Attached files
| file | filename |
|---|---|
| EX-99.2 - EX-99.2 - OLD LINE BANCSHARES INC | w77890exv99w2.htm |
| EX-32 - EX-32 - OLD LINE BANCSHARES INC | w77890exv32.htm |
| EX-23.1 - EX-23.1 - OLD LINE BANCSHARES INC | w77890exv23w1.htm |
| EX-99.1 - EX-99.1 - OLD LINE BANCSHARES INC | w77890exv99w1.htm |
| EX-31.1 - EX-31.1 - OLD LINE BANCSHARES INC | w77890exv31w1.htm |
| EX-31.2 - EX-31.2 - OLD LINE BANCSHARES INC | w77890exv31w2.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
| o | 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 (State or other jurisdiction of incorporation or organization) |
20-0154352 (I.R.S. Employer Identification No.) |
|
| 1525 Pointer Ridge Place | 20716 | |
| Bowie, Maryland (Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (301) 430-2500
Securities registered pursuant to Section 12(b) of the Act:
| Common stock, par value $0.01 per share (Title of each class) |
Name of exchange on which registered The NASDQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
o Yes
þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.
o Yes
þ No
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant 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).
Yes o
No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 | Smaller Reporting Company þ | |||
| (Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
o Yes
þ No
The aggregate market value of the common equity held by non-affiliates was $19,799,562 as of June
30, 2009 based on a sales price of $5.90 per share of Common Stock, which is the sales price at
which the Common Stock was last traded on June 30, 2009 as reported by the NASDAQ Stock Market LLC.
The number of shares outstanding of the issuer’s Common Stock was 3,862,364 as of March 1, 2010.
.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2010 Annual Meeting of Stockholders of Old Line Bancshares,
Inc., to be filed with the Securities and Exchange Commission no later than 120 days after the
close of the fiscal year, are incorporated by reference in Part III of this Annual Report on Form
10-K.
OLD LINE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
PART I
| Item 1. | Business |
Business of Old Line Bancshares, Inc.
Old Line