olb10q.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
R
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
EXCHANGE ACT OF 1934
|
|
|
|
For the quarterly period ended March 31, 2011
|
OR
£
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
EXCHANGE ACT OF 1934
|
Commission File Number: 000-50345
Old Line Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Maryland
|
|
20-0154352
|
(State or other jurisdiction
|
|
(I.R.S. Employer
|
of incorporation or organization)
|
|
Identification No.)
|
|
1525 Pointer Ridge Place
|
20716
|
|
Bowie, Maryland
|
(Zip Code)
|
|
(Address of principal executive offices)
|
|
Registrant’s telephone number, including area code: (301) 430-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
|
Accelerated filer o
|
|
|
Non-accelerated filer o (Do not check if a smaller reporting company)
|
Smaller reporting company þ
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of May 1, 2011, the registrant had 6,809,594 shares of common stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
Old Line Bancshares, Inc. & Subsidiaries
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and due from banks
|
|
$ |
8,512,884 |
|
|
$ |
14,325,266 |
|
Interest bearing accounts
|
|
|
115,680 |
|
|
|
109,170 |
|
Federal funds sold
|
|
|
558,214 |
|
|
|
180,536 |
|
Total cash and cash equivalents
|
|
|
9,186,778 |
|
|
|
14,614,972 |
|
Time deposits in other banks
|
|
|
99,000 |
|
|
|
297,000 |
|
Investment securities available for sale
|
|
|
37,658,830 |
|
|
|
33,049,795 |
|
Investment securities held to maturity
|
|
|
20,267,496 |
|
|
|
21,736,469 |
|
Loans, less allowance for loan losses
|
|
|
306,653,965 |
|
|
|
299,606,430 |
|
Restricted equity securities at cost
|
|
|
2,596,650 |
|
|
|
2,562,750 |
|
Premises and equipment
|
|
|
16,703,016 |
|
|
|
16,867,561 |
|
Accrued interest receivable
|
|
|
1,239,489 |
|
|
|
1,252,970 |
|
Prepaid income taxes
|
|
|
- |
|
|
|
189,523 |
|
Deferred income taxes
|
|
|
190,186 |
|
|
|
265,551 |
|
Bank owned life insurance
|
|
|
8,765,616 |
|
|
|
8,703,175 |
|
Other real estate owned
|
|
|
1,976,516 |
|
|
|
1,153,039 |
|
Other assets
|
|
|
2,214,039 |
|
|
|
1,610,715 |
|
Total assets
|
|
$ |
407,551,581 |
|
|
$ |
401,909,950 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$ |
56,827,155 |
|
|
$ |
67,494,744 |
|
Interest bearing
|
|
|
281,811,895 |
|
|
|
273,032,442 |
|
Total deposits
|
|
|
338,639,050 |
|
|
|
340,527,186 |
|
Short term borrowings
|
|
|
6,584,128 |
|
|
|
5,669,332 |
|
Long term borrowings
|
|
|
16,349,219 |
|
|
|
16,371,947 |
|
Accrued interest payable
|
|
|
363,763 |
|
|
|
434,656 |
|
Income tax payable
|
|
|
56,415 |
|
|
|
- |
|
Other liabilities
|
|
|
1,220,714 |
|
|
|
1,248,079 |
|
Total liabilities
|
|
|
363,213,289 |
|
|
|
364,251,200 |
|
|
|
|
|
|
|
|
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|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; authorized 15,000,000 shares;
|
|
|
|
|
|
issued and outstanding 4,677,363 in 2011 and 3,891,705 in 2010
|
|
|
46,774 |
|
|
|
38,917 |
|
Additional paid-in capital
|
|
|
35,582,975 |
|
|
|
29,206,617 |
|
Retained earnings
|
|
|
7,917,628 |
|
|
|
7,535,268 |
|
Accumulated other comprehensive income
|
|
|
208,879 |
|
|
|
272,956 |
|
Total Old Line Bancshares, Inc. stockholders' equity
|
|
|
43,756,256 |
|
|
|
37,053,758 |
|
Non-controlling interest
|
|
|
582,036 |
|
|
|
604,992 |
|
Total stockholders' equity
|
|
|
44,338,292 |
|
|
|
37,658,750 |
|
Total liabilities and stockholders' equity
|
|
$ |
407,551,581 |
|
|
$ |
401,909,950 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
|
|
Consolidated Statements of Income
|
|
(Unaudited)
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Interest revenue
|
|
|
|
|
|
|
Loans, including fees
|
|
$ |
4,195,866 |
|
|
$ |
3,953,356 |
|
U.S. government agency securities
|
|
|
26,117 |
|
|
|
54,555 |
|
Mortgage backed securities
|
|
|
379,418 |
|
|
|
275,216 |
|
Municipal securities
|
|
|
19,704 |
|
|
|
19,633 |
|
Federal funds sold
|
|
|
1,831 |
|
|
|
643 |
|
Other
|
|
|
24,926 |
|
|
|
86,726 |
|
Total interest revenue
|
|
|
4,647,862 |
|
|
|
4,390,129 |
|
Interest expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
875,976 |
|
|
|
974,929 |
|
Borrowed funds
|
|
|
184,623 |
|
|
|
273,544 |
|
Total interest expense
|
|
|
1,060,599 |
|
|
|
1,248,473 |
|
Net interest income
|
|
|
3,587,263 |
|
|
|
3,141,656 |
|
Provision for loan losses
|
|
|
150,000 |
|
|
|
70,000 |
|
Net interest income after provision for loan losses
|
|
|
3,437,263 |
|
|
|
3,071,656 |
|
Non-interest revenue
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
82,450 |
|
|
|
74,820 |
|
Gains on sales of investment securities
|
|
|
38,070 |
|
|
|
- |
|
Earnings on bank owned life insurance
|
|
|
79,038 |
|
|
|
86,123 |
|
Gain on sale of other real estate owned
|
|
|
2,985 |
|
|
|
- |
|
Other fees and commissions
|
|
|
122,337 |
|
|
|
131,946 |
|
Total non-interest revenue
|
|
|
324,880 |
|
|
|
292,889 |
|
Non-interest expense
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
1,133,787 |
|
|
|
1,165,415 |
|
Employee benefits
|
|
|
366,924 |
|
|
|
350,135 |
|
Occupancy
|
|
|
366,023 |
|
|
|
333,406 |
|
Equipment
|
|
|
93,891 |
|
|
|
106,876 |
|
Data processing
|
|
|
129,750 |
|
|
|
94,426 |
|
FDIC insurance and State of Maryland assessments
|
|
|
151,504 |
|
|
|
115,115 |
|
Merger and integration expenses
|
|
|
90,060 |
|
|
|
- |
|
Other operating
|
|
|
595,235 |
|
|
|
529,409 |
|
Total non-interest expense
|
|
|
2,927,174 |
|
|
|
2,694,782 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
834,969 |
|
|
|
669,763 |
|
Income taxes
|
|
|
335,243 |
|
|
|
230,069 |
|
Net income
|
|
|
499,726 |
|
|
|
439,694 |
|
Less: Net loss attributable to the noncontrolling interest
|
|
|
(22,956 |
) |
|
|
(24,840 |
) |
Net income attributable to Old Line Bancshares, Inc.
|
|
$ |
522,682 |
|
|
$ |
464,534 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
Diluted earnings per common share
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
Dividend per common share
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
|
|
Consolidated Statement of Changes in Stockholders' Equity
|
|
Three Months Ended March 31, 2011
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
|
|
|
Accumulated other comprehensive
|
|
|
Comprehensive
|
|
|
Non-controlling
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
earnings
|
|
|
income |
|
|
income
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
3,891,705 |
|
|
$ |
38,917 |
|
|
$ |
29,206,617 |
|
|
$ |
7,535,268 |
|
|
$ |
272,956 |
|
|
|
|
|
$ |
604,992 |
|
Net income attributable
to Old Line Bancshares, Inc.
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
522,682 |
|
|
|
- |
|
|
$ |
522,682 |
|
|
|
- |
|
Unrealized loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available for sale,
net of income tax benefit of $41,739
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(64,077 |
) |
|
|
(64,077 |
) |
|
|
- |
|
Comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
458,605 |
|
|
|
- |
|
Net loss attributable
to non-controlling interest
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
(22,956 |
) |
Stock based compensation awards
|
|
|
- |
|
|
|
- |
|
|
|
43,514 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Restricted stock issued
|
|
|
8,786 |
|
|
|
88 |
|
|
|
(88 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Private placement
|
|
|
776,872 |
|
|
|
7,769 |
|
|
|
6,332,932 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Common stock cash dividend
$0.03 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(140,322 |
) |
|
|
- |
|
|
|
|
|
|
|
- |
|
Balance March 31, 2011
|
|
|
4,677,363 |
|
|
$ |
46,774 |
|
|
$ |
35,582,975 |
|
|
$ |
7,917,628 |
|
|
$ |
208,879 |
|
|
|
|
|
|
$ |
582,036 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
|
|
Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Interest received
|
|
$ |
4,746,447 |
|
|
$ |
4,259,662 |
|
Fees and commissions received
|
|
|
221,384 |
|
|
|
219,933 |
|
Interest paid
|
|
|
(1,131,492 |
) |
|
|
(1,282,557 |
) |
Cash paid to suppliers and employees
|
|
|
(3,315,887 |
) |
|
|
(2,447,341 |
) |
Income taxes paid
|
|
|
27,799 |
|
|
|
(506,144 |
) |
|
|
|
548,251 |
|
|
|
243,553 |
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net change in time deposits in other banks
|
|
|
198,000 |
|
|
|
1,658,831 |
|
Purchase of investment securities
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
- |
|
|
|
(16,620,595 |
) |
Available for sale
|
|
|
(14,812,374 |
) |
|
|
(3,140,625 |
) |
Proceeds from disposal of investment securities
|
|
|
|
|
|
|
|
|
Held to maturity at maturity or call
|
|
|
1,427,498 |
|
|
|
427,831 |
|
Available for sale at maturity or call
|
|
|
2,318,135 |
|
|
|
1,606,397 |
|
Available for sale securities sold
|
|
|
7,684,037 |
|
|
|
- |
|
Gain on sale of available for sale securities
|
|
|
38,070 |
|
|
|
- |
|
Loans made, net of principal collected
|
|
|
(7,969,291 |
) |
|
|
(6,030,826 |
) |
Proceeds from sale of other real estate owned
|
|
|
2,985 |
|
|
|
- |
|
Redemption (Purchase) of equity securities
|
|
|
(33,900 |
) |
|
|
- |
|
Purchase of premises, equipment and software
|
|
|
(33,917 |
) |
|
|
(113,541 |
) |
|
|
|
(11,180,757 |
) |
|
|
(22,212,528 |
) |
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
830,123 |
|
|
|
3,593,546 |
|
Other deposits
|
|
|
(2,718,258 |
) |
|
|
12,209,674 |
|
Increase in short term borrowings
|
|
|
914,796 |
|
|
|
14,593,406 |
|
Decrease in long term borrowings
|
|
|
(22,728 |
) |
|
|
(21,432 |
) |
Private placement - common stock
|
|
|
6,340,701 |
|
|
|
- |
|
Cash dividends paid-preferred stock
|
|
|
- |
|
|
|
- |
|
Cash dividends paid-common stock
|
|
|
(140,322 |
) |
|
|
(116,399 |
) |
Distributions to minority members
|
|
|
- |
|
|
|
(4,875 |
) |
|
|
|
5,204,312 |
|
|
|
30,253,920 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(5,428,194 |
) |
|
|
8,284,945 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
14,614,972 |
|
|
|
11,436,587 |
|
Cash and cash equivalents at end of period
|
|
$ |
9,186,778 |
|
|
$ |
19,721,532 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
|
|
Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Reconciliation of net income to net cash
|
|
|
|
|
|
|
provided by operating activities
|
|
|
|
|
|
|
Net income
|
|
$ |
499,726 |
|
|
$ |
439,694 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
198,462 |
|
|
|
199,154 |
|
Provision for loan losses
|
|
|
150,000 |
|
|
|
70,000 |
|
Gain on sale of other real estate owned
|
|
|
(2,985 |
) |
|
|
- |
|
Change in deferred loan fees net of costs
|
|
|
(51,721 |
) |
|
|
(16,063 |
) |
Gain on sale of securities
|
|
|
(38,070 |
) |
|
|
- |
|
Amortization of premiums and discounts
|
|
|
136,825 |
|
|
|
27,744 |
|
Deferred income taxes
|
|
|
117,104 |
|
|
|
(11,650 |
) |
Stock based compensation awards
|
|
|
43,514 |
|
|
|
40,270 |
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
(70,893 |
) |
|
|
(34,084 |
) |
Income tax payable
|
|
|
56,415 |
|
|
|
(175,543 |
) |
Other liabilities
|
|
|
(27,365 |
) |
|
|
(28,141 |
) |
Decrease (increase) in
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
13,481 |
|
|
|
(142,148 |
) |
Bank owned life insurance
|
|
|
(62,441 |
) |
|
|
(72,956 |
) |
Prepaid income taxes
|
|
|
189,523 |
|
|
|
(88,882 |
) |
Other assets
|
|
|
(603,324 |
) |
|
|
36,158 |
|
|
|
$ |
548,251 |
|
|
$ |
243,553 |
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned
|
|
$ |
825,289 |
|
|
$ |
223,169 |
|
The accompanying notes are an integral part of these consolidated financial statements
Old Line Bancshares, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization and Description of Business-Old Line Bancshares, Inc. (Old Line Bancshares) 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 is to own all of the capital stock of Old Line Bank. We provide a full range of banking services to customers located in Prince George’s, Charles, Anne Arundel, and St. Mary’s counties in Maryland and surrounding areas.
On November 17, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest in Pointer Ridge Office Investment, LLC (Pointer Ridge), a real estate investment company. The effective date of the purchase was November 1, 2008. As a result of this purchase, our membership interest increased from 50.0% to 62.5%. Consequently, we consolidated Pointer Ridge’s results of operations from the date of acquisition. Prior to the date of acquisition, we accounted for our investment in Pointer Ridge using the equity method.
Basis of Presentation and Consolidation-The accompanying consolidated financial statements include the activity of Old Line Bancshares and its wholly owned subsidiary, Old Line Bank, and its majority owned subsidiary Pointer Ridge. We have eliminated all significant intercompany transactions and balances.
We report the non-controlling interests in Pointer Ridge separately in the consolidated balance sheet. We report the income of Pointer Ridge attributable to Old Line Bancshares on the consolidated statement of income.
The foregoing consolidated financial statements are unaudited; however, in the opinion of management we have included all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim period. We derived the balances as of December 31, 2010 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’ Form 10-K for the year ended December 31, 2010. We have made no significant changes to Old Line Bancshares’ accounting policies as disclosed in the Form 10-K.
The accounting and reporting policies of Old Line Bancshares conform to accounting principles generally accepted in the United States of America.
Reclassifications-We have made certain reclassifications to the 2010 financial presentation to conform to the 2011 presentation.
Subsequent Events-We evaluated subsequent events after March 31, 2011 through May 1, 2011, the date this report was available to be issued. On April 1, 2011, our acquisition of Maryland Bankcorp, Inc. became effective.
