|
|
Total chargeoffs |
|
|
(2,685 |
) |
|
|
(135 |
) |
|
|
(135 |
) |
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
2,997 |
|
|
|
2,997 |
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
Installment & other consumer |
|
|
5,055 |
|
|
|
646 |
|
|
|
2,982 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
5,055 |
|
|
|
3,643 |
|
|
|
5,979 |
|
|
|
|
|
|
|
|
|
|
|
Net (chargeoffs) recoveries |
|
|
2,370 |
|
|
|
3,508 |
|
|
|
5,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
1,253,076 |
|
|
$ |
913,370 |
|
|
$ |
954,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to gross loans |
|
|
0.91 |
% |
|
|
0.96 |
% |
|
|
0.91 |
% |
Ratio of net-chargeoffs (recoveries)
during period to average loans
outstanding during period |
|
|
(0.002 |
%) |
|
|
(0.004 |
%) |
|
|
(0.006 |
%) |
19
The following table provides a breakdown of the allowance for loan losses.
Allocation of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
|
|
|
in Each |
|
|
|
Amount |
|
|
Category |
|
|
Amount |
|
|
Category |
|
|
Amount |
|
|
Category |
|
Installment & other
con. |
|
$ |
7,578 |
|
|
|
0.61 |
% |
|
$ |
6,198 |
|
|
|
0.62 |
% |
|
$ |
6,995 |
|
|
|
0.57 |
% |
Boat |
|
|
130,926 |
|
|
|
15.46 |
|
|
|
170,836 |
|
|
|
24.28 |
|
|
|
148,045 |
|
|
|
21.22 |
|
Mortgage |
|
|
659,495 |
|
|
|
63.34 |
|
|
|
476,386 |
|
|
|
59.84 |
|
|
|
483,245 |
|
|
|
60.21 |
|
Commercial |
|
|
455,077 |
|
|
|
20.59 |
|
|
|
259,950 |
|
|
|
15.26 |
|
|
|
316,421 |
|
|
|
18.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,253,076 |
|
|
|
100.00 |
% |
|
$ |
913,370 |
|
|
|
100.00 |
% |
|
$ |
954,706 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Revenue
Three months ended September 30, 2006 compared to three months ended September 30,
2005
Non-interest revenue totaled $322,056 for the three months ended September 30, 2006, an
increase of $137,168 or 74.19% from the 2005 amount of $184,888. Non-interest revenue for the three
months ended September 30, 2006 and September 30, 2005 included fee income from service charges on
deposit accounts, broker origination fees from the marine division, earnings on bank owned life
insurance, and other fees and commissions. For the three months ended September 30, 2006,
non-interest revenue also included income from our investment in real estate, LLC (Pointer Ridge).
For the three months ended September 30, 2006, service charges on deposit accounts increased
$5,102 and marine division broker origination fees increased $26,717. Our earnings on bank owned
life insurance decreased $2,752 and other fees and commissions increased $30,573. Service charges
on deposit accounts and other fees and commissions increased due to increases in the number of
customers and the services they used. The marine divisions broker origination fees increased due
to the increase in the number of transactions and the average dollar amount of the transactions
that the division brokered. Other loan fees increased due to an increase in the number of
construction loans closed. Pointer Ridge began leasing its building to tenants in June 2006 and our
interest in the earnings was $77,528 during the period.
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
Non-interest revenue totaled $786,008 for the nine months ended September 30, 2006, an
increase of $338,402 or 75.60% from the 2005 amount of $447,606. Non-interest revenue for the nine
months ended September 30, 2006 included primarily fee income from service charges on deposit
accounts, marine division broker origination fees, earnings on bank owned life insurance, income
from investment in real estate, LLC (Pointer Ridge) and other fees and commissions. Service charge
fees increased $15,953 because of an increase in the number of customers and an increase in the
services they used. Broker origination fees increased $193,443 or 276% due to the increase in the
number of transactions and the average dollar amount of the transactions that the division
brokered. Our earnings on the $3.3 million bank owned life insurance increased $68,079 because we
purchased this investment in June 2005. Therefore, the nine months ended September 30, 2005
included three months of earnings versus nine months for the nine months ended September 30, 2006.
Other fees and commissions decreased $16,847 because of a decrease in the number of construction
loans closed during the period.
During the rest of 2006, we anticipate the marine division will continue to increase income
from broker origination fees and we will receive a full year of earnings on the bank owned life
insurance. Because we anticipate the residential builders in our customer base will construct fewer
new homes during the remainder of 2006, we
20
expect construction loan fees will remain stable or
decline slightly. We also believe the demand in the commercial real estate market will remain
stable throughout the rest of the year. Therefore, other loan fees should remain constant.
Additionally, because of the College Park loan production office, the new Bowie branch that we
opened in July 2006, and the new loan officer in Gaithersburg we expect that customer relationships
will grow. We anticipate this growth will cause an increase in service charges on deposit accounts.