As Old Line Bank purchases securities, management determines if we should classify the securities as held to maturity, available for sale or trading. We record the securities which management has the intent and ability to hold to maturity at amortized cost which is cost adjusted for amortization of premiums and accretion of discounts to maturity. We classify securities which we may sell before maturity as available for sale and carry these securities at fair value with unrealized gains and losses included in stockholders' equity on an after tax basis. Management has not identified any investment securities as trading.
We record gains and losses on the sale of securities on the trade date and determine these gains or losses using the specific identification method. We amortize premiums and accrete discounts using the interest method. Presented below is a summary of the amortized cost and estimated fair value of securities.
March 31, 2011
|
|
Amortized
cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency
|
|
$ |
3,616,091 |
|
|
$ |
76,188 |
|
|
$ |
- |
|
|
$ |
3,692,279 |
|
Municipal securities
|
|
|
1,302,125 |
|
|
|
44,972 |
|
|
|
(84 |
) |
|
|
1,347,013 |
|
Mortgage backed
|
|
|
32,395,673 |
|
|
|
366,559 |
|
|
|
(142,694 |
) |
|
|
32,619,538 |
|
|
|
$ |
37,313,889 |
|
|
$ |
487,719 |
|
|
$ |
(142,778 |
) |
|
$ |
37,658,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$ |
983,107 |
|
|
$ |
11,546 |
|
|
$ |
(9,961 |
) |
|
$ |
984,692 |
|
Mortgage backed
|
|
|
19,284,389 |
|
|
|
316,376 |
|
|
|
(3,704 |
) |
|
|
19,597,061 |
|
|
|
$ |
20,267,496 |
|
|
$ |
327,922 |
|
|
$ |
(13,665 |
) |
|
$ |
20,581,753 |
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency
|
|
$ |
3,716,858 |
|
|
$ |
90,881 |
|
|
$ |
(3,942 |
) |
|
$ |
3,803,797 |
|
Municipal securities
|
|
|
1,302,630 |
|
|
|
24,746 |
|
|
|
(169 |
) |
|
|
1,327,207 |
|
Mortgage backed
|
|
|
27,579,549 |
|
|
|
519,919 |
|
|
|
(180,677 |
) |
|
|
27,918,791 |
|
|
|
$ |
32,599,037 |
|
|
$ |
635,546 |
|
|
$ |
(184,788 |
) |
|
$ |
33,049,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$ |
983,783 |
|
|
$ |
11,569 |
|
|
$ |
(39,568 |
) |
|
$ |
955,784 |
|
Mortgage backed
|
|
|
20,752,686 |
|
|
|
290,747 |
|
|
|
(33,636 |
) |
|
|
21,009,797 |
|
|
|
$ |
21,736,469 |
|
|
$ |
302,316 |
|
|
$ |
(73,204 |
) |
|
$ |
21,965,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. INVESTMENT SECURITIES (Continued)
As of March 31, 2011, securities with unrealized losses segregated by length of impairment were as follows:
March 31, 2011
|
|
Fair
value
|
|
|
Unrealized
losses
|
|
Unrealized losses less than 12 months
|
|
|
|
|
|
|
Municipal securities
|
|
$ |
470,483 |
|
|
$ |
9,961 |
|
Mortgage backed
|
|
|
18,986,996 |
|
|
|
146,398 |
|
Total unrealized losses less than 12 months
|
|
|
19,457,479 |
|
|
|
156,359 |
|
|
|
|
|
|
|
|
|
|
Unrealized losses greater than 12 months
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
200,350 |
|
|
|
84 |
|
Mortgage backed
|
|
|
- |
|
|
|
- |
|
Total unrealized losses greater than 12 months
|
|
|
200,350 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
Total unrealized losses
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
|
670,833 |
|
|
|
10,045 |
|
Mortgage backed
|
|
|
18,986,996 |
|
|
|
146,398 |
|
Total unrealized losses
|
|
$ |
19,657,829 |
|
|
$ |
156,443 |
|
|
|
|
|
|
|
|
|
|
We consider all unrealized losses on securities as of March 31, 2011 to be temporary losses because we will redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of March 31, 2011, we do not have the intent to sell any of the securities classified as available for sale and believe that it is more likely than not that we will not have to sell any such securities before a recovery of cost. In most cases, market interest rate fluctuations cause a temporary impairment in value. We expect the fair value to recover as the investments approach their maturity or repricing date or if market yields for these investments decline. We do not believe that credit quality caused the impairment in any of these securities. Because we believe these impairments are temporary, we have not realized any loss in our consolidated statement of income.
As a result of the merger with Maryland Bankcorp, Inc. and the merger of Maryland Bank & Trust Company into Old Line Bank, we plan to reevaluate the investment portfolio to ensure that the securities acquired in the acquisition meet our investment criteria and provide adequate liquidity. This may cause us to reclassify or sell securities.
In the three month period ended March 31, 2011, we recorded $38,070 in gains from the sales of available for sale securities. In the three month period ended March 31, 2010 we did not record any gains or losses from the sale of available for sale securities.
2. INVESTMENT SECURITIES (Continued)
Contractual maturities and pledged securities at March 31, 2011 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. We classify mortgage backed securities based on maturity date. However, we receive payments on a monthly basis.
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
March 31, 2011
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
Amortized
cost
|
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$ |
1,006,883 |
|
|
$ |
1,031,890 |
|
|
$ |
- |
|
|
$ |
- |
|
Over one to five years
|
|
|
1,950,400 |
|
|
|
2,028,554 |
|
|
|
301,977 |
|
|
|
305,769 |
|
Over five to ten years
|
|
|
11,162,445 |
|
|
|
11,374,524 |
|
|
|
6,200,411 |
|
|
|
6,438,573 |
|
Over ten years
|
|
|
23,194,161 |
|
|
|
23,223,862 |
|
|
|
13,765,108 |
|
|
|
13,837,411 |
|
|
|
$ |
37,313,889 |
|
|
$ |
37,658,830 |
|
|
$ |
20,267,496 |
|
|
$ |
20,581,753 |
|
Pledged securities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. POINTER RIDGE OFFICE INVESTMENT, LLC
On November 17, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest in Pointer Ridge. The effective date of the purchase was November 1, 2008. As a result of this purchase, we own 62.5% of Pointer Ridge and we have consolidated its results of operations from the date of acquisition.
The following table summarizes the condensed Balance Sheets and Statements of Income information for Pointer Ridge.
Pointer Ridge Office Investment, LLC
Balance Sheets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
724,906 |
|
|
$ |
758,257 |
|
Non-current assets
|
|
|
7,203,631 |
|
|
|
7,252,413 |
|
Liabilities
|
|
|
6,376,442 |
|
|
|
6,397,360 |
|
Equity
|
|
|
1,552,095 |
|
|
|
1,613,310 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2011 |
|
|
2010 |
|
Statements of Income
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
205,732 |
|
|
$ |
197,539 |
|
Expenses
|
|
|
266,947 |
|
|
|
263,780 |
|
Net loss
|
|
$ |
(61,215 |
) |
|
$ |
(66,241 |
) |
The provision for income taxes includes taxes payable for the current year and deferred income taxes. We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. We have not recorded a valuation allowance against deferred tax assets as management believes that it is more likely than not that we will realize all of the deferred tax assets because they were supported by recoverable taxes paid in prior years. We allocate tax expense and tax benefits to Old Line Bank and Old Line Bancshares based on their proportional share of taxable income.
Major classifications of loans are as follows:
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
Commercial
|
|
$ |
158,590,978 |
|
|
$ |
153,526,907 |
|
Construction
|
|
|
28,633,846 |
|
|
|
24,377,690 |
|
Residential
|
|
|
27,956,682 |
|
|
|
27,081,399 |
|
Commercial
|
|
|
81,240,269 |
|
|
|
83,523,056 |
|
Consumer
|
|
|
11,818,932 |
|
|
|
13,079,878 |
|
|
|
|
308,240,707 |
|
|
|
301,588,930 |
|
Allowance for loan losses
|
|
|
(2,124,439 |
) |
|
|
(2,468,476 |
) |
Deferred loan costs, net
|
|
|
537,697 |
|
|
|
485,976 |
|
|
|
$ |
306,653,965 |
|
|
$ |
299,606,430 |
|
Credit policies and Administration
We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. We have designed our underwriting standards to promote a complete banking relationship rather than a transactional relationship. In an effort to manage risk, prior to funding, the loan committee consisting of the Executive Officers and six members of the Board of Directors must approve by a majority vote all credit decisions in excess of a lending officer’s lending authority. Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial condition of its borrowers and loan concentrations.
In addition to the internal business processes employed in the credit administration area, the Bank retains an outside independent firm to review the loan portfolio. This firm performs a detailed annual review and an interim update. We use the results of the firm’s report to validate our internal rating and we review the commentary on specific loans and on our loan administration activities in order to improve our operations.
Commercial real estate lending entails significant risks. Risks inherent in managing our commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate these risks by carefully underwriting these loans. We also generally require the personal or corporate guarantee(s) of the owners and/or occupant(s) of the property. For loans of this type in excess of $250,000, we monitor the financial condition and operating performance of the borrower through a review of annual tax returns and updated financial statements. In addition, we meet with the borrower and/or perform site visits as required.
Management tracks all loans secured by commercial real estate. With the exception of loans to the hospitality industry, the properties secured by commercial real estate are diverse in terms of type. This diversity helps to reduce our exposure to economic events that affect any single market or industry. As a general rule, we avoid financing single purpose properties unless other underwriting factors are present to help mitigate the risk. As previously mentioned, we do have a concentration in the hospitality industry. At March 31, 2011 and December 31, 2010, we had approximately $39.4 million and $38.5 million, respectively, of commercial real estate loans to the hospitality industry. An individual review of these loans indicates that they generally have a low loan to value, more than acceptable existing or projected cash flow, are to experienced operators and are generally dispersed throughout the region.
Real Estate Construction Loans
This segment of our portfolio consists of funds advanced for construction of single family residences, multi-family housing and commercial buildings. These loans generally have short durations, meaning maturities typically of nine months or less. Residential houses, multi-family dwellings and commercial buildings under construction and the underlying land for which the loan was obtained secure the construction loans. All of these loans are concentrated in our primary market area.
Construction lending also entails significant risk. These risks involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. An appraisal of the property estimates the value of the project prior to completion of construction. Thus, it is more difficult to accurately evaluate the total loan funds required to complete a project and related loan to value ratios. To mitigate the risks, we generally limit loan amounts to 80% of appraised values and obtain first lien positions on the property. We generally offer real estate construction financing only to experienced builders, commercial entities or individuals who have demonstrated the ability to obtain a permanent loan “take-out.” We also perform a complete analysis of the borrower and the project under construction. This analysis includes a review of the cost to construct, the borrower’s ability to obtain a permanent “take-out”, the cash flow available to support the debt payments and construction costs in excess of loan proceeds, and the value of the collateral. During construction, we advance funds on these loans on a percentage of completion basis. We inspect each project as needed prior to advancing funds during the term of the construction loan.
Residential Real Estate Loans
We offer a variety of consumer oriented residential real estate loans. The majority of our residential real estate portfolio is home equity loans to individuals with a loan to value not exceeding 85%. We also offer fixed rate home improvement loans. Our home equity and home improvement loan portfolio consists of a diverse client base. Although most of these loans are in our primary market area, the diversity of the individual loans in the portfolio reduces our potential risk. Usually, we secure our home equity loans and lines of credit with a security interest in the borrower’s primary or secondary residence. Our initial underwriting includes an analysis of the borrower’s debt/income ratio which generally may not exceed 40%, collateral value, length of employment and prior credit history. We do not have any subprime residential real estate loans.
Commercial Business Lending
Our commercial business lending consists of lines of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans, SBA loans, standby letters of credit and unsecured loans. We originate commercial business loans for any business purpose including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, and acquisition activities. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, deeds of trust and other collateral such as marketable securities, cash value of life insurance and time deposits at Old Line Bank.
Commercial business loans generally depend on the success of the business for repayment. They may also involve high average balances, increased difficulty monitoring and a high risk of default. To help manage this risk, we typically limit these loans to proven businesses and we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of the business. For loans in excess of $250,000, monitoring generally includes a review of the borrower’s annual tax returns and updated financial statements.
Consumer Installment Lending
We offer various types of secured and unsecured consumer loans. Prior to 2008, a primary aspect of our consumer lending was financing for luxury boat purchases. Although we continue to maintain a portfolio of approximately $10.4 million of these loans, we have not originated any substantive new luxury boat loans since the third quarter of 2007. These loans are risky because the boats that secure these loans are depreciable assets. Further, payment on these loans depends on the borrower’s continuing financial stability. Job loss, divorce, illness or personal bankruptcy may adversely impact the borrower’s ability to pay. To mitigate these risks, we have more stringent underwriting standards for these loans than for other installment loans. As a general guideline, the individual must have a debt service less than 36% of gross income, stability of employment, verifiable liquidity, satisfactory prior credit repayment history, must own a home and the loan to value ratio may not exceed 85%. The majority of these boats are United States Coast Guard documented vessels and we have obtained a lien on the vessel with a first preferred ship mortgage, where applicable, or a security interest on the title.
We also make consumer loans for personal, family or household purposes as a convenience to our customer base. However, these loans are not a focus of our lending activities. As a general guideline, a consumer’s total debt service should not exceed 40% of his or her gross income. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan.
Consumer loans are risky because they are unsecured or rapidly depreciating assets secure these loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the borrower may not repay the loan. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.
Concentrations of Credit
Most of our lending activity occurs within the state of Maryland within the suburban Washington, D.C. market area. The majority of our loan portfolio consists of commercial real estate loans and commercial and industrial loans. As of March 31, 2011 and December 31, 2010, the only industry in which we had a concentration of loans was the hospitality industry, as previously mentioned.
Non-Accrual and Past Due Loans
We consider loans past due if the borrower has not paid the required principal and interest payments when due. Management generally classifies loans as non-accrual when it does not expect collection of full principal and interest under the original terms of the loan or payment of principal or interest has become 90 days past due. When we classify a loan as non-accrual, we no longer accrue interest on such loan and we reverse any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual loans only when received.
The table below presents a breakdown of the non-performing loans and accruing past due loans at March 31, 2011 and December 31, 2010, respectively.
Non-Accrual and Past Due Loans
|
|
(000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
# of
Borrowers
|
|
|
Account
Balance
|
|
|
Interest Not
Accrued
|
|
|
# of
Borrowers
|
|
|
Account
Balance
|
|
|
Interest Not
Accrued
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1 |
|
|
$ |
1,169,337 |
|
|
$ |
129,143 |
|
|
|
2 |
|
|
$ |
2,426,608 |
|
|
$ |
314,804 |
|
Construction
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Residential
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Commercial
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Consumer
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
284,011 |
|
|
|
3,728 |
|
Total non-performing loans
|
|
|
1 |
|
|
$ |
1,169,337 |
|
|
$ |
129,143 |
|
|
|
3 |
|
|
$ |
2,710,619 |
|
|
$ |
318,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing past due loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days past due
|
|
|
4 |
|
|
$ |
1,129,554 |
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
90 or more days past due
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Total accruing past due loans
|
|
|
4 |
|
|
$ |
1,129,554 |
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The only non-accrual loan at March 31, 2011 had a balance of $1,169,337 and is a residential land acquisition and development loan secured by real estate and described below. At March 31, 2011, the non-accrued interest on this loan was $129,143, none of which was included in interest income. The borrower and guarantor on this loan have filed bankruptcy. We are currently working towards a “lift stay” and foreclosure. During the 1st quarter of 2011, we charged $446,980 to the allowance for loan losses and reduced the balance on this loan from $1,616,317 to $1,169,337. We have an additional $65,000 of the allowance for loan losses specifically allocated to this loan.
At December 31, 2010, we had three loans totaling $2,710,619 past due and classified as non-accrual. The first loan in the amount of $810,291 is the same loan that we previously reported in our December 31, 2008 and December 31, 2009 financial statements. The borrower on this loan filed for bankruptcy protection in November 2007. A commercial real estate property secures this loan. The loan to value at inception of this loan was 80%. A recent appraisal on the property indicates that the collateral is sufficient for full repayment and we have not designated a specific allowance for this non-accrual loan. At December 31, 2010, we had obtained a “lift stay” on the property and were awaiting ratification of foreclosure. We received this ratification in January 2011 and transferred this property to other real estate owned during the 1st quarter of 2011. At December 31, 2010, the non-accrued interest on this loan was $212,934.
The second loan in the amount of $1,616,317 is the residential acquisition and development loan secured by real estate discussed above. We have received an appraisal that indicates the current value of the collateral that secures this loan is insufficient for repayment. At December 31, 2010, we considered this loan impaired and had allocated $450,000 of the allowance for loan losses to this loan. At December 31, 2010, the interest not accrued on this loan was $101,867.
The third loan at December 31, 2010 was a luxury boat loan in the amount of $284,011. The borrower on this loan has also filed bankruptcy. At December 31, 2010, the interest not accrued on this loan was $3,728. During the 1st quarter of 2011, we repossessed the boat, charged $47,261 to the allowance for loan losses and recorded the remaining balance of $236,750 as repossessed property in other assets.
Credit Quality Indicators
We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310 Receivables, and ASC Topic 450 Contingencies. Also, incorporated in determining the adequacy of the allowance is guidance contained in the SEC’s SAB No. 102, Loan Loss Allowance Methodology and Documentation; the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, and the Interagency Policy Statement on the Allowance for Loan and Lease Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision.
We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as installment and other consumer loans (other than boat loans), boat loans, real estate loans and commercial loans. We further divide commercial and real estate 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 collateral separately and assign loss amounts based upon the evaluation.
We determine loss ratios for installment and other consumer loans 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 as follows:
|
o
|
Risk rating 1 (Highest Quality) is normally assigned to investment grade risks, meaning that level of risk is associated with entities having access (or capable of access) to the public capital markets and the loan underwriting in question conforms to the standards of institutional credit providers. We also include in this category loans with a perfected security interest in U.S. government securities, investment grade government sponsored entities’ bonds, investment grade municipal bonds, insured savings accounts, and insured certificates of deposits drawn on high quality financial institutions.
|
|
o
|
Risk rating 2 (Good Quality) is normally assigned to a loan with a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. Cash flow coverage is greater than 1.25:1 but may be vulnerable to more rapid deterioration than the higher quality loans. We may also include loans secured by high quality traded stocks, lower grade municipal bonds and uninsured certificates of deposit.
|
Characteristics of such credits should include: (a) sound primary and secondary repayment sources; (b) strong debt capacity and coverage; (c) good management in all key positions. A credit secured by a properly margined portfolio of marketable securities, but with some portfolio concentration, also would qualify for this risk rating. Additionally, individuals with significant liquidity, low leverage and a defined source of repayment would fall within this risk rating.
|
o
|
Risk rating 3 (Acceptable Quality) is normally assigned when the borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. We classify many small business loans in this category unless deterioration occurs or we believe the loan requires additional monitoring, such as construction loans, asset based (accounts receivable/inventory) loans, and Small Business Administration (SBA) loans.
|
|
o
|
Risk rating 4 (Pass/Watch) These loans exhibit all the characteristics of a loan graded as a “3” with the exception that there is a greater than normal concern that an external factor may impact the viability of the borrower at some later date; or that the Bank is uncertain because of the lack of financial information available. We will generally grant this risk rating to credits that require additional monitoring such as construction loans, SBA loans and other loans deemed in need of additional monitoring.
|
|
o
|
Risk ratings 5 (Special Mention) is assigned to risks in need of close monitoring. These are defined as classified assets. Loans generally in this category may have either inadequate information, lack sufficient cash flow or some other problem that requires close scrutiny. The current worth and debt service capacity of the borrower or of any pledged collateral are insufficient to ensure repayment of the loan. These risk ratings may also apply to an improving credit previously criticized but some risk factors remain. All loans in this classification or below should have an action plan.
|
|
o
|
Risk rating 6 (Substandard) is assigned to loans where there is insufficient debt service capacity. These obligations, even if apparently protected by collateral value, have well defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. There is also the possibility that the Bank will sustain some future loss if the weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual loan we may classify as substandard.
|
|
o
|
Risk rating 7 (Doubtful) corresponds to the doubtful asset categories defined by regulatory authorities. A loan classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to strengthening of the asset we have deferred its classification as loss until we may determine a more exact status and estimation of the potential loss.
|
|
o
|
Risk rating 8 (Loss) is assigned to charged off loans. We consider assets classified as loss as uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has no recovery value, but that it is not practical to defer writing off the worthless assets, even though partial recoveries may occur in the future. We charge off assets in this category. We consider suggestions from our external loan review firm and bank examiners when determining which loans to charge off. We automatically charge off consumer loan accounts based on regulatory requirements.
|
The following table outlines the allocation of allowance for loan losses by risk rating.
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Account
Balance
|
|
|
Allocation
of
Allowance for
Loan Losses
|
|
|
Account
Balance
|
|
|
Allocation
of
Allowance for
Loan Losses
|
|
Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass (1-4)
|
|
$ |
294,415,161 |
|
|
$ |
1,868,346 |
|
|
$ |
281,901,972 |
|
|
$ |
1,529,356 |
|
Special Mention (5)
|
|
|
6,121,811 |
|
|
|
191,093 |
|
|
|
13,777,303 |
|
|
|
489,120 |
|
Substandard (6)
|
|
|
7,703,735 |
|
|
|
65,000 |
|
|
|
5,909,655 |
|
|
|
450,000 |
|
Doubtful (7)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss (8)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
308,240,707 |
|
|
$ |
2,124,439 |
|
|
$ |
301,588,930 |
|
|
$ |
2,468,476 |
|
The following table details activity in the allowance for loan losses by portfolio segment for the periods ended March 31, 2011 and December 31, 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
March 31, 2011
|
|
Real
Estate
|
|
|
Commercial
|
|
|
Boats
|
|
|
Other
Consumer
|
|
|
Total
|
|
Beginning balance
|
|
$ |
1,748,122 |
|
|
$ |
417,198 |
|
|
$ |
294,723 |
|
|
$ |
8,433 |
|
|
$ |
2,468,476 |
|
Provision for loan losses
|
|
|
(235,445 |
) |
|
|
293,080 |
|
|
|
90,221 |
|
|
|
2,144 |
|
|
|
150,000 |
|
Recoveries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
204 |
|
|
|
204 |
|
|
|
|
1,512,677 |
|
|
|
710,278 |
|
|
|
384,944 |
|
|
|
10,781 |
|
|
|
2,618,680 |
|
Loans charged off
|
|
|
(446,980 |
) |
|
|
- |
|
|
|
(47,261 |
) |
|
|
- |
|
|
|
(494,241 |
) |
Ending Balance
|
|
$ |
1,065,697 |
|
|
$ |
710,278 |
|
|
$ |
337,683 |
|
|
$ |
10,781 |
|
|
$ |
2,124,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment with specific
allocation
|
|
$ |
65,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
65,000 |
|
Loans collectively evaluated
for impairment
|
|
|
1,000,697 |
|
|
|
710,278 |
|
|
|
337,683 |
|
|
|
10,781 |
|
|
|
2,059,439 |
|
Ending balance
|
|
$ |
1,065,697 |
|
|
$ |
710,278 |
|
|
$ |
337,683 |
|
|
$ |
10,781 |
|
|
$ |
2,124,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Real
Estate
|
|
|
Commercial
|
|
|
Boats
|
|
|
Other
Consumer
|
|
|
Total
|
|
Beginning balance
|
|
$ |
1,845,126 |
|
|
$ |
544,854 |
|
|
$ |
81,417 |
|
|
$ |
10,319 |
|
|
$ |
2,481,716 |
|
Provision for loan losses
|
|
|
857,818 |
|
|
|
9,495 |
|
|
|
213,306 |
|
|
|
1,381 |
|
|
|
1,082,000 |
|
Recoveries
|
|
|
3,650 |
|
|
|
- |
|
|
|
- |
|
|
|
927 |
|
|
|
4,577 |
|
|
|
|
2,706,594 |
|
|
|
554,349 |
|
|
|
294,723 |
|
|
|
12,627 |
|
|
|
3,568,293 |
|
Loans charged off
|
|
|
(958,472 |
) |
|
|
(137,151 |
) |
|
|
- |
|
|
|
(4,194 |
) |
|
|
(1,099,817 |
) |
Ending Balance
|
|
$ |
1,748,122 |
|
|
$ |
417,198 |
|
|
$ |
294,723 |
|
|
$ |
8,433 |
|
|
$ |
2,468,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment with specific
allocation
|
|
$ |
450,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
450,000 |
|
Loans collectively evaluated
for impairment
|
|
|
1,298,122 |
|
|
|
417,198 |
|
|
|
294,723 |
|
|
|
8,433 |
|
|
|
2,018,476 |
|
Ending balance
|
|
$ |
1,748,122 |
|
|
$ |
417,198 |
|
|
$ |
294,723 |
|
|
$ |
8,433 |
|
|
$ |
2,468,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our recorded investment in loans as of March 31, 2011 and December 31, 2010 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows:
March 31, 2011
|
|
Real
Estate
|
|
|
Commercial
|
|
|
Boats
|
|
|
Other
Consumer
|
|
|
Total
|
|
Loans individually evaluated
for impairment with
specific reserve
|
|
$ |
1,169,337 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
1,169,337 |
|
Loans individually evaluated
for impairment without
specific reserve
|
|
|
4,539,446 |
|
|
|
1,994,952 |
|
|
|
- |
|
|
|
- |
|
|
|
6,534,398 |
|
Loans collectively evaluated
for impairment
|
|
|
209,472,723 |
|
|
|
79,245,317 |
|
|
|
10,408,608 |
|
|
|
1,410,324 |
|
|
|
300,536,972 |
|
Ending balance
|
|
$ |
215,181,506 |
|
|
$ |
81,240,269 |
|
|
$ |
10,408,608 |
|
|
$ |
1,410,324 |
|
|
$ |
308,240,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Real
Estate
|
|
|
Commercial
|
|
|
Boats
|
|
|
Other
Consumer
|
|
|
Total
|
|
Loans individually evaluated
for impairment with
specific reserve
|
|
$ |
1,616,317 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
1,616,317 |
|
Loans individually evaluated
for impairment without
specific reserve
|
|
|
2,273,029 |
|
|
|
2,020,309 |
|
|
|
- |
|
|
|
- |
|
|
|
4,293,338 |
|
Loans collectively evaluated
for impairment
|
|
|
201,096,650 |
|
|
|
81,502,747 |
|
|
|
11,621,392 |
|
|
|
1,458,486 |
|
|
|
295,679,275 |
|
Ending balance
|
|
$ |
204,985,996 |
|
|
$ |
83,523,056 |
|
|
$ |
11,621,392 |
|
|
$ |
1,458,486 |
|
|
$ |
301,588,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
EARNINGS PER COMMON SHARE
|
We calculate basic earnings per common share by dividing net income by the weighted average number of shares of common stock outstanding giving retroactive effect to stock dividends.
We calculate diluted earnings per common 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
March 31,
|
|
|
|
|
2011
|
2010
|
|
|
|
Weighted average number of shares
|
4,428,629
|
3,873,537
|
Dilutive average number of shares
|
36,933
|
14,239
|
7.
|
STOCK BASED COMPENSATION
|
We account for stock options and restricted stock awards under the fair value method of accounting using a Black-Scholes valuation model to measure stock based compensation expense at the date of grant. We recognize compensation expense related to stock based compensation awards in our income statements over the period during which we require an individual to provide service in exchange for such award. For the three months ended March 31, 2011 and 2010, we recorded stock based compensation expense of $43,514 and $40,270, respectively.
We only recognize tax benefits for options that ordinarily will result in a tax deduction when the grant is exercised (non-qualified options). For the three months ended March 31, 2011, we recognized a $15,097 tax benefit associated with the portion of the expense that was related to the issuance of non-qualified options. There were no non-qualified options included in expense for the three months ended March 31, 2010.
We have three equity incentive plans under which we may issue stock options and restricted stock, the 2010 Equity Incentive Plan, approved at the 2010 Annual Meeting of stockholders, the 2001 Incentive Stock Option Plan, as amended, and the 2004 Equity Incentive Plan. Our Compensation Committee administers the equity incentive plans. As the plans outline, the Compensation Committee approves stock option and restricted stock grants to directors and employees, determines the number of shares, the type of award, the option or share price, the term (not to exceed 10 years from the date of issuance), the restrictions, and the vesting period of options and restricted stock issued. The Compensation Committee has approved and we have granted options vesting immediately as well as over periods of two, three and five years and restricted stock awards that vest over periods of twelve months to three years. We recognize the compensation expense associated with these grants over their respective vesting periods. At March 31, 2011, there was $169,735 of total unrecognized compensation cost related to non-vested stock options and restricted stock awards that we expect to realize over the next 3 years. As of March 31, 2011, there were 249,242 shares remaining available for future issuance under the equity incentive plans. Directors and officers did not exercise any options during the three month period ended March 31, 2011 or 2010.