We also expect that our investment in Pointer Ridge will generate modest income during the
remainder of the year, albeit at a lower rate than that realized in the quarter ended September 30,
2006.
21
Non-interest Expense
Three months ended September 30, 2006 compared to three months ended September 30,
2005
Non-interest expense was $1.5 million for the quarter ended September 2006, which was $588,197
greater than the 2005 level of $946,357. This increase was primarily due to increases in salaries
and benefit costs, which amounted to $916,245 in the three months ended September 30, 2006, as
compared to $614,443 in the comparable 2005 period. During the past twelve months, we have
increased staff to support our growth from 45 employees at September 30, 2005 to 56 employees at
September 30, 2006. These individuals annual salary and benefits as well as bonuses and salary
increases for existing staff, caused the increase in salaries and benefits during the 2006 period.
In June 2006, we also experienced an increase in medical and dental insurance premiums during the
quarter. Additionally, in January 2006, we established a salary continuation plan for executive
officers that increased benefit expenses by $23,478 and adopted SFAS 123 which increased benefits
expense by approximately $23,000.
Occupancy expenses increased $134,518 or 225.84% in the third quarter of 2006 compared to the
third quarter of 2005. This increase was because of the establishment of the College Park loan
production office in August 2005, the move of our new headquarters to Bowie in July 2006, the
opening of the new Bowie branch in July 2006 and annual escalation clauses in existing leases.
Data processing expenses increased $15,525 in the third quarter of 2006 relative to 2005
because of an increase in customer relationships, the implementation of a new network and data
services in July 2006 and increased usage.
Other operating expenses increased $103,113 or 48.62% from $212,059 for the three months ended
September 30, 2005 to $315,172 for the three months ended September 30, 2006. This was primarily
the result of an approximately $36,000 increase in broker and loan fees, a $23,000 increase in
business development and advertising, a $17,000 increase in stationary and supplies, and a $16,000
increase in armored car and courier services. These increases occurred because of costs associated
with the marine division, expenses associated with our move to Bowie and increased business
development and marketing efforts during the period.
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
Non-interest expense for the nine months ended September 30, 2006 was $4.0 million versus $2.6
million for the same period in 2005. The $1.4 million or 53.85% increase was primarily attributable
to a $944,720 increase in salary and benefit expense, a $156,264 increase in occupancy expense, and
a $268,877 increase in other operating expenses. Salary and benefit expenses increased because of
general salary increases and because of the new individuals hired in the marine division, the
College Park loan production office, the lending officer and additions to corporate and branch
staff. Annual escalations in the leases, the move of the main office from Waldorf, Maryland to
Bowie, Maryland in July 2006, the establishment of the new Bowie branch in July 2006, and the new
College Park loan office in August 2005 caused the increased occupancy expenses. Other operating
expenses increased because of a $70,000 increase in business development and entertainment costs
associated with the start up of the marine division and expanded business development efforts, a
$45,000 increase in loan fees, a $40,000 increase in courier costs, approximately $40,000 in costs
associated with the move to Bowie and the opening of the Bowie branch and a $29,000 increase in
broker fees paid by the marine division to outside referral sources.
We anticipate that during the remainder of 2006, non-interest expense will continue to
increase. In addition to the personnel increases discussed above, we anticipate that we will
continue to incur expenses relating to our July 2006 move of our main office from Waldorf to Bowie,
Maryland. We also will work to identify and, perhaps, open a new branch location. We will incur a
full year of expenses for executive life insurance established in June 2005 and salary continuation
plans that were established in January 2006. We expect to somewhat offset the effect of these
increases with increases in non-interest income that derive from the boat brokerage business,
earnings on the bank owned life insurance, earnings from our investment in Pointer Ridge and
continued increases in interest income through loan growth.
22
Income Taxes
Three months ended September 30, 2006 compared to three months ended September 30,
2005
Income tax expense was $233,177 (35.88% of pre-tax income) for the three months ended
September 30, 2006 as compared to $135,867 (32.57% of pre-tax income) for the comparable 2005
period. The increase in the effective tax rate is primarily due to a higher proportion of taxable
income during the period.
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
Income tax expense was $618,243 (33.88% of pre-tax income) for the nine months ended
September 30, 2006 compared to $394,165 (34.43% of pre-tax net income) for the same period in 2005.
The decrease in the effective tax rate is primarily due to the tax-exempt income generated by the
bank owned life insurance.
Net Income
Three months ended September 30, 2006 compared to three months ended September 30,
2005
Net income was $416,624 or $0.10 basic and diluted earnings per common share for the three
months ended September 30, 2006, an increase of $135,353 or 48.12%, compared to net income of
$281,271 for the same period during 2005. The increase in net income was the result of increases
in net interest income after provision for loan losses of $683,692 and non-interest revenue of
$137,168, partially offset by increases in non-interest expense of $588,197 and income taxes of
$97,310.
Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
Net income was $1.2 million or $0.28 basic and diluted earnings per common share for the nine
month period ending September 30, 2006, an increase of $456,064 or 60.75% compared to net income of
$750,755 or $0.35 basic and diluted earnings per common share for the same period in 2005. The
increase in net income was the result of a $1.8 million increase in net interest income after
provision for loan losses and a $338,402 increase in non-interest revenue. A $1.4 million increase
in non-interest expense and a $224,078 increase in income tax expense for the period compared to
the same period in 2005 offset the increase in income. Earnings per share decreased on a basic and
diluted basis because of the increase in the number of average shares outstanding that derived from
the public offering in October 2005.
Analysis of Financial Condition
Investment Securities
Our portfolio consists primarily of U.S. Treasury securities, U.S. government agency
securities, securities issued by states, counties and municipalities, and mortgage-backed
securities. In addition, we own certain equity securities, including Federal Reserve Bank stock,
Federal Home Loan Bank stock, Maryland Financial Bank stock and Atlantic Central Bankers Bank
stock. The portfolio provides a source of liquidity, collateral for repurchase agreements and a
means of diversifying our earning asset portfolio. While we generally intend to hold the
investment portfolio assets until maturity, we classify a significant portion of the portfolio as
available for sale. We account for securities so classified at fair value and report the
unrealized appreciation and depreciation as a separate component of stockholders equity, net of
income tax effects. We account for securities classified in the held to maturity category at
amortized cost. We invest in securities for the yield they produce and not to profit from trading
the securities. There are no trading securities in the portfolio.
The investment portfolio at September 30, 2006 amounted to $17.4 million, an increase of $1.3
million, from the December 31, 2005 amount of $16.1 million. Available for sale investment
securities increased to $14.6 million at September 30, 2006 from $13.9 million at December 31,
2005. The increase in the available for sale
23
investment portfolio occurred as a result of purchases during the period. Held to maturity
securities increased $599,146 from $2.2 million at December 31, 2005 to $2.8 million at September
30, 2006. The carrying value of available for sale securities included net unrealized losses of
$303,016 at September 30, 2006 (reflected as unrealized losses of $185,991 in stockholders equity
after deferred taxes) as compared to net unrealized losses of $414,777 ($254,590 net of taxes) as
of December 31, 2005. In general, the decrease in unrealized losses was a result of declining
interest rates. As required under SFAS No. 115, we have evaluated securities with unrealized
losses for an extended period and determined that these losses are temporary because we expect to
hold them until maturity. As the maturity date moves closer and/or interest rates decline, the
unrealized losses in the portfolio will decline or dissipate.
Investment in Pointer Ridge LLC and Minority Interest
As discussed above, Old Line Bancshares also has an approximately $915,000 investment in
Pointer Ridge, a real estate investment limited liability. Old Line Bancshares owns 50% of Pointer
Ridge. In connection with our execution of a guarantee for a construction loan made to Pointer
Ridge by an unrelated bank, in November 2005 we reconsidered our investment in Pointer Ridge and
determined that under FASB Interpretation No. 46 Consolidation of Variable Interest Entities
(FIN46R), Pointer Ridge was a variable interest entity, but that Old Line Bancshares was not the
primary beneficiary. Because we concluded that Old Line Bancshares was not the primary beneficiary
of Pointer Ridge under FIN46R, we did not consolidate Pointer Ridges results and financial
position with that of Old Line Bancshares. Rather, we accounted for our investment in Pointer
Ridge using the equity method.
At the suggestion of our auditors and the direction of our audit committee, in May 2006, we
requested guidance from the SEC regarding FIN46R and our investment in Pointer Ridge. After
discussions with the SEC, we reconsidered our original conclusions regarding our investment in
Pointer Ridge. We again concluded that Pointer Ridge was a variable interest entity under FIN46R.
We also concluded that our determination in November 2005 that Old Line Bancshares was not the
primary beneficiary was incorrect. Therefore, we consolidated the results and financial position
of Pointer Ridge with Old Line Bancshares for the period ended June 30, 2006. We did not restate
our financial statements for the periods ended December 31, 2005 and March 31, 2006 to reflect
these changes since the impact is immaterial.
On August 25, 2006, as discussed further below, we executed a new Guaranty Agreement with a
new lender that was effective upon Pointer Ridges execution of an Amended Promissory Note and
Amended Deed of Trust, as described immediately below. As required under FIN46R, we once again
reconsidered our investment in Pointer Ridge. Because the new Guaranty Agreement definitively
limits Old Lines guaranty and the variability caused by previous contracts executed by Pointer
Ridge ceases to exist, we have determined that Pointer Ridge is no longer a variable interest
entity and, therefore, we have accounted for our investment in Pointer Ridge using the equity
method. However, even if we had continued to consolidate Pointer Ridges results and financial
position, the effect of the consolidation on our financial statements would be immaterial.