A summary of the stock option activity during the three month period follows:
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
average
|
|
|
Number
|
|
average
|
|
|
|
of shares
|
|
exercise price
|
|
|
of shares
|
|
exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
310,151 |
|
|
$ |
8.60 |
|
|
|
299,270 |
|
|
$ |
8.50 |
|
Options granted
|
|
|
23,280 |
|
|
|
7.82 |
|
|
|
22,581 |
|
|
|
7.13 |
|
Options forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding, end of period
|
|
|
333,431 |
|
|
$ |
8.54 |
|
|
|
321,851 |
|
|
$ |
8.41 |
|
7.
|
STOCK-BASED COMPENSATION (Continued)
|
Information related to options as of March 31, 2011 follows:
|
|
|
Outstanding options
|
|
|
Exercisable options
|
|
Exercise
price
|
|
|
Number
of shares at
March 31, 2011
|
|
|
Weighted
average
remaining
term
|
|
|
Weighted
average
exercise
price
|
|
|
Number
of shares at
March 31, 2011
|
|
|
Weighted
average
exercise
price
|
|
$4.39-$5.00 |
|
|
|
18,000 |
|
|
|
1.30 |
|
|
$ |
4.69 |
|
|
|
18,000 |
|
|
$ |
4.69 |
|
$5.01-$7.64 |
|
|
|
85,231 |
|
|
|
8.09 |
|
|
|
6.52 |
|
|
|
77,704 |
|
|
|
6.46 |
|
$7.65-$8.65 |
|
|
|
60,580 |
|
|
|
7.99 |
|
|
|
7.78 |
|
|
|
44,519 |
|
|
|
7.76 |
|
$8.66-$10.00 |
|
|
|
46,620 |
|
|
|
3.39 |
|
|
|
9.74 |
|
|
|
46,620 |
|
|
|
9.74 |
|
$10.01-$11.31 |
|
|
|
123,000 |
|
|
|
5.06 |
|
|
|
10.43 |
|
|
|
119,000 |
|
|
|
10.42 |
|
|
|
|
|
|
333,431 |
|
|
|
5.93 |
|
|
$ |
8.54 |
|
|
|
305,843 |
|
|
$ |
8.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of outstanding options
where the market value exceeds the
exercise price
|
|
|
$ |
423,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of exercisable options
where the market value exceeds the
exercise price
|
|
|
$ |
381,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
STOCK-BASED COMPENSATION (Continued)
|
During the three months ended March 31, 2011 and 2010, we granted 8,786 and 17,641 restricted common stock awards, respectively. The following tables provide a summary of the restricted stock awards during the three month periods and their vesting schedule.
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Number
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
of shares
|
|
average
|
|
|
of shares
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
|
grant date
fair value
|
|
Outstanding, beginning of period
|
|
|
17,641 |
|
|
$ |
7.13 |
|
|
|
- |
|
|
$ |
- |
|
Restricted stock granted
|
|
|
8,786 |
|
|
|
7.82 |
|
|
|
17,641 |
|
|
|
7.13 |
|
Restricted stock vested
|
|
|
8,279 |
|
|
|
7.13 |
|
|
|
- |
|
|
|
- |
|
Restricted stock forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding, end of period
|
|
|
18,148 |
|
|
$ |
7.46 |
|
|
|
17,641 |
|
|
$ |
7.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested, end of period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of outstanding restricted
stock awards
where the market value exceeds the
exercise price
|
|
$ |
170,147 |
|
|
|
|
|
|
$ |
113,170 |
|
Intrinsic value of vested restricted
stock awards
where the market value exceeds the
exercise price
|
|
$ |
77,574 |
|
|
|
|
|
|
$ |
29,016 |
|
Grant
Date
|
Vesting
Date
|
|
# of Restricted
Shares
|
|
1/28/2010
|
1/28/2012
|
|
|
4,680 |
|
1/28/2010
|
1/28/2013
|
|
|
4,681 |
|
1/27/2011
|
12/31/2011
|
|
|
2,457 |
|
1/27/2011
|
1/27/2012
|
|
|
2,110 |
|
1/27/2011
|
1/27/2013
|
|
|
2,110 |
|
1/27/2011
|
1/27/2014
|
|
|
2,110 |
|
Total Issued
|
|
|
|
18,148 |
|
Eligible employees participate in a profit sharing plan that qualifies under Section 401(k) of the Internal Revenue Code. The plan allows for elective employee deferrals and Old Line Bank makes matching contributions of up to 4% of eligible employee compensation. Our contributions to the plan, included in employee benefit expenses, for the three months ended March 31, 2011 and 2010 were $41,589 and $37,670, respectively.
Old Line Bank also offers Supplemental Executive Retirement Plans (SERPs) to its executive officers providing for retirement income benefits. We accrue the present value of the SERPs over the remaining number of years to the executives’ retirement dates. Old Line Bank’s expenses for the SERPs for the three month periods ended March 31, 2011 and 2010 were $38,605 and $43,948, respectively. The SERPs are non-qualified defined benefit pension plans that we have not funded.
9.
|
FAIR VALUE MEASUREMENTS
|
FASB ASC Topic 820 Fair Value Measurements and Disclosures which defines fair value as the price participants would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. We value investment securities classified as available for sale at fair value. The fair value hierarchy established in FASB ASC Topic 820 defines three input levels for fair value measurement. Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than those in Level 1. Level 3 is based on significant unobservable inputs.
We value investment securities classified as available for sale at fair value on a recurring basis. We value treasury securities, government sponsored entity securities, and some agency securities under Level 1, and collateralized mortgage obligations and some agency securities under Level 2. At March 31, 2011, we established values for available for sale investment securities as follows (000’s);
|
|
Total Fair Value
March 31, 2011
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
Investment securities available for sale
|
|
$ |
37,659 |
|
|
$ |
2,091 |
|
|
$ |
35,568 |
|
|
$ |
- |
|
Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes our methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value. Furthermore, we have not comprehensively revalued the fair value amounts since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the above presented amounts.
We also measure certain non-financial assets such as other real estate owned and repossessed or foreclosed property at fair value on a non-recurring basis. Generally, we estimate the fair value of these items using Level 2 inputs based on observable market data or Level 3 inputs based on discounting criteria. As of March 31, 2011 and December 31, 2010, we estimated the fair value of foreclosed assets using Level 2 inputs to be $1,976,516 and $1,153,039, respectively. We obtained these Level 2 inputs from appraisals of the real estate that we obtained from an outside third party during the preceding twelve months. The following outlines the transactions in other real estate owned during the period (000’s).
Other Real Estate Owned
|
|
|
|
Beginning balance
|
|
$ |
1,153,039 |
|
Transferred in
|
|
|
825,290 |
|
Payment received
|
|
|
(1,813 |
) |
Total end of period
|
|
$ |
1,976,516 |
|
9.
|
FAIR VALUE MEASUREMENTS (Continued)
|
We use the following methodologies for estimating fair values of financial instruments that we do not measure on a recurring basis. The estimated fair values of financial instruments equal the carrying value of the instruments except as noted.
Time Deposits-The fair value of time deposits in other banks is an estimate determined by discounting future cash flows using current rates offered for deposits of similar remaining maturities.
Investment Securities-We base the fair values of investment securities upon quoted market prices or dealer quotes.
Loans-We estimate the fair value of loans by discounting future cash flows using current rates for which we would make similar loans to borrowers with similar credit histories. The book value of variable rate loans equals the fair value. We then adjust these calculated amounts for any impairment.
Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. We estimate the fair value of fixed maturity certificates of deposit using the rates currently offered for deposits of similar remaining maturities.
Long and short term borrowings-The fair value of long and short term fixed rate borrowings is estimated by discounting the value of contractual cash flows using rates currently offered for advances with similar terms and remaining maturities.
Loan Commitments, Standby and Commercial Letters of Credit-Lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair value of these items is insignificant and we have not included it in the following table.
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$ |
99,000 |
|
|
$ |
99,186 |
|
|
$ |
297,000 |
|
|
$ |
297,482 |
|
Investment securities
|
|
|
57,926,326 |
|
|
|
58,240,583 |
|
|
|
54,786,264 |
|
|
|
55,015,376 |
|
Loans
|
|
|
306,653,965 |
|
|
|
307,126,471 |
|
|
|
299,606,430 |
|
|
|
301,862,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
281,811,895 |
|
|
|
283,679,890 |
|
|
$ |
273,032,442 |
|
|
$ |
274,003,958 |
|
Short term borrowings
|
|
|
6,584,128 |
|
|
|
6,584,128 |
|
|
|
5,669,332 |
|
|
|
5,669,332 |
|
Long term borrowings
|
|
|
16,349,219 |
|
|
|
16,967,895 |
|
|
|
16,371,947 |
|
|
|
17,080,540 |
|
We measure certain financial assets and financial liabilities at fair value on a non-recurring basis. These assets and liabilities are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. We did not have any financial assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2011 or year ended December 31, 2010
10.
|
ACCOUNTING STANDARDS UPDATES
|
Accounting Standards Updates (ASU) No. 2009-16, “Transfers and Servicing (Topic- 860)-Accounting for Transfers of Financial Assets” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvement with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on our consolidated results of operations or financial position.
ASU No. 2009-17, “Consolidations (Topic 810)-Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” amends prior guidance to change how a company determines when an entity that is sufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. As further discussed below, ASU No. 2010-10, “Consolidations (Topic 810),” deferred the effective date of ASU 2009-17 for a reporting entity’s interests in investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and they did not have a material impact on our consolidated results of operations or financial position.
ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures About Fair Value Measurements” requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between the levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) companies should provide fair value measurement disclosures for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. ASU No. 2010-06 requires the disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy beginning January 1, 2011. We have included these disclosures and they did not have a material impact on our consolidated results of operations or financial position. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective on January 1, 2010. See Note 8-Fair Value Measurements.
ASU No. 2010-10, “Consolidations (Topic 810)-Amendments for Certain Investment Funds” defers the effective date of the amendments to the consolidation requirements made by ASU 2009-17 to a company’s interest in an entity (i) that has all of the attributes of an investment company, as specified under ASC Topic 946, “Financial Services-Investment Companies,” or (ii) for which it is industry practice to apply measurement principles of financial reporting that are consistent with those in ASC Topic 946. As a result of the deferral, companies are not required to apply the ASU 2009-17 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest held by a related party should be treated as though it is an entity’s own interest when evaluating the criteria for determining whether such interest represents a variable interest. ASU 2010-10 also clarifies that companies should not use a quantitative calculation as the sole basis for evaluating whether a decision maker’s or service provider’s fee is variable interest. The provisions of ASU 2010-10 became effective as of January 1, 2010 and did not have a material impact on our consolidated results of operations or financial position.
10.
|
ACCOUNTING STANDARDS UPDATES (Continued)
|
ASU No. 2010-11, “Derivatives and Hedging (Topic 815)-Scope Exception Related to Embedded Credit Derivatives” clarifies that the only form of an embedded credit derivative that is exempt from the embedded derivative bifurcation requirement are those that relate to the subordination of one financial instrument to another. Entities that have contracts containing an embedded credit derivative feature in a form other than subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 became effective on July 1, 2010 and did not have a material impact on our consolidated results of operations or financial position.
ASU No. 2010-20 “Receivables (Topic 310)-Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systemic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a carry forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-2 became effective for financial statements as of December 31, 2010 as it relates to disclosures required as of the end of the reporting period. Disclosures that relate to activity during a reporting period became effective January 1, 2011 and did not have a material impact on our consolidated results of operations or financial position.
ASU No. 2010-29 “Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations” contains amendments that specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands supplemental pro forma disclosures under Topic 350 to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in reported pro forma revenue and earnings. ASU 2010-29 became effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We do not anticipate that the implementation of ASU 2010-29 will have a material impact on our consolidated results of operations or financial position.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Some of the matters discussed below include forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be different from those anticipated or estimated for the reasons discussed below and under the heading “Information Regarding Forward Looking Statements.”
Overview
Old Line Bancshares 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 $970,000 investment in a real estate investment limited liability company named Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 62.5% of Pointer Ridge. Frank Lucente, one of our directors and a director of Old Line Bank, controls 12.5% 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 owns a commercial office building containing approximately 40,000 square feet and leases this space to tenants. We lease approximately 50% of this building for our main office and operate a branch of Old Line Bank from this address.
Summary of Recent Performance and Other Activities
In a continually challenging economic environment, we are pleased to report significant strategic accomplishments and continued profitability for the first quarter of 2011. Net income attributable to Old Line Bancshares, Inc., after inclusion of $90,060 of merger and integration expenses, was $522,682 or $0.12 per basic and diluted common share for the three month period ending March 31, 2011. This was $58,148 or 12.52% higher than net income attributable to Old Line Bancshares, Inc. of $464,534 or $0.12 per basic and diluted common share for the same period in 2010.
During 2011, the following events have occurred.
|
·
|
On September 1, 2010, we announced that we had executed a merger agreement that provided for the acquisition of Maryland Bankcorp, Inc. The merger became effective April 1, 2011.
|
|
·
|
We did not place any new loans on non-accrual status and we charged off $494,241 on two loans that we previously reported as non-accrual loans.
|
|
·
|
At March 31, 2011, we had one loan on non-accrual status with a total balance due of $1.2 million (0.29% of total assets) compared to three borrowers with total balances due of $2.7 million 0.67%) at December 31, 2010.
|
|
·
|
At first quarter end, we had four other loans past due between 30 and 89 days in the amount of approximately $1.1 million. Subsequent to quarter end, we received the payments due from all of these borrowers.
|
|
·
|
We increased the provision for loan losses by $80,000 compared to the first quarter of 2010.
|
|
·
|
Average total loans grew approximately $33.0 million or 12.27% for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.
|
|
·
|
Average non-interest bearing deposits grew $15.0 million or 32.08% for the quarter ended March 31, 2011 relative to the same period in 2010.
|
|
·
|
We maintained liquidity and by all regulatory measures remained “well capitalized”.
|
|
·
|
We recognized a loss on our investment in Pointer Ridge of approximately $38,000.
|
The following summarizes the highlights of our financial performance for the three month period ended March 31, 2011 compared to the three month period ended March 2010 (figures in the table may not match those discussed in the balance of this section due to rounding).
|
|
Three months ended March 31,
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$ |
523 |
|
|
$ |
465 |
|
|
$ |
58 |
|
|
|
12.47 |
% |
Interest revenue
|
|
|
4,648 |
|
|
|
4,390 |
|
|
|
258 |
|
|
|
5.88 |
|
Interest expense
|
|
|
1,061 |
|
|
|
1,248 |
|
|
|
(187 |
) |
|
|
(14.98 |
) |
Net interest income after provision
for loan losses
|
|
|
3,437 |
|
|
|
3,072 |
|
|
|
365 |
|
|
|
11.88 |
|
Non-interest revenue
|
|
|
325 |
|
|
|
293 |
|
|
|
32 |
|
|
|
10.92 |
|
Non-interest expense
|
|
|
2,927 |
|
|
|
2,695 |
|
|
|
232 |
|
|
|
8.61 |
|
Average total loans
|
|
|
301,602 |
|
|
|
268,629 |
|
|
|
32,973 |
|
|
|
12.27 |
|
Average interest earning assets
|
|
|
367,123 |
|
|
|
333,611 |
|
|
|
33,512 |
|
|
|
10.05 |
|
Average total interest bearing deposits
|
|
|
277,107 |
|
|
|
242,884 |
|
|
|
34,223 |
|
|
|
14.09 |
|
Average non-interest bearing deposits
|
|
|
61,770 |
|
|
|
46,768 |
|
|
|
15,002 |
|
|
|
32.08 |
|
Net interest margin (1)
|
|
|
4.01 |
% |
|
|
3.87 |
% |
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
5.33 |
% |
|
|
5.17 |
% |
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
- |
|
|
|
- |
|
Diluted earnings per common share
|
|
|
0.12 |
|
|
|
0.12 |
|
|
|
- |
|
|
|
- |
|
(1) See “Reconciliation of Non-GAAP Measures”
Growth Strategy
We have based our strategic plan on the premise of enhancing stockholder value and growth through branching and operating profits. Our short term goals include maintaining credit quality, maintaining an attractive branch network, expanding fee income, generating extensions of core banking services, and using technology to maximize stockholder value. During the past two years, we have expanded in Prince George’s County and Anne Arundel County, Maryland and the recent acquisition of Maryland Bankcorp, Inc. will expand our operations into St. Mary’s and Calvert Counties, Maryland.
On September 1, 2010, we announced that we had executed a merger agreement that provides for the acquisition of Maryland Bankcorp, the parent company of Maryland Bank & Trust Company, N.A. This acquisition would create the sixth largest independent commercial bank based in Maryland, with assets of more than $750 million and with 20 full service branches serving five counties. Teams from both institutions have worked diligently to join the two organizations. The merger became effective on April 1, 2011.
Other Opportunities
We use the Internet and technology to augment our growth plans. Currently, we offer our customers image technology, Internet banking with on-line account access and bill payer service. We provide selected commercial customers the ability to remotely capture their deposits and electronically transmit them to us. We will continue to evaluate cost effective ways that technology can enhance our management capabilities, products and services.
We may take advantage of strategic opportunities presented to us via mergers occurring in our marketplace. For example, we may purchase branches that other banks close or lease branch space from other banks or hire additional loan officers. We also continually evaluate and consider opportunities with financial services companies or institutions with which we may become a strategic partner, merge or acquire.
Although the current economic climate continued to present significant challenges for our industry, we have worked diligently towards our goal of becoming the premier community bank east of Washington D.C. While we remain uncertain whether the economy will continue on its path towards recovery and that the high unemployment rate and soaring national debt will not dampen this recovery, it appears the economy may reach sustainable recovery during 2011. We continue to remain cautiously optimistic that we have identified any problem assets and the remaining borrowers will continue to stay current on their loans. Now that we have substantially completed our branch expansion, enhanced our data processing capabilities and expanded our commercial lending team, we believe that we are well positioned to capitalize on the opportunities that may become available in a healthy economy as we have with the Maryland Bankcorp, Inc. acquisition that became effective April 1, 2011.
We anticipate that as a result of this acquisition that salaries and benefits expenses and other operating expenses will increase in 2011. We anticipate that, over time, income generated from the branches acquired in the merger, our new loan officers, and our expanded market area will offset any corresponding increases in expenses. We believe with our ten existing branches, the addition of Maryland Bankcorp’s ten branches (one of which we closed during the second quarter of 2011) and staff, our lending staff, our corporate infrastructure and our solid balance sheet and strong capital position, we can continue to focus our efforts on improving earnings per share and enhancing stockholder value. We also expect the merger will be accretive to earnings by the end of 2011.
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, interest bearing deposits and federal funds sold. Cost of funds consists of interest bearing deposits and other borrowings. Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix of earning assets and funding sources along with changes in associated interest rates determine changes in net interest income.
Three months ended March 31, 2011 compared to three months ended March 31, 2010
Net interest income after provision for loan losses for the three months ended March 31, 2011 increased $365,607 or 11.90% to $3.4 million from $3.1 million for the same period in 2010
Interest revenue increased from $4.4 million for the three months ended March 31, 2010 to $4.7 million for the same period in 2011. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were the result of average interest earning assets growing at a faster rate than average interest bearing liabilities. A decline in interest rates on these interest earning assets partially offset this growth. The interest rate on interest bearing liabilities also declined at a faster rate than the rate on interest earning assets. This resulted in a 14 basis point improvement in the net interest margin which also increased net interest income.
Changes in the federal funds rate and the prime rate impact the interest rates on interest earning assets, net interest income and net interest margin. During the entire year of 2010 and the first three months of 2011, the prime interest rate remained at 3.25% and the intended federal funds rate remained relatively constant at zero to 0.25%. These rates have remained at historically low levels for a sustained period of time. During 2010 when investments and loans matured, they were reinvested in lower yielding securities and loans. Although these lower yields have also negatively impacted net interest income in 2011, the relatively stable rate environment has allowed us to adjust the mix and volume of interest earning assets and liabilities on the balance sheet. As a result, the net interest margin has improved.
One of the primary contributors to the improvement in our net interest margin is our ability to grow average interest earning assets. During the period, total average interest earning assets increased $33.5 million or 10.04% to $367.1 million for the three months ended March 31, 2011 from $333.6 million for the three months ended March 31, 2010. The growth in average interest earning assets derived from a $33.0 million increase in average total loans, a $1.6 million increase in federal funds sold, and an $18.5 million increase in average investment securities. A $21.0 million decrease in average borrowed funds also contributed to the growth in the net interest margin. The growth in net interest income that derived from the increase in total average interest earning assets and the decline in borrowed funds was partially offset by growth in average interest bearing liabilities. The growth in average interest bearing liabilities derived primarily from the $34.2 million increase in average interest bearing deposits which increased to $277.1 million for the three months ended March 31, 2011 from $242.9 million for the three months ended March 31, 2010. A $21.0 million decrease in average borrowed funds decreased the total growth in interest bearing liabilities.
Our net interest margin was 4.01% for the three months ended March 31, 2011 as compared to 3.87% for the three months ended March 31, 2010. The yield on average interest earning assets declined during the period 21 basis points from 5.39% for the quarter ended March 31, 2010 to 5.18% for the quarter ended March 31, 2011. This decrease was primarily because we received a lower rate on interest bearing deposits and the average rate on the loan portfolio declined 33 basis points. As outlined above, we partially offset these rate reductions by growing the loan portfolio and reducing borrowings. The decline in interest rates also lowered our cost of interest bearing deposits in the three month period to 1.28% from 1.63%. The decline in interest expense on borrowings was partially offset by a slight increase in the interest rate on borrowed funds during the period to 3.13% from 2.47% in 2010.
With our new branches acquired in the Maryland Bank & Trust acquisition and increased recognition in the St. Mary’s, Calvert, Charles, Prince George’s County and Anne Arundel County markets, and with continued growth in deposits, we anticipate that we will continue to grow earning assets during 2011. If the Federal Reserve maintains the federal funds rate at current levels and the economy remains stable, we believe that we can continue to grow total loans and deposits in 2011. We also believe that we will maintain or improve the net interest margin during 2011. As a result of this growth and maintenance of the net interest margin, we expect that net interest income will increase during 2011, although there can be no guarantee that this will be the case.
One of our primary sources of funding loans, investments and interest bearing deposits is non-interest bearing demand deposits. The Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. Although we have not yet determined the ultimate impact of this legislation on our operations, we expect that it will cause interest costs associated with deposits to increase.
The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the three months ended March 31, 2011 and 2010, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using average daily balances.
|
|
Average Balances, Interest and Yields
|
|
Three Months Ended March 31,
|
|
2011
|
|
|
2010
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
balance
|
|
|
Interest
|
|
|
Yield
|
|
|
balance
|
|
|
Interest
|
|
|
Yield
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold(1)
|
|
$ |
3,356,545 |
|
|
$ |
1,831 |
|
|
|
0.22 |
% |
|
$ |
1,748,352 |
|
|
$ |
643 |
|
|
|
0.15 |
% |
Interest bearing deposits
|
|
|
7,644,227 |
|
|
|
7,009 |
|
|
|
0.37 |
|
|
|
27,225,642 |
|
|
|
66,554 |
|
|
|
0.99 |
|
Investment securities(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency
|
|
|
3,689,403 |
|
|
|
27,622 |
|
|
|
3.04 |
|
|
|
7,087,111 |
|
|
|
57,700 |
|
|
|
3.30 |
|
Mortgage backed securities
|
|
|
48,454,718 |
|
|
|
379,419 |
|
|
|
3.18 |
|
|
|
26,224,492 |
|
|
|
275,216 |
|
|
|
4.26 |
|
Municipal securities
|
|
|
2,285,989 |
|
|
|
29,136 |
|
|
|
5.17 |
|
|
|
2,354,600 |
|
|
|
28,283 |
|
|
|
4.87 |
|
Other
|
|
|
2,564,257 |
|
|
|
18,222 |
|
|
|
2.88 |
|
|
|
2,833,656 |
|
|
|
20,426 |
|
|
|
2.92 |
|
Total investment securities
|
|
|
56,994,367 |
|
|
|
454,399 |
|
|
|
3.23 |
|
|
|
38,499,859 |
|
|
|
381,625 |
|
|
|
4.02 |
|
Loans: (1) (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
83,195,488 |
|
|
|
1,049,627 |
|
|
|
5.12 |
|
|
|
72,995,285 |
|
|
|
1,014,893 |
|
|
|
5.64 |
|
Mortgage
|
|
|
205,454,739 |
|
|
|
3,000,543 |
|
|
|
5.92 |
|
|
|
180,888,945 |
|
|
|
2,765,783 |
|
|
|
6.20 |
|
Consumer
|
|
|
12,951,854 |
|
|
|
172,965 |
|
|
|
5.42 |
|
|
|
14,744,834 |
|
|
|
200,346 |
|
|
|
5.51 |
|
Total loans
|
|
|
301,602,081 |
|
|
|
4,223,135 |
|
|
|
5.68 |
|
|
|
268,629,064 |
|
|
|
3,981,022 |
|
|
|
6.01 |
|
Allowance for loan losses
|
|
|
2,473,958 |
|
|
|
- |
|
|
|
|
|
|
|
2,492,377 |
|
|
|
- |
|
|
|
|
|
Total loans, net of allowance
|
|
|
299,128,123 |
|
|
|
4,223,135 |
|
|
|
5.73 |
|
|
|
266,136,687 |
|
|
|
3,981,022 |
|
|
|
6.07 |
|
Total interest earning assets(1)
|
|
|
367,123,262 |
|
|
|
4,686,374 |
|
|
|
5.18 |
|
|
|
333,610,540 |
|
|
|
4,429,844 |
|
|
|
5.39 |
|
Non-interest bearing cash
|
|
|
8,691,969 |
|
|
|
|
|
|
|
|
|
|
|
9,720,531 |
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
16,805,170 |
|
|
|
|
|
|
|
|
|
|
|
17,286,712 |
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
12,785,287 |
|
|
|
|
|
|
|
|
|
|
|
11,946,739 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
405,405,688 |
|
|
|
|
|
|
|
|
|
|
$ |
372,564,522 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$ |
9,259,200 |
|
|
|
5,137 |
|
|
|
0.23 |
|
|
$ |
7,569,600 |
|
|
|
6,684 |
|
|
|
0.36 |
|
Money market and NOW
|
|
|
74,851,199 |
|
|
|
149,493 |
|
|
|
0.81 |
|
|
|
43,015,595 |
|
|
|
83,267 |
|
|
|
0.79 |
|
Other time deposits
|
|
|
192,996,118 |
|
|
|
721,346 |
|
|
|
1.52 |
|
|
|
192,299,113 |
|
|
|
884,978 |
|
|
|
1.87 |
|
Total interest bearing deposits
|
|
|
277,106,517 |
|
|
|
875,976 |
|
|
|
1.28 |
|
|
|
242,884,308 |
|
|
|
974,929 |
|
|
|
1.63 |
|
Borrowed funds
|
|
|
23,910,483 |
|
|
|
184,623 |
|
|
|
3.13 |
|
|
|
44,891,310 |
|
|
|
273,544 |
|
|
|
2.47 |
|
Total interest bearing liabilities
|
|
|
301,017,000 |
|
|
|
1,060,599 |
|
|
|
1.43 |
|
|
|
287,775,618 |
|
|
|
1,248,473 |
|
|
|
1.76 |
|
Non-interest bearing deposits
|
|
|
61,770,178 |
|
|
|
|
|
|
|
|
|
|
|
46,768,076 |
|
|
|
|
|
|
|
|
|
|
|
|
362,787,178 |
|
|
|
|
|
|
|
|
|
|
|
334,543,694 |
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,275,957 |
|
|
|
|
|
|
|
|
|
|
|
1,608,587 |
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
590,886 |
|
|
|
|
|
|
|
|
|
|
|
673,250 |
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
39,751,667 |
|
|
|
|
|
|
|
|
|
|
|
35,738,991 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$ |
405,405,688 |
|
|
|
|
|
|
|
|
|
|
$ |
372,564,522 |
|
|
|
|
|
|
|
|
|
Net interest spread(1)
|
|
|
|
|
|
|
|
|
|
|
3.75 |
|
|
|
|
|
|
|
|
|
|
|
3.63 |
|
Net interest income and
Net interest margin(1)
|
|
|
|
|
|
$ |
3,625,775 |
|
|
|
4.01 |
% |
|
|
|
|
|
$ |
3,181,371 |
|
|
|
3.87 |
% |
|
(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 assets. 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)
|
Average non-accruing loans for the three month periods ended March 31, 2011 and 2010 were $1,724,674 and $1,914,079, respectively.
|
The following table describes the impact on our interest revenue and expense resulting from changes in average balances and average rates for the periods indicated. We have allocated the change in interest revenue, interest expense and net interest income due to both volume and rate proportionately to the rate and volume variances.
Rate/Volume Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended March 31,
|
|
|
|
2011 compared to 2010
|
|
|
|
Variance due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
Federal funds sold(1)
|
|
$ |
1,188 |
|
|
$ |
809 |
|
|
$ |
379 |
|
Interest bearing deposits
|
|
|
(59,545 |
) |
|
|
(46,382 |
) |
|
|
(13,163 |
) |
Investment Securities(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency
|
|
|
(30,078 |
) |
|
|
(12,176 |
) |
|
|
(17,902 |
) |
Mortgage backed securities
|
|
|
104,203 |
|
|
|
(198,752 |
) |
|
|
302,955 |
|
Municipal securities
|
|
|
853 |
|
|
|
2,238 |
|
|
|
(1,385 |
) |
Other
|
|
|
(2,204 |
) |
|
|
(831 |
) |
|
|
(1,373 |
) |
Loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
34,734 |
|
|
|
(181,392 |
) |
|
|
216,126 |
|
Mortgage
|
|
|
234,760 |
|
|
|
(295,652 |
) |
|
|
530,412 |
|
Consumer
|
|
|
(27,381 |
) |
|
|
(9,964 |
) |
|
|
(17,417 |
) |
Total interest revenue (1)
|
|
|
256,530 |
|
|
|
(742,102 |
) |
|
|
998,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
(1,547 |
) |
|
|
(3,946 |
) |
|
|
2,399 |
|
Money market and NOW
|
|
|
66,226 |
|
|
|
9,815 |
|
|
|
56,411 |
|
Other time deposits
|
|
|
(163,632 |
) |
|
|
(169,242 |
) |
|
|
5,610 |
|
Borrowed funds
|
|
|
(88,921 |
) |
|
|
116,513 |
|
|
|
(205,434 |
) |
Total interest expense
|
|
|
(187,874 |
) |
|
|
(46,860 |
) |
|
|
(141,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(1)
|
|
$ |
444,404 |
|
|
$ |
(695,242 |
) |
|
$ |
1,139,646 |
|
(1) Interest revenue is presented on a fully taxable equivalent (FTE) basis. Management believes providing this information on a FTE basis provides investors with a more accurate picture of our net interest spread and net interest income and we believe it to be the preferred industry measurement of these calculations. See “Reconciliation of Non-GAAP Measures.”