On September 25, 2006, Pointer Ridge advised us that on August 25, 2006, Pointer Ridge had
entered into with an unrelated lender (1) an Amended and Restated Promissory Note that increased
the principal amount of the current Deed of Trust Note dated November 3, 2005 from $5,880,000 to
$6,620,000 (the Amended Promissory Note) and (2) an Amended and Restated Deed of Trust and
Security Agreement that amended and restated the current Deed of Trust Assignment and Security
Agreement dated November 3, 2005 (the Amended Deed of Trust) for that purpose and to reflect the
other modifications, terms and conditions agreed upon by Pointer Ridge and the lender.
The Amended Promissory Note provides that the loan will accrue interest from the date of the
Amended Promissory Note through September 5, 2016 at a rate of 6.28% (Initial Term Interest
Rate). After September 5, 2016, the interest rate will adjust to the greater of (i) the Initial
Term Interest Rate plus 200 basis points or (ii) the Treasury Rate (as defined in the Amended
Promissory Note) plus 200 basis points.
Payments on the Amended Promissory Note began October 5, 2006. For the first 12 months,
Pointer Ridge will pay to the lender an installment of interest only. Commencing with the
13th payment and continuing until
24
August 5, 2036, Pointer Ridge will pay equal monthly payments of principal and interest based
on a 30-year amortization. There is a prepayment penalty if Pointer Ridge prepays the loan prior
to September 5, 2016. At September 30, 2006, Pointer Ridge had borrowed $6.6 million under Amended
Promissory Note.
On August 25, 2006, Old Line executed a new Guaranty Agreement with the lender that was
effective upon Pointer Ridges execution of the Amended Promissory Note and Amended Deed of Trust.
Pursuant to the terms of the guaranty, Old Line has guaranteed the payment to the lender of up to
50% of the loan amount plus any costs incurred by the lender resulting from any acts, omissions or
alleged acts or omissions arising out of or relating to: (1) the misapplication or misappropriation
by Pointer Ridge of any or all money collected, paid or received; (2) rents, issues, profits and
revenues of all or any portion of the property located at 1525 Pointer Ridge Place, Bowie, Maryland
(the Security Property) received or applicable to a period after the occurrence of any Event of
Default which are not applied to pay, first (a) real estate taxes and other charges which, if
unpaid, could result in liens superior to that of the Amended Deed of Trust and (b) premiums on
insurance policies required under the loan documents, and, second, the other ordinary and necessary
expenses of owning and operating the Security Property; (3) waste committed on the Security
Property or damage to the Security Property as a result of intentional misconduct or gross
negligence or the removal of all or any portion of the Security Property in violation of the terms
of the loan documents; (4) fraud or material misrepresentation or failure to disclose a material
fact; (5) the filing of any petition for bankruptcy; or (6) Pointer Ridges failure to maintain its
status as a single purpose entity as required by the loan documents.
Loan Portfolio
Loans secured by real estate or luxury boats comprise the majority of our loan portfolio. Old
Line Banks loan customers are generally located in the greater Washington, D.C. metropolitan area.
The loan portfolio, net of allowance, unearned fees and origination costs, increased $32.9
million or 31.57% to $137.1 million at September 30, 2006 from $104.2 million at December 31, 2005.
Commercial business loans increased by $9.5 million (50.26%), commercial real estate loans
(generally owner-occupied) increased by $21.3 million (43.92%), residential real estate loans
(generally home equity and fixed rate home improvement loans) increased by $1.7 million (17.35%),
real estate construction loans increased by $1.4 million (29.13%) and installment loans decreased
by $646,619 (2.83%) from their respective balances at December 31, 2005.
During the fourth quarter of 2005 and the first nine months of 2006, we saw loan and deposit
growth generated from the team of lenders we hired for the College Park loan production office in
August 2005, as well as our existing staff. We anticipate our entire team of lenders will continue
to focus their efforts on business development during the remainder of 2006 and continue to grow
the loan portfolio. The October 2005 capital offering increased our legal lending limit to $4.2
million. At September 30, 2006 it was $4.7 million. We expect that this increased limit will also
allow us to originate and retain loans with a higher dollar value.