Provision for Loan Losses
Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit worthiness of the borrowers over the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions. We charge the provision for loan losses to earnings to maintain the total allowance for loan losses at a level considered by management to represent its best estimate of the losses known and inherent in the portfolio that are both probable and reasonable to estimate, based on, among other factors, prior loss experience, volume and type of lending conducted, estimated value of any underlying collateral, economic conditions (particularly as such conditions relate to Old Line Bank’s market area), regulatory guidance, peer statistics, management’s judgment, past due loans in the loan portfolio, loan charge off experience and concentrations of risk (if any). We charge losses on loans against the allowance when we believe that collection of loan principal is unlikely. We add back recoveries on loans previously charged to the allowance.
The provision for loan losses was $150,000 for the three months ended March 31, 2011, as compared to $70,000 for the three months ended March 31, 2010, an increase of $80,000 or 114.3%. After completing the analysis outlined below, during the three month period ended March 31, 2011, we increased the provision for loan losses primarily because we have seen a modest increase in our historical losses over prior periods and some of our borrowers continue to report weaker profitability. As previously mentioned, while it remains uncertain whether the economy will continue on its path towards recovery, it appears the economy may reach a sustainable recovery during 2011 and we remain cautiously optimistic that our borrowers will continue to stay current on their loans.
We review the adequacy of the allowance for loan losses at least quarterly. Our review includes evaluation of impaired loans as required by ASC Topic 310-Receivables, and ASC Topic 450-Contingencies. Also incorporated in determining the adequacy of the allowance is guidance contained in the Securities and Exchange Commission’s SAB No. 102, Loan Loss Allowance Methodology and Documentation, the Federal Financial Institutions Examination Council’s Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions and the Interagency Policy Statement on the Allowance for Loan and Lease Losses provided by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration and Office of Thrift Supervision.
We base the evaluation of the adequacy of the allowance for loan losses upon loan categories. We categorize loans as installment and other consumer loans (other than boat loans), boat loans, mortgage loans (commercial real estate, residential real estate and real estate construction) and commercial loans. We apply loss ratios to each category of loan other than commercial loans. 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, 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, probability of loss factors and industry standards.
With respect to commercial loans, management assigns a risk rating of one through eight to each loan at inception, with a risk rating of one having the least amount of risk and a risk rating of eight having the greatest amount of risk. For commercial loans of less than $250,000, we may review the risk rating annually based on, among other things, the borrower’s financial condition, cash flow and ongoing financial viability; the collateral securing the loan; the borrower’s industry; and payment history. We review the risk rating for all commercial loans in excess of $250,000 at least annually. We evaluate loans with a risk rating of five or greater separately and allocate a portion of the allowance for loan losses 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, probability of loss factors and industry standards.
We also identify and make any necessary allocation adjustments for any specific concentrations of credit in a loan category that in management’s estimation increase the risk inherent in the category. If necessary, we will also make an adjustment within one or more loan categories for economic considerations in our market area that may impact the quality of the loans in the category. For all periods presented, there were no specific adjustments made for concentrations of credit. We consider qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience. These factors include, but are not limited to, changes in lending policies and procedures, changes in the nature and volume of the loan portfolio, changes in the experience, ability and depth of lending management and the effect of other external factors such as economic factors, competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio.
In the event that our review of the adequacy of the allowance results in any unallocated amounts, we reallocate such amounts to our loan categories based on the percentage that each category represents to total gross loans. We have risk management practices designed to ensure timely identification of changes in loan risk profiles. However, undetected losses inherently exist within the portfolio. We believe that the allocation of the unallocated portion of the reserve in the manner described above is appropriate. Although we may allocate specific portions of the allowance for specific credits or other factors, the entire allowance is available for any credit that we should charge off.
We will not create a separate valuation allowance unless we consider a loan impaired. At March 31, 2011, we had one non-accrual loan totaling $1.2 million. As outlined below in the Loan Portfolio section of this report, we have allocated a specific valuation allowance to those loans where we anticipate a loss.
During the three months ended March 31, 2011, we charged $494,241 to the allowance for loan losses. Of this amount, $446,980 was to properly reflect the fair value of the collateral that secured the loan that we report as non-accrual. As reported for the year ended December 31, 2010, this loan was a residential acquisition and development loan secured by real estate with a balance of $1.6 million. The borrower and the guarantor on this loan filed bankruptcy. We received an appraisal that indicates that the current value of the collateral that secures the loan was insufficient for repayment and we have reduced the loan balance by the deficiency amount of $446,980. We are currently working towards obtaining a “lift stay” and foreclosure. We are currently evaluating all costs associated with the disposition of this property and may take an additional charge to the allowance for loan losses of approximately $65,000.
During the three months ended March 31, 2011, we also charged $47,261 to the allowance for loan losses to properly reflect the balance of a delinquent boat loan that we also reported for the year ended December 31, 2010. This loan was a luxury boat loan in the amount of $284,011. The borrower on this loan also filed bankruptcy. We repossessed the boat during the three months ended March 31, 2011. We charged off $47,261 to properly record the value of the repossessed boat in other assets.
During the year ended December 31, 2010, we charged $1.1 million to the allowance for loan losses. This amount was primarily from two loans. The first loan was an unsecured facility in the amount of $137,151. The borrower experienced health related problems that detrimentally impacted his business. The second loan is a residential land acquisition and development loan. During the third quarter of 2010, we received a deed in lieu of foreclosure on this property and an appraisal of the property indicated that the value was insufficient to repay the full principal balance and cost associated with the property. Therefore, we recognized this impairment and charged $946,739 to the allowance for losses during the third quarter of 2010. The remaining amount charged to the allowance for loan losses during 2010 consisted of small deficiencies related to various loans.
Our policies require a review of assets on a regular basis and we believe that we appropriately classify loans as well as other assets if warranted. We believe that we use the best information available to make a determination with respect to the allowance for loan losses, recognizing that the determination is inherently subjective and that future adjustments may be necessary depending upon, among other factors, a change in economic conditions of specific borrowers or generally in the economy and new information that becomes available to us. However, there are no assurances that the allowance for loan losses will be sufficient to absorb losses on non-performing assets, or that the allowance will be sufficient to cover losses on non-performing assets in the future.
The allowance for loan losses represented 0.69% of gross loans at March 31, 2011 and 0.82% as of December 31, 2010. We have no exposure to foreign countries or foreign borrowers. Based on our analysis and the satisfactory historical performance of the loan portfolio, we believe this allowance appropriately reflects the inherent risk of loss in our portfolio.
The following table provides an analysis of the allowance for loan losses for the periods indicated:
Allowance for Loan Losses
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$ |
2,468,476 |
|
|
$ |
2,481,716 |
|
|
$ |
2,481,716 |
|
Provision for loan losses
|
|
|
150,000 |
|
|
|
70,000 |
|
|
|
1,082,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargeoffs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
- |
|
|
|
- |
|
|
|
(137,151 |
) |
Mortgage
|
|
|
(446,980 |
) |
|
|
(11,733 |
) |
|
|
(958,472 |
) |
Consumer
|
|
|
(47,261 |
) |
|
|
(1,223 |
) |
|
|
(4,194 |
) |
Total chargeoffs
|
|
|
(494,241 |
) |
|
|
(12,956 |
) |
|
|
(1,099,817 |
) |
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
- |
|
|
|
- |
|
|
|
3,650 |
|
Consumer
|
|
|
204 |
|
|
|
206 |
|
|
|
927 |
|
Total recoveries
|
|
|
204 |
|
|
|
206 |
|
|
|
4,577 |
|
Net (chargeoffs) recoveries
|
|
|
(494,037 |
) |
|
|
(12,750 |
) |
|
|
(1,095,240 |
) |
Balance, end of period
|
|
$ |
2,124,439 |
|
|
$ |
2,538,966 |
|
|
$ |
2,468,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
0.69 |
% |
|
|
0.93 |
% |
|
|
0.82 |
% |
Non-accrual loans
|
|
|
181.68 |
% |
|
|
169.21 |
% |
|
|
91.07 |
% |
Ratio of net-chargeoffs during period to
|
|
|
|
|
|
|
|
|
|
|
|
|
average total loans during period
|
|
|
0.164 |
% |
|
|
0.005 |
% |
|
|
0.384 |
% |
The following table provides a breakdown of the allowance for loan losses:
Allocation of Allowance for Loan Losses
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
|
Amount
|
|
|
% of Loans
in Each
Category
|
|
|
Amount
|
|
|
% of Loans
in Each
Category
|
|
|
Amount
|
|
|
% of Loans
in Each
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer & others
|
|
$ |
10,781 |
|
|
|
0.42 |
% |
|
$ |
10,174 |
|
|
|
0.54 |
% |
|
$ |
8,433 |
|
|
|
0.48 |
% |
Boat
|
|
|
337,683 |
|
|
|
3.41 |
|
|
|
109,359 |
|
|
|
4.72 |
|
|
|
294,723 |
|
|
|
3.86 |
|
Mortgage
|
|
|
1,065,697 |
|
|
|
69.81 |
|
|
|
2,102,088 |
|
|
|
67.28 |
|
|
|
1,748,122 |
|
|
|
67.97 |
|
Commercial
|
|
|
710,278 |
|
|
|
26.36 |
|
|
|
317,345 |
|
|
|
27.46 |
|
|
|
417,198 |
|
|
|
27.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,124,439 |
|
|
|
100.00 |
% |
|
$ |
2,538,966 |
|
|
|
100.00 |
% |
|
$ |
2,468,476 |
|
|
|
100.00 |
% |
Non-interest Revenue
Three months ended March 31, 2011 compared to three months ended March 31, 2010
Non-interest revenue totaled $324,880 for the three months ended March 31, 2011, an increase of $31,991 or 10.92% from the 2010 amount of $292,889. Non-interest revenue for the three months ended March 31, 2011 and March 31, 2010 included fee income from service charges on deposit accounts, earnings on bank owned life insurance, gains on sales of investment securities, gain on the sale of other real estate owned, and other fees and commissions including revenues with respect to Pointer Ridge. The primary causes of the increase in non-interest revenue were the $38,070 gains on sales of investment securities, an increase in rents received by Pointer Ridge, an increase in service charges on deposit accounts and a gain on other real estate owned. This was offset by a decline in the interest we earned on bank owned life insurance and other fees and commissions. In an effort to minimize call and prepayment risk and manage future interest rate risk, we elected to sell some of our available for sale securities during the three months ended March 31, 2011. Pointer Ridge’s rents increased during the period because they have new tenants paying rental fees. Service charges increased as a result of an increase in the number of customers. The interest we earned on bank owned life insurance decreased because of a decline in the yield on insurance policies we own. As we previously reported, the tenant who leased the second floor of our branch located at 301 Crain Highway vacated the space on March 31, 2010.
The following table outlines the changes in non-interest revenue for the three month periods.
|
|
March 31,
2011
|
|
|
March 31,
2010
|
|
|
$ Change
|
|
|
% Change
|
|
Service charges on deposit accounts
|
|
$ |
82,450 |
|
|
$ |
74,820 |
|
|
$ |
7,630 |
|
|
|
10.20 |
% |
Gain on sales of investment securities
|
|
|
38,070 |
|
|
|
- |
|
|
|
38,070 |
|
|
|
- |
|
Earnings on bank owned life insurance
|
|
|
79,038 |
|
|
|
86,123 |
|
|
|
(7,085 |
) |
|
|
(8.23 |
) |
Pointer Ridge rent and other revenue
|
|
|
68,155 |
|
|
|
63,970 |
|
|
|
4,185 |
|
|
|
6.54 |
|
Gain on sale of other real estate owned
|
|
|
2,985 |
|
|
|
- |
|
|
|
2,985 |
|
|
|
- |
|
Other fees and commissions
|
|
|
54,182 |
|
|
|
67,976 |
|
|
|
(13,794 |
) |
|
|
(20.29 |
) |
Total non-interest revenue
|
|
$ |
324,880 |
|
|
$ |
292,889 |
|
|
$ |
31,991 |
|
|
|
10.92 |
% |
As we reported for the year ended December 31, 2010, as a result of the acquisition of Maryland Bank and Trust, we anticipate that we will rent additional space from Pointer Ridge in 2011. As a result, we expect that Pointer Ridge will have an increase in earnings in 2011 and operate at breakeven or a slight profit for the year.
We also anticipate that we will use the space available in our Crain Highway location. Therefore, we will not receive any rental income from this facility. We also believe that we will see an increase in service charges on deposit accounts and other fees and commissions as a result of growth in our existing customers, new customers originated by our current staff and new customers acquired as a result of the acquisition of Maryland Bankcorp.
Non-interest Expense
Three months ended March 31, 2011 compared to three months ended March 31, 2010
Non-interest expense increased $232,392 for the three months ended March 31, 2011. The following chart outlines the changes in non-interest expenses for the period.
|
|
March 31,
2011
|
|
|
March 31,
2010
|
|
|
$ Change
|
|
|
% Change
|
|
Salaries
|
|
$ |
1,133,787 |
|
|
$ |
1,165,415 |
|
|
$ |
(31,628 |
) |
|
|
(2.71 |
) % |
Employee benefits
|
|
|
366,924 |
|
|
|
350,135 |
|
|
|
16,789 |
|
|
|
4.80 |
|
Occupancy
|
|
|
366,023 |
|
|
|
333,406 |
|
|
|
32,617 |
|
|
|
9.78 |
|
Equipment
|
|
|
93,891 |
|
|
|
106,876 |
|
|
|
(12,985 |
) |
|
|
(12.15 |
) |
Data processing
|
|
|
129,750 |
|
|
|
94,426 |
|
|
|
35,324 |
|
|
|
37.41 |
|
Pointer Ridge other operating
|
|
|
118,222 |
|
|
|
113,770 |
|
|
|
4,452 |
|
|
|
3.91 |
|
FDIC insurance and
State of Maryland assessments
|
|
|
151,504 |
|
|
|
115,115 |
|
|
|
36,389 |
|
|
|
31.61 |
|
Merger and integration expenses
|
|
|
90,060 |
|
|
|
- |
|
|
|
90,060 |
|
|
|
- |
|
Other operating
|
|
|
477,013 |
|
|
|
415,639 |
|
|
|
61,374 |
|
|
|
14.77 |
|
Total non-interest expenses
|
|
$ |
2,927,174 |
|
|
$ |
2,694,782 |
|
|
$ |
232,392 |
|
|
|
8.62 |
% |
Employee benefits increased primarily because of increases in health care insurance. Occupancy expense increased as a result of increases in rents, taxes and utilities. Data processing increased due to a growth in assets and customers. FDIC insurance and State of Maryland assessments increased primarily as a result of growth in deposits and an increase in the rates assessed on these deposits. Merger and integration expenses resulted from the expenses associated with our acquisition of Maryland Bankcorp, Inc. and Maryland Bank & Trust and represent payment for data processing, attorneys, accounting and advisory fees. Other operating expenses increased as a result of increases in the cost of travel, education, supplies and other miscellaneous costs. These increases were offset by a decrease in salary expense which occurred primarily because we closed significantly more loans during the first quarter of 2011 than the first quarter of 2010, which caused us to defer a higher dollar amount of salary expense in 2011 than in 2010.