25
The following table summarizes the composition of the loan portfolio by dollar amount and
percentages:
Loan Portfolio
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
69,796 |
|
|
|
50.54 |
% |
|
$ |
48,530 |
|
|
|
46.29 |
% |
Construction |
|
|
6,155 |
|
|
|
4.46 |
|
|
|
4,823 |
|
|
|
4.60 |
|
Residential |
|
|
11,522 |
|
|
|
8.34 |
|
|
|
9,767 |
|
|
|
9.32 |
|
Commercial |
|
|
28,435 |
|
|
|
20.59 |
|
|
|
18,871 |
|
|
|
18.00 |
|
Installment & other consumer |
|
|
22,195 |
|
|
|
16.07 |
|
|
|
22,842 |
|
|
|
21.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,103 |
|
|
|
100.00 |
% |
|
|
104,833 |
|
|
|
100.00 |
% |
Allowance for loan losses |
|
|
(1,253 |
) |
|
|
|
|
|
|
(955 |
) |
|
|
|
|
Net deferred loan (fees) and costs |
|
|
205 |
|
|
|
|
|
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
137,055 |
|
|
|
|
|
|
$ |
104,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nonaccrual 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 nonaccrual results in our no longer accruing interest on such loan and
reversing any interest previously accrued but not collected. We will generally restore a
nonaccrual loan to accrual status when delinquent principal and interest payments are brought
current and we expect to collect future monthly principal and interest payments. We recognize
interest on nonaccrual loans only when received. There were no loans 90 days or more past due or
nonaccrual loans as of September 30, 2006 or December 31, 2005.
We classify any property acquired as a result of foreclosure on a mortgage loan as real
estate owned and record it at the lower of the unpaid principal balance or fair value at the date
of acquisition and subsequently carry the loan at the lower of cost or net realizable value. We
charge any required write-down of the loan to its net realizable value against the allowance for
loan losses at the time of foreclosure. We charge to expense any subsequent adjustments to net
realizable value. Upon foreclosure, Old Line Bank generally requires an appraisal of the property
and, thereafter, appraisals of the property on at least an annual basis and external inspections on
at least a quarterly basis. As of September 30, 2006 and December 31, 2005, we held no real estate
acquired as a result of foreclosure.
We apply the provisions of Statement of Financial Accounting Standards No. 114 (SFAS No.
114), Accounting by Creditors for Impairment of a Loan, as amended by Statement of Financial
Accounting Standards No. 118 (SFAS No. 118), Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure. SFAS No. 114 and SFAS No. 118 require that we measure
impaired loans, which consist of all modified loans and other loans for which collection of all
contractual principal and interest is not probable, based on the present value of expected future
cash flows discounted at the loans effective interest rate, or at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, an impairment is recognized
through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers
consumer loans as homogenous loans and thus does not apply the SFAS No. 114 impairment test to
these loans. We write off impaired loans when collection of the loan is doubtful. As of September
30, 2006 and December 31, 2005, we had no impaired or restructured loans.
26
Bank owned life insurance
In June 2005, we purchased $3.3 million of Bank Owned Life Insurance (BOLI) on the lives
of our executive officers, Messrs. Cornelsen and Burnett and Ms. Rush. We anticipate funding our
obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements
that we entered into with our executives from earnings derived from the BOLI. During the nine
months ended September 30, 2006, the cash surrender value of the insurance policies increased
$100,042.
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, 2006, the deposit portfolio had grown to $130.4 million, a $10.7 million or
8.94% increase over the December 31, 2005 level of $119.7 million. We have seen growth in several
key categories over the period. Non-interest bearing deposits grew $1.3 million during the period
to $31.7 million from $30.4 million due to new and expanded commercial relationships.
Interest-bearing deposits grew $9.4 million to $98.7 million from $89.3 million. A portion of the
growth in interest-bearing deposits was in other time deposits (primarily, certificates of
deposit), which increased from $55.8 million at December 31, 2005 to $66.1 million at September 30,
2006. Certificates of deposits grew due to increased customer relationships, transfers of funds
from savings, money market and NOW accounts, and the introduction of the CDARS product in February
2006. Money market and NOW accounts decreased from $25.3 million at December 31, 2005 to $25.1
million at September 30, 2006 while savings accounts decreased by $663,208 to $7.5 million at
September 30, 2006 from $8.2 million at December 31, 2005.
Historically, we have not purchased brokered deposits. As discussed above, however, in
February 2006, we began accepting brokered certificates of deposit through the Promontory
Interfinancial Network. Through this deposit matching network and its certificate of deposit
account registry service (CDARS), we obtained the ability to offer our customers access to
FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we
place funds through CDARS on behalf of a customer, we receive matching deposits through the
network. As of September 30, 2006, we had $4.6 million in CDARS. We expect that we will continue
to grow brokered deposits in 2006 with this product and others, if appropriate.
During the third quarter of 2006, we saw a decline in deposits from the quarter ended June 30,
2006. Because of the slowdown in sales of homes in our primary market area during the third
quarter, we experienced declines in balances in title company and real estate related business
accounts relative to the second quarter of 2006. We anticipate that as long as residential sales
remain slow in our market area that deposits in these accounts will remain below historical levels.