For the remainder of 2011, we anticipate non-interest expenses will increase as a result of the merger with Maryland Bankcorp. We will incur increased rent expense related to the expansion of space in our headquarters building. As a result of the merger, the number of branches that we operate has increased from 10 to 19 and we expect that we will incur increased operational expenses associated with these branches. We will also incur increased data processing costs because of these new branches and the integration of our computer systems with Maryland Bankcorp’s and increased FDIC insurance premiums as a result of the increase in deposits. We also anticipate that we will continue to incur legal, accounting and advisory fees associated with the merger of Maryland Bankcorp during 2011.
Income Taxes
Three months ended March 31, 2011 compared to three months ended March 31, 2010
Income tax expense was $335,243 (40.15% of pre-tax income) for the three months ended March 31, 2011 as compared to $230,069 (34.35 % of pre-tax income) for the same period in 2010. The tax rate was higher in 2011 than in 2010 because non-deductible expenses were higher and tax exempt interest income was lower.
Net Income Attributable to Old Line Bancshares, Inc.
Three months ended March 31, 2011 compared to three months ended March 31, 2010
Net income attributable to Old Line Bancshares was $522,682 for the three months ended March 31, 2011 compared to $464,534 for the three month period ended March 31, 2010. Earnings per basic and diluted common share for the three month period was $0.12. The increase in net income attributable to Old Line Bancshares for the 2011 period was primarily the result of a $365,607 increase in net interest income after provision for loan losses, and a $31,991 increase in non-interest revenue. These items were partially offset by a $232,392 increase in non-interest expense and a $105,174 increase in income taxes compared to the same period in 2010.
Analysis of Financial Condition
Investment Securities
Our portfolio consists primarily of time deposits in other banks, investment grade securities including U.S. Treasury securities, U.S. government agency securities, U.S. government sponsored entity securities, securities issued by states, counties and municipalities, mortgage backed securities, and certain equity securities, including Federal Reserve Bank stock, Federal Home Loan Bank stock, Maryland Financial Bank stock and Atlantic Central Bankers Bank stock. We have prudently managed our investment portfolio to maintain liquidity and safety and we have never owned stock in Fannie Mae or Freddie Mac or any of the more complex securities available in the market. The portfolio provides a source of liquidity, collateral for borrowings as well as a means of diversifying our earning asset portfolio. While we generally intend to hold the investment securities until maturity, we classify a portion of the investment securities as available for sale. We account for investment 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 investment securities classified in the held to maturity category at amortized cost. Although we will occasionally sell a security to assist with interest rate risk management or minimize prepayments, generally, 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 securities at March 31, 2011 amounted to $57.9 million, an increase of $3.1 million, or 5.66%, from the December 31, 2010 amount of $54.8 million. Available for sale investment securities increased to $37.7 million at March 31, 2011 from $33.0 million at December 31, 2010. Held to maturity securities at March 31, 2011 decreased to $20.3 million from the $21.7 million balance on December 31, 2010. During the three month period, we maintained sufficient cash balances to provide adequate liquidity for operations. Therefore, we deployed the excess funds into available for sale securities. The fair value of available for sale securities included net unrealized gains of $344,941 at March 31, 2011 (reflected as unrealized gains of $208,879 in stockholders’ equity after deferred taxes) as compared to net unrealized gains of $635,246 ($272,956 net of taxes) as of December 31, 2010. In general, the decrease in fair value was a result of maturities and increasing market interest rates. We have evaluated securities with unrealized losses for an extended period of time and we consider all unrealized losses on securities as of March 31, 2011 to be temporary losses because we expect to redeem each security at face value at or prior to maturity. We have the ability and intent to hold these securities until recovery or maturity. As of March 31, 2011, we do not have the intent to sell any of the securities classified as available for sale and believe that it is more likely than not that we will not have to sell any such securities before a recovery of cost. We do not believe that credit quality caused the impairment in these securities.
We are currently evaluating the impact of the Maryland Bank & Trust Company’s investment securities on our earnings, interest rate sensitivity and liquidity. As a result of this acquisition, we may reposition the investments in our portfolio to ensure that we maintain an acceptable level of earnings and liquidity and that there is not any significant credit exposure that arises from the combined portfolio. As previously mentioned, it is not our intent to sell securities. If, however, this analysis indicates that it is prudent to sell securities, we may elect to sell securities.
Loan Portfolio
Commercial loans and loans secured by real estate comprise the majority of the loan portfolio. Old Line Bank’s 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 $7.1 million or 2.37% to $306.7 million at March 31, 2011 from $299.6 million at December 31, 2010 Commercial business loans decreased by $2.3 million (2.75%), commercial real estate loans increased by $5.1 million (3.32%), residential real estate loans (generally home equity and fixed rate home improvement loans) increased by $876,000 (3.23%), real estate construction loans (primarily commercial real estate construction) increased by $4.3 million (17.21%) and consumer loans decreased by $1.3 million (9.92%) from their respective balances at December 31, 2010. During the first three months of 2011, we received scheduled loan payoffs on business loans that negatively impacted our loan growth for the period. In spite of these payoffs, we experienced a 2.37% growth in the loan portfolio. We saw loan and deposit growth generated from our entire team of lenders, branch personnel and board of directors. We anticipate our entire lending team, including the new team members from Maryland Bank & Trust, will continue to focus their efforts on business development during the remainder of 2011 and continue to grow the loan portfolio. We also anticipate that the addition of the Maryland Bank & Trust portfolio will increase net loans by approximately $205 million. However, the current economic climate and the challenges associated with integrating Maryland Bank & Trust into our organization may cause slower loan growth.
The following table summarizes the composition of the loan portfolio by dollar amount and percentages:
Loan Portfolio
|
|
(Dollars in thousands)
|
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
158,591 |
|
|
|
51.45 |
% |
|
$ |
153,527 |
|
|
|
50.91 |
% |
Construction
|
|
|
28,634 |
|
|
|
9.29 |
|
|
|
24,378 |
|
|
|
8.08 |
|
Residential
|
|
|
27,957 |
|
|
|
9.07 |
|
|
|
27,081 |
|
|
|
8.98 |
|
Commercial
|
|
|
81,240 |
|
|
|
26.36 |
|
|
|
83,523 |
|
|
|
27.69 |
|
Consumer
|
|
|
11,819 |
|
|
|
3.83 |
|
|
|
13,080 |
|
|
|
4.34 |
|
|
|
|
308,241 |
|
|
|
100.00 |
% |
|
|
301,589 |
|
|
|
100.00 |
% |
Allowance for loan losses
|
|
|
(2,125 |
) |
|
|
|
|
|
|
(2,469 |
) |
|
|
|
|
Deferred loan costs, net
|
|
|
538 |
|
|
|
|
|
|
|
486 |
|
|
|
|
|
|
|
$ |
306,654 |
|
|
|
|
|
|
$ |
299,606 |
|
|
|
|
|
Asset Quality
Management performs reviews of all delinquent loans and directs relationship officers to work with customers to resolve potential credit issues in a timely manner.
As outlined below, we have only two construction loans that have an interest reserve included in the commitment amount and where advances on the loan currently pay the interest due.
Loans With Interest Paid From Loan Advances
|
|
(000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
# of
Borrowers
|
|
|
|
|
|
# of
Borrowers
|
|
|
|
|
Hotels
|
|
|
1 |
|
|
$ |
979 |
|
|
|
1 |
|
|
$ |
979 |
|
Single family acquisition & development
|
|
|
1 |
|
|
|
2,276 |
|
|
|
1 |
|
|
|
2,336 |
|
|
|
|
2 |
|
|
$ |
3,255 |
|
|
|
2 |
|
|
$ |
3,315 |
|
Management generally classifies loans as non-accrual when it does not expect collection of full principal and interest under the original terms of the loan or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in our no longer accruing interest on such loan and reversing any interest previously accrued but not collected. We will generally restore a non-accrual loan to accrual status when the borrower brings delinquent principal and interest payments current and we expect to collect future monthly principal and interest payments. We recognize interest on non-accrual loans only when received.
As previously discussed in the provision for loan losses section of this report, at March 31, 2011, we had one loan totaling $1.2 million that was 90 days past due and was classified as non-accrual compared to three loans in the amount of $2.7 million at December 31, 2010.
The table below outlines the transfer of loans from and to non-accrual status for the three month period:
Non-Accrual Loans
(000's)
|
|
|
|
|
|
|
|
|
# of
Borrowers
|
|
|
Loan
Balance
|
|
Beginning Balance
|
|
|
3 |
|
|
$ |
2,711 |
|
Added to non-accrual
|
|
|
|
|
|
|
- |
|
Charged-off
|
|
|
|
|
|
|
(494 |
) |
Repossessed
|
|
|
(1 |
) |
|
|
(237 |
) |
Transferred to other real estate owned
|
|
|
(1 |
) |
|
|
(810 |
) |
Ending balance non-accrual loans
|
|
|
1 |
|
|
$ |
1,170 |
|
The only non-accrual loan at March 31, 2011 had a balance of $1.2 million and is a residential land acquisition and development loan secured by real estate. The non-accrued interest on this loan was $129,143 at March 31, 2011, none of which is included in interest income. The borrower and the guarantor on this loan have filed bankruptcy. We have received an appraisal that indicates the current value of the collateral that secures this loan is insufficient for repayment and are currently working towards obtaining a “lift stay” and foreclosure. As previously mentioned, because we believe the collateral is insufficient to repay the original amount due on this loan of $1.6 million, we charged $446,980 to the allowance for loan losses.
At December 31, 2010, we had three loans totaling $2.7 million past due and classified as non-accrual. The first loan in the amount of $810,291 was the same loan that we previously reported for the years ended December 31, 2008 and 2009. At December 31, 2010, we had obtained a “lift stay” on the property that secured the loan and were awaiting ratification of foreclosure. We received this ratification in January 2011 and subsequent to year end transferred this property to other real estate owned.
The second loan, in the amount of $1,616,317, is a residential acquisition and development loan secured by real estate. As discussed above we have charged $446,980 to the allowance for loan losses. At December 31, 2010, we considered this loan impaired and had allocated $450,000 of the allowance for loan losses to this loan.
The third loan was a luxury boat loan in the amount of $284,011. The borrower on this loan filed bankruptcy. During the 1st quarter of 2011, we repossessed the boat securing this loan. At repossession, we obtained a survey on the boat to determine its value. The collateral is insufficient to repay the loan balance. We have charged approximately $50,000 to the allowance for loan losses and recorded the remaining value of the repossessed boat of $236,750 in other assets.
We classify any property acquired as a result of foreclosure on a mortgage loan as “other 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 property 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 required by ASC Topic 310-Receivables and ASC Topic 450-Contingencies, we measure all 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 loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, we recognize impairment through a valuation allowance and corresponding provision for loan losses. Old Line Bank considers consumer loans as homogenous loans and thus does not apply the impairment test to these loans. We write off impaired loans when collection of the loan is doubtful.
The table below presents a breakdown of the non-performing loans, other real estate owned and accruing past due loans at March 31, 2011.
Non-Performing Assets and Past Due Loans
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
December 31, 2010
|
|
|
|
|
# |
|
|
Balance
|
|
|
Interest Not
Accrued
|
|
|
|
# |
|
|
Balance
|
|
|
Interest Not
Accrued
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1 |
|
|
$ |
1,169 |
|
|
$ |
129 |
|
|
|
2 |
|
|
$ |
2,427 |
|
|
$ |
315 |
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Residential
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consumer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
284 |
|
|
|
4 |
|
Other real estate owned
|
|
|
3 |
|
|
|
1,978 |
|
|
|
- |
|
|
|
2 |
|
|
|
1,153 |
|
|
|
- |
|
Total non-performing assets
|
|
|
4 |
|
|
$ |
3,147 |
|
|
$ |
129 |
|
|
|
5 |
|
|
$ |
3,864 |
|
|
$ |
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets as
a percentage of total assets
|
|
|
|
0.77 |
% |
|
|
|
|
|
|
|
|
|
|
0.96 |
% |
|
|
|
|
Non-performing loans as
a percentage of total gross loans
|
|
|
|
0.38 |
% |
|
|
|
|
|
|
|
|
|
|
0.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing past due loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days past due
|
|
|
4 |
|
|
$ |
1,130 |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
90 or more days past due
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Total accruing past due loans
|
|
|
4 |
|
|
$ |
1,130 |
|
|
|
|
|
|
|
0 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of accruing past due
loans to total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 days past due
|
|
|
|
|
|
|
0.37 |
% |
|
|
|
|
|
|
|
|
|
|
- |
% |
|
|
|
|
90 or more days past due
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
Total accruing past due loans
|
|
|
|
|
|
|
0.37 |
% |
|
|
|
|
|
|
|
|
|
|
- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank owned life insurance
We have invested $8.8 million in life insurance policies on our executive officers and other officers of the bank. We anticipate the earnings on these policies will contribute to our employee benefit expenses as well as our obligations under our Salary Continuation Agreements and Supplemental Life Insurance Agreements that we entered into with our executive officers in January 2006. During the first three months of 2011, the cash surrender value of the insurance policies increased by $62,441 as a result of earnings on the investments. There are no post retirement death benefits associated with the BOLI policies.
Deposits
We seek deposits within our market area by paying competitive interest rates, offering high quality customer service and using technology to deliver deposit services effectively.
At March 31, 2011, the deposit portfolio was $338.6 million, a $1.9 million or 0.56% decrease over the December 31, 2010 level of $340.5 million. Non-interest bearing deposits decreased $10.7 million during the period to $56.8 million from $67.5 million primarily due to temporary fluctuations in real estate settlement and trustee accounts and the transfer of funds to interest bearing accounts. Interest bearing deposits grew $8.8 million to $281.8 million from $273.0 million. Approximately $8.9 million was in money market accounts and approximately $830,000 was in certificates of deposit. The growth in money market accounts and certificates of deposit was offset by an approximately $1.0 million decline in savings accounts. The growth in these categories was the result of expansion of existing customer relationships, the money market accounts discussed below and new customers.
We acquire brokered certificates of deposit through the Promontory Interfinancial Network (Promontory). Through this deposit matching network and its certificate of deposit account registry service (CDARS) and money market account service, we have the ability to offer our customers access to FDIC insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through Promontory on behalf of a customer, we receive matching deposits through the network’s reciprocal deposit program. We can also place deposits through this network without receiving matching deposits. At March 31, 2011, we had $21.3 million in CDARS and $9.0 million in money market accounts through the reciprocal deposit program compared to $21.1 million in CDARS and $5.7 million in money market accounts at December 31, 2010. We had received $37.0 million at March 31, 2011 and $31.8 million at December 31, 2010 in certificates of deposit through the CDARS network that were not reciprocal deposits. We had no other brokered certificates of deposit as of March 31, 2011 or December 31, 2010. We expect that we will continue to use brokered deposits as an element of our funding strategy when required to maintain an acceptable loan to deposit ratio.
Borrowings
Old Line Bancshares has an available line of credit secured by Old Line Bank stock in the amount of $3 million. Old Line Bank has available lines of credit, including overnight federal funds and repurchase agreements from its correspondent banks totaling $29.5 million as of March 31, 2011. Old Line Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta (FHLB) that totaled $118.2 million at March 31, 2011 and $120.9 million at December 31, 2010. As a condition of obtaining the line of credit from the FHLB, the FHLB requires that Old Line Bank purchase shares of capital stock in the FHLB. Prior to allowing Old Line Bank to borrow under the line of credit, the FHLB also requires that Old Line Bank provide collateral to support borrowings. This collateral consists of commercial and residential mortgage loans held in our portfolio. The FHLB monitors the value of this collateral and performs audits on a regular basis. At March 31, 2011, we have provided collateral to support up to $60.8 million of borrowings. Of this, we had borrowed $10.0 million at March 31, 2011 and December 31, 2010, as outlined below. This was the maximum amount that we had borrowed during the three month period ended March 31, 2011.
Short-term borrowings consisted of short-term promissory notes issued to Old Line Bank’s customers. Old Line Bank offers its commercial customers an enhancement to the basic non-interest bearing demand deposit account. This service electronically sweeps excess funds from the customer’s account into an interest bearing Master Note with Old Line Bank. These Master Notes are payable on demand, re-price daily and have maturities of 270 days or less.
At March 31, 2011 and December 31, 2010, Old Line Bank had two advances in the amount of $5,000,000 each from the FHLB totaling $10 million. The 3.358% FHLB borrowing matures on December 12, 2012. Interest is payable on the 12th day of each March, June, September and December. On any interest payment date, the FHLB has the option to convert the interest rate on this advance from a fixed rate to a three month LIBOR based variable rate. The 3.12% FHLB borrowing matures December 19, 2012. Interest is payable on the 19th day of each month. On any interest payment date, the FHLB has the option to convert the interest rate on this advance from a fixed rate to a one month LIBOR based variable rate. The senior note is an obligation of Pointer Ridge. It has a 10 year fixed interest rate of 6.28% and matures on September 5, 2016.
The following table outlines our borrowings as of March 31, 2011 and December 31, 2010.
Borrowings
|
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Short term promissory notes
|
|
$ |
6,584,128 |
|
|
|
0.50 |
% |
|
$ |
5,669,332 |
|
|
|
0.50 |
% |
FHLB advance due Dec. 2012
|
|
|
5,000,000 |
|
|
|
3.58 |
% |
|
|
5,000,000 |
|
|
|
3.58 |
% |
FHLB advance due Dec. 2012
|
|
|
5,000,000 |
|
|
|
3.12 |
% |
|
|
5,000,000 |
|
|
|
3.12 |
% |
Senior note, fixed at 6.28%
|
|
|
6,349,219 |
|
|
|
6.28 |
% |
|
|
6,371,947 |
|
|
|
6.28 |
% |
Total
|
|
$ |
22,933,347 |
|
|
|
|
|
|
$ |
22,041,279 |
|
|
|
|
|
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
A principal objective of Old Line Bank’s asset/liability management policy is to minimize exposure to changes in interest rates by an ongoing review of the maturity and re-pricing of interest earning assets and interest bearing liabilities. The Asset and Liability Committee of the Board of Directors oversees this review.
The Asset and Liability Committee establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a bank’s earnings resulting from movements in market interest rates. Management monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. Monthly financial reports supply management with information to evaluate and manage rate sensitivity and adherence to policy. Old Line Bank’s asset/liability policy’s goal is to manage assets and liabilities in a manner that stabilizes net interest income and net economic value within a broad range of interest rate environments. Management makes adjustments to the mix of assets and liabilities periodically in an effort to achieve dependable, steady growth in net interest income regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee examines the extent to which Old Line Bank’s assets and liabilities are interest rate sensitive and monitors the interest rate sensitivity gap. An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market rates. The interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities scheduled to mature or re-price within such time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of declining interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If re-pricing of assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.
Old Line Bank currently has a negative gap over the short term, which suggests that the net yield on interest earning assets may decrease during periods of rising interest rates. However, a simple interest rate “gap” analysis by itself may not be an accurate indicator of how changes in interest rates will affect net interest income. Changes in interest rates may not uniformly affect income associated with interest earning assets and costs associated with interest bearing liabilities. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest-rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.
Liquidity
Our overall asset/liability strategy takes into account our need to maintain adequate liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position daily in conjunction with Federal Reserve guidelines. As outlined in the borrowing section of this report, we have credit lines, unsecured and secured, available from several correspondent banks totaling $32.5 million. Additionally, we may borrow funds from the FHLB and the Federal Reserve Bank of Richmond. 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 available for sale investment securities or pledge investment securities as collateral to create additional liquidity. From time to time we may sell or participate out loans to create additional liquidity as required. Additional sources of liquidity include funds held in time deposits and cash from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks, federal funds sold and time deposits in other banks. On March 31, 2011, we had $8.5 million in cash and due from banks, $115,680 in interest bearing accounts, $558,214 in federal funds sold, and $99,000 in time deposits in other banks. As of December 31, 2010, we had $14.3 million in cash and due from banks, $109,170 in interest bearing accounts, $180,536 in federal funds sold and other overnight investments and $297,000 in time deposits in other banks.
Old Line Bank has sufficient liquidity to meet its loan commitments as well as fluctuations in deposits. We usually retain maturing certificates of deposit as we offer competitive rates on certificates of deposit. Management is not aware of any demands, trends, commitments, or events that would result in Old Line Bank’s inability to meet anticipated or unexpected liquidity needs. We have experienced no material change in borrowings or fluctuations in deposits during the three month period ended March 31, 2011.
During the recent period of turmoil in the financial markets, some institutions experienced large deposit withdrawals that caused liquidity problems. We did not have any significant withdrawals of deposits or any liquidity issues. Although we plan for various liquidity scenarios, if there is further turmoil in the financial markets or our depositors lose confidence in us, we could experience liquidity issues.
Capital
Our stockholders’ equity amounted to $43.8 million at March 31, 2011 and $37.1 million at December 31, 2010. We are considered “well capitalized” under the risk based capital guidelines adopted by the Federal Reserve. Stockholders’ equity increased during the three month period primarily because of net income attributable to Old Line Bancshares, Inc. of $522,682 and the $43,514 adjustment for stock based compensation awards. These items were partially offset by the $140,322 common stock cash dividend and the $64,077 after tax unrealized loss on available for sale securities.
Contractual Obligations, Commitments, Contingent Liabilities, and Off Balance Sheet Arrangements
Old Line Bancshares 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 uses these financial instruments to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit, interest rate, and liquidity risk. These commitments do not represent unusual risks and management does not anticipate any losses which would have a material effect on Old Line Bancshares. Old Line Bancshares also has operating lease obligations.
Outstanding loan commitments and lines and letters of credit at March 31, 2011 and December 31, 2010, are as follows:
Contractual Obligations, Commitments, Contingent Liabilities
and
Off Balance Sheet Arragements
|
|
|
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(000's)
|
|
|
|
|
|
|
|
|
Commitments to extend credit and available credit lines:
|
|
|
|
|
|
|
Commercial
|
|
$ |
38,831 |
|
|
$ |
34,485 |
|
Real estate undisbursed development and construction
|
|
|
15,680 |
|
|
|
11,512 |
|
Consumer
|
|
|
7,861 |
|
|
|
7,256 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,372 |
|
|
$ |
53,253 |
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Old Line Bancshares generally requires collateral to support financial instruments with credit risk on the same basis as it does for on balance sheet instruments. The collateral is based on management's credit evaluation of the counter party. Commitments generally have interest rates fixed at current market rates, expiration dates or other termination clauses and may require payment of a fee. Available credit lines represent the unused portion of lines of credit previously extended and available to the customer so long as there is no violation of any contractual condition. These lines generally have variable interest rates. Since many of the commitments are expected to expire without being drawn upon, and since it is unlikely that all customers will draw upon their lines of credit in full at any time, the total commitment amount or line of credit amount does not necessarily represent future cash requirements. We evaluate each customer's credit worthiness on a case by case basis. We regularly reevaluate many of our commitments to extend credit. Because we conservatively underwrite these facilities at inception, we generally do not have to withdraw any commitments. We are not aware of any loss that we would incur by funding our commitments or lines of credit.
Commitments for real estate development and construction, which totaled $15.7 million, or 24.76% of the $62.4 million of outstanding commitments at March 31, 2011, are generally short term and turn over rapidly with principal repayment from permanent financing arrangements upon completion of construction or from sales of the properties financed.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Our exposure to credit loss in the event of nonperformance by the customer is the contract amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In general, loan commitments, credit lines and letters of credit are made on the same terms, including with respect to collateral, as outstanding loans. We evaluate each customer’s credit worthiness and the collateral required on a case by case basis.
Reconciliation of Non-GAAP Measures
Below is a reconciliation of the fully tax equivalent adjustments and the GAAP basis information presented in this report:
Three months ended March 31, 2011
|
|
Net Interest
Income
|
|
|
Yield
|
|
|
Net
Interest
Spread
|
|
GAAP net interest income
|
|
$ |
3,587,263 |
|
|
|
3.71 |
% |
|
|
3.97 |
% |
Tax equivalent adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
- |
|
|
|
0.00 |
|
|
|
0.00 |
|
Investment securities
|
|
|
11,243 |
|
|
|
0.01 |
|
|
|
0.01 |
|
Loans
|
|
|
27,269 |
|
|
|
0.03 |
|
|
|
0.03 |
|
Total tax equivalent adjustment
|
|
|
38,512 |
|
|
|
0.04 |
|
|
|
0.04 |
|
Tax equivalent interest yield
|
|
$ |
3,625,775 |
|
|
|
3.75 |
% |
|
|
4.01 |
% |
Three months ended March 31, 2010
|
|
Net Interest
Income
|
|
|
Yield
|
|
|
Net
Interest
Spread
|
|
GAAP net interest income
|
|
$ |
3,141,656 |
|
|
|
3.82 |
% |
|
|
3.58 |
% |
Tax equivalent adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Investment securities
|
|
|
12,049 |
|
|
|
0.01 |
|
|
|
0.01 |
|
Loans
|
|
|
27,666 |
|
|
|
0.04 |
|
|
|
0.04 |
|
Total tax equivalent adjustment
|
|
|
39,715 |
|
|
|
0.05 |
|
|
|
0.05 |
|
Tax equivalent interest yield
|
|
$ |
3,181,371 |
|
|
|
3.87 |
% |
|
|
3.63 |
% |
Impact of Inflation and Changing Prices
Management has prepared the financial statements and related data presented herein 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 institution’s 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 a 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
We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which we operate. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. We base these estimates, assumptions, and judgments on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. We base the fair values and the information used to record valuation adjustments for certain assets and liabilities on quoted market prices or from information other third party sources provide, when available.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the provision for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral and the financial condition of the borrower, and in establishing loss ratios and risk ratings. The establishment of allowance factors is a continuing exercise and allowance factors may change over time, resulting in an increase or decrease in the amount of the provision or allowance based upon the same volume and classification of loans.
Changes in allowance factors or in management’s interpretation of those factors will have a direct impact on the amount of the provision, and a corresponding effect on income and assets. Also, errors in management’s perception and assessment of the allowance factors could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs, which 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 Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also include forward-looking statements in other statements that we make. All statements that are not descriptions of historical facts are forward looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
The statements presented herein with respect to, among other things, Old Line Bancshares’ plans, objectives, expectations and intentions, including anticipated increases in expenses as a result of the merger with Maryland Bankcorp, our expectations that income generated from the branches acquired in the merger, our new loan officers, and our expanded market area will offset corresponding increased expenses, that the merger will be accretive to earnings by the end of 2011, statements regarding anticipated changes in revenue, expenses and income, increases in net interest income, improvement in our net interest margin, our expectation that Pointer Ridge will have an increase in earnings and operate at breakeven or a slight profit in 2011, our expectations with respect to renting and using available space, our belief that we have identified any problem assets and that our borrowers will continue to remain current on their loans, being well positioned to capitalize on potential opportunities in a healthy economy, continued growth in customer relationships, sources of liquidity, the allowance for loan losses, expected loan, deposit and asset growth, losses on and our intentions with respect to our investment securities, interest rate sensitivity, losses on off balance sheet arrangements, earnings on BOLI, improving earnings per share and stockholder value, and financial and other goals and plans are forward looking. Old Line Bancshares bases these statements on our beliefs, assumptions and on information available to us as of the date of this filing, which involves risks and uncertainties. These risks and uncertainties include, among others: those discussed in this report; the businesses of Maryland Bankcorp may not be integrated into Old Line Bancshares successfully or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings from the merger may not be fully realized, or realized within the expected timeframe; potential disruption in our businesses, operations and customer and employee relationships as a result of the integration of Maryland Bankcorp’s business with our own; the ability of Old Line Bancshares to retain key personnel; the ability of Old Line Bancshares to successfully implement its growth and expansion strategy; risk of loan losses; that the allowance for loan losses may not be sufficient; that changes in interest rates and monetary policy could adversely affect Old Line Bancshares; that changes in regulatory requirements and/or restrictive banking legislation may adversely affect Old Line Bancshares; including regulations adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; that the market value of investments could negatively impact stockholders’ equity; risks associated with Old Line Bancshares’ 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; further deterioration in general economic conditions or a slower than anticipated recovery; and changes in competitive, governmental, regulatory, technological and other factors which may affect Old Line Bancshares specifically or the banking industry generally. For a more complete discussion of some of these risks and uncertainties see “Risk Factors” in Old Line Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2010, Old Line Bancshares’ registration statement on Form S-4 filed on November 8, 2010, and the Risk Factors section of this report.
Old Line Bancshares’ 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 undertakes no obligation to update the forward-looking statements to reflect factual assumptions, circumstances or events that have changed after we have made the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. Due to the nature of our operations, only interest rate risk is significant to our consolidated results of operations or financial position. For information regarding our Quantitative and Qualitative Disclosure about Market Risk, see “Interest Rate Sensitivity Analysis and Interest Rate Risk Management” in Part I, Item 2 of this Form 10-Q.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line Bancshares’ disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, Old Line Bancshares’ Chief Executive Officer and Chief Financial Officer concluded that Old Line Bancshares’ disclosure controls and procedures are effective as of March 31, 2011. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Old Line Bancshares 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 SEC’s rules and forms.
In addition, there were no changes in Old Line Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, Old Line Bancshares’ internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes in the risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. (Removed and Reserved)
Item 5. Other Information
None
Item 6. Exhibits
|
10.45
|
Agreement of Lease by and between Millbank Partners-Riva Limited Partnership and Old Line Bank (filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 4, 2011)
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Old Line Bancshares, Inc.
|
|
|
|
|
|
|
|
Date: May 9, 2011
|
|
By:
|
/s/ James W. Cornelsen
|
|
|
|
James W. Cornelsen,
President and Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
Date: May 9, 2011
|
|
By:
|
/s/ Christine M. Rush
|
|
|
|
Christine M. Rush,
Executive Vice President and Chief Financial Officer
|
|
|
|
(Principal Accounting and Financial Officer)
|
|
|
|
|