Borrowings
Old Line Bank has available lines of credit, including overnight federal funds and repurchase
agreements from its correspondent banks, totaling $22.5 million as of September 30, 2006. Old Line
Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta that
totaled $56.9 million at September 30, 2006 and $56.3 million at December 31, 2005. Of this, we
had borrowed $5 million at September 30, 2006 and advances of $2 million and $4 million at December
31, 2005, respectively, as outlined below.
Short-term borrowings consisted of short-term promissory notes issued to Old Line Banks
customers and federal funds purchased. In 2004, Old Line Bank developed an enhancement to the
basic non-interest bearing demand deposit account for its commercial clients. This service
electronically sweeps excess funds from the customers account into an interest bearing Master Note
with Old Line Bank. These Master Notes re-price daily and have maturities of 270 days or less. At
December 31, 2005, Old Line Bank had $9.3 million outstanding in these short term promissory notes
with an average interest rate of 2.02%. At September 30, 2006, Old Line Bank had $9.2 million
outstanding with an average interest rate of 2.93%.
At December 31, 2005, long term borrowings were comprised of advances from the Federal Home
Loan Bank of Atlanta (FHLB) totaling $6 million. Old Line Bank borrowed $4.0 million of the $6.0
million in January
27
2001, and paid interest only at 4.80%. The FHLB had the option to convert the
interest rate into a three (3) month LIBOR based floating rate on any future payment date.
In March 2004, Old Line Bank borrowed an additional $2 million from the FHLB. Old Line Bank
paid interest only. The FHLB had the option to convert the interest rate into a three (3) month
LIBOR based floating rate on any future payment date.
In March 2006, the FHLB increased the interest rate on the $2 million borrowing and offered
Old Line Bank the option to prepay the facility. Old Line Bank paid the $2 million borrowing. In
July 2006, the FHLB increased the interest rate on the $4 million advance and offered Old Line Bank
the option to prepay the facility. Old Line Bank repaid the advance in full on July 3, 2006.
There were no penalties associated with these prepayments.
At September 30, 2006, long term borrowings consisted of advance from the FHLB totaling $5
million. On July 16, 2006, Old Line Bank borrowed $2 million of the $5.0 million and pays interest
at 5.65% monthly. The balance is due in full on August 16, 2007. On July 20, 2006, Old Line Bank
borrowed $3.0 million of the $5.0 million and pays interest at 5.328% each January, April, July and
October. The balance is due in full on July 20, 2009. The FHLB has the one-time option to
terminate the transaction and require payment in full on July 20, 2007. There are prepayment
penalties for early prepayments with these facilities.
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
A principal objective of Old Line Banks asset/liability management policy is to minimize
exposure to changes in interest rates by an ongoing review of the maturity and re-pricing of
interest-earning assets and interest-bearing liabilities. The Asset and Liability Committee of the
Board of Directors oversees this review.
The Asset and Liability Committee establishes policies to control interest rate sensitivity.
Interest rate sensitivity is the volatility of a banks earnings resulting from movements in market
interest rates. Management monitors rate sensitivity in order to reduce vulnerability to interest
rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity.
Monthly financial reports supply management with information to evaluate and manage rate
sensitivity and adherence to policy. Old Line Banks asset/liability policys goal is to manage
assets and liabilities in a manner that stabilizes net interest income and net economic value
within a broad range of interest rate environments. Management adjusts the mix of assets and
liabilities periodically in an effort to achieve dependable, steady growth in net interest income
regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee
examines the extent to which Old Line Banks assets and liabilities are interest rate sensitive and
monitors the interest rate sensitivity gap. An interest rate sensitive asset or liability is one
that, within a defined time period, either matures or experiences an interest rate change in line
with general market rates. The interest rate sensitivity gap is the difference between
interest-earning assets and interest-bearing liabilities scheduled to mature or re-price within
such time period. A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the 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 accurately indicate how changes in interest
rates will affect net interest income. Changes in interest rates may not uniformly affect income
associated with interest-earning assets and costs associated with interest-bearing liabilities. In
addition, the magnitude and duration of changes in interest rates may have a significant impact
on net interest income. Although certain assets and
28
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 $22.5 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 available for sale investment securities to create
additional liquidity. From time to time we may sell or participate out loans to create additional
liquidity as required. Additional sources of liquidity include 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, 2006 we had $3.5 million in cash and due from banks and $11.6 million in federal
funds sold and other overnight investments. At September 30, 2006, our investment in federal funds
had declined because of the $32.9 million in loan growth that has occurred since December 31, 2005.
As we continue to grow the loan portfolio, we anticipate these balances will decline.
Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in
deposits. We usually retain maturing certificates of deposit as we offer competitive rates on
certificates of deposit. Management is not aware of any demands, trends, commitments, or events
that would result in Old Line Banks inability to meet anticipated or unexpected liquidity needs.
Capital
Our stockholders equity amounted to $34.5 million at September 30, 2006 and $33.5 million at
December 31, 2005. We are considered well capitalized under the risk-based capital guidelines
adopted by the Federal Reserve. Stockholders equity increased during the period because of net
income of $1.2 million, plus the $94,846 adjustment for stock-based compensation awards and options
exercised less the dividends paid in September and June of $127,503 and in March of $106,223, and
the $68,559 of unrealized gains, net of income taxes, in available for sale securities.
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
Old Line Bancshares, Inc. is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments primarily include commitments to extend
credit, lines of credit and standby letters of credit. Old Line Bancshares, Inc. uses these
financial instruments to meet the financing needs of its customers. These financial instruments
involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These do not
represent unusual risks and management does not anticipate any losses which would have a material
effect on Old Line Bancshares, Inc. In addition, Old Line Bancshares, Inc. has operating lease
obligations.
Old Line Bancshares, Inc.s guaranty obligation made in connection with Pointer Ridges
construction loan, as described under Investment in Pointer Ridge LLC and Minority Interest, also
creates off-balance sheet risk.
29
Outstanding loan commitments, lines and letters of credit at September 30, 2006 and December 31,
2005 are as follows (000s):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Commitments to extend credit and available credit lines: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
10,354 |
|
|
$ |
5,225 |
|
Real estate-undisbursed development and construction |
|
|
25,179 |
|
|
|
13,921 |
|
Real estate-undisbursed home equity lines of credit |
|
|
4,508 |
|
|
|
4,886 |
|
|
|
|
|
|
|
|
|
|
$ |
40,041 |
|
|
$ |
24,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
1,655 |
|
|
$ |
1,807 |
|
|
|
|
|
|
|
|
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 $25.2 million, or 63.00% of
the $40.0 million, are generally short-term and turn over rapidly, satisfying cash requirements
with principal repayments and from sales of the properties financed.
Reconciliation of Non-GAAP Measures
Below is a reconciliation of the FTE adjustments and the GAAP basis information presented in
this report.
Nine months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds |
|
|
Investment |
|
|
Interest |
|
|
Net Interest |
|
|
Net Interest |
|
|
|
Sold |
|
|
Securities |
|
|
Earning Assets |
|
|
Income |
|
|
Spread |
|
GAAP interest income |
|
$ |
952,888 |
|
|
$ |
471,160 |
|
|
$ |
7,842,732 |
|
|
$ |
5,331,550 |
|
|
|
|
|
Tax equivalent adjustment |
|
|
21,939 |
|
|
|
49,102 |
|
|
|
71,041 |
|
|
|
71,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest income |
|
$ |
974,827 |
|
|
$ |
520,262 |
|
|
$ |
7,913,773 |
|
|
$ |
5,402,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP interest yield |
|
|
4.77 |
% |
|
|
3.35 |
% |
|
|
6.38 |
% |
|
|
4.33 |
% |
|
|
3.26 |
% |
Taxable equivalent adjustment |
|
|
0.11 |
% |
|
|
0.35 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest yield |
|
|
4.88 |
% |
|
|
3.70 |
% |
|
|
6.44 |
% |
|
|
4.39 |
% |
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds |
|
|
Investment |
|
|
Interest |
|
|
Net Interest |
|
|
Net Interest |
|
|
|
Sold |
|
|
Securities |
|
|
Earning Assets |
|
|
Income |
|
|
Spread |
|
GAAP interest income |
|
$ |
309,596 |
|
|
$ |
458,062 |
|
|
$ |
4,878,795 |
|
|
$ |
3,417,193 |
|
|
|
|
|
Tax equivalent adjustment |
|
|
3,629 |
|
|
|
49,045 |
|
|
|
52,674 |
|
|
|
52,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest income |
|
$ |
313,225 |
|
|
$ |
507,107 |
|
|
$ |
4,931,469 |
|
|
$ |
3,469,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP interest yield |
|
|
2.99 |
% |
|
|
3.22 |
% |
|
|
5.48 |
% |
|
|
3.84 |
% |
|
|
3.21 |
% |
Taxable equivalent adjustment |
|
|
0.03 |
% |
|
|
0.35 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent interest yield |
|
|
3.02 |
% |
|
|
3.57 |
% |
|
|
5.54 |
% |
|
|
3.90 |
% |
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
30
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of financial position
and operating results in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more significant impact on a
financial institutions performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the price of goods and
services, and may frequently reflect government policy initiatives or economic factors not measured
by price index. As discussed above, we strive to manage our interest sensitive assets and
liabilities in order to offset the effects of rate changes and inflation.
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 managements interpretation of those factors will have a
direct impact on the amount of the provision, and a corresponding effect on income and assets.
Also, errors in managements perception and assessment of the allowance factors could result in the
allowance not being adequate to cover losses in the portfolio, and may result in additional
provisions or charge-offs, which would adversely affect income and capital. For additional
information regarding the allowance for loan losses, see Provision for Loan Losses.
Information Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of
the Securities Exchange Act of 1933, as amended and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act). Forward-looking statements also may be included in other
statements that we make. All statements that are not descriptions of historical facts are
forward-looking statements. Forward-looking statements often use words such as believe, expect,
plan, may, will, should, project, contemplate, anticipate, forecast, intend or
other words of similar meaning. You can also identify them by the fact that they do not relate
strictly to historical or current facts.
31
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 report; the ability of Old Line Bancshares, Inc. to retain key
personnel; the ability of Old Line Bancshares, Inc. to successfully implement its growth and
expansion strategy; risk of loan losses; risks associated with the marine brokerage division; that
the allowance for loan losses may not be sufficient; that changes in interest rates and monetary
policy could adversely affect Old Line Bancshares, Inc.; that changes in regulatory requirements
and/or restrictive banking legislation may adversely affect Old Line Bancshares, Inc.; that the
market value of investments could negatively impact stockholders equity; risks associated with Old
Line Bancshares, Inc.s lending limit; increased expenses due to stock benefit plans; expenses
associated with operating as a public company; potential conflicts of interest associated with the
interest in Pointer Ridge; and changes in economic, competitive, governmental, regulatory,
technological and other factors which may affect Old Line Bancshares, Inc. specifically or the
banking industry generally. For a more complete discussion of some of these risks and
uncertainties see Factors Affecting Future Results in Old Line Bancshares, Inc.s Annual Report
on Form 10-KSB for the year ended December 31, 2005.
Old Line Bancshares, Inc.s actual results and the actual outcome of our expectations and
strategies could differ materially from those anticipated or estimated because of these risks and
uncertainties and you should not put undue reliance on any forward-looking statements. All
forward-looking statements speak only as of the date of this filing, and Old Line Bancshares, Inc.
undertakes no obligation to update the forward-looking statements to reflect factual assumptions,
circumstances or events that have changed after the forward-looking statements are made.
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 as defined in Rule 13a-15(e)
under the Exchange Act. Based upon that evaluation, Old Line Bancshares, Inc.s Chief Executive
Officer and Chief Financial Officer concluded that Old Line Bancshares, Inc.s disclosure controls
and procedures are effective as of September 30, 2006. Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information required to be disclosed
by Old Line Bancshares, Inc. in the reports that it files or submits under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms.
In addition, there were no changes in Old Line Bancshares, Inc.s internal control over
financial reporting (as defined in Rule 13a-15(f)) under the Exchange Act during the quarter ended
September 30, 2006, that have materially affected, or are reasonably likely to materially affect,
Old Line Bancshares, Inc.s internal control over financial reporting.
32
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
None
Item 5. Other Information.
Not applicable.
Item 6. Exhibits
|
3.1 |
|
Articles of Amendment and Restatement of Old Line Bancshares, Inc.
(previously filed with, and incorporated by reference from, Old Line Bancshares,
Inc.s Registration Statement on Form 10-SB, as amended (File Number 000-50345). |
|
|
3.1.1 |
|
Articles of Amendment of Old Line Bancshares, Inc. |
|
|
3.1.2 |
|
Articles of Amendment of Old Line Bancshares, Inc. |
|
|
10.36 |
|
Lease Agreement dated as of June 10, 2006 between Pointer Ridge Office
Investment, LLC and Old Line Bank (1st Floor 1525 Pointer Ridge Place,
Bowie, Md.). |
|
|
10.37 |
|
Lease Agreement dated as of June 10, 2006 between Pointer Ridge Office
Investment, LLC and Old Line Bank (3rd Floor 1525 Pointer Ridge Place,
Bowie, Md.). |
|
|
10.38 |
|
Lease Agreement dated as of June 10, 2006 between Pointer Ridge Office
Investment, LLC and Old Line Bank (4th Floor 1525 Pointer Ridge Place,
Bowie, Md.). |
|
|
10.39 |
|
Indemnity and Guaranty Agreement between Old Line Bancshares, Inc. and
Prudential Mortgage Capital Company, LLC dated August 25, 2006. |
|
|
31.1 |
|
Rule 13a-14(a)Certification of Chief Executive Officer. |
|
|
31.2 |
|
Rule 13a-14(a)Certification of Chief Financial Officer. |
|
|
32 |
|
Rule 13a-14(b)Certification of Chief Executive Officer and Chief
Financial Officer. |
33
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 9, 2006 |
By: |
/s/ James W. Cornelsen
|
|
|
|
James W. Cornelsen, President |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
Date: November 9, 2006 |
By: |
/s/ Christine M. Rush
|
|
|
|
Christine M. Rush, Chief Financial Officer |
|
|
|
(Principal Accounting and Financial Officer) |
|
|
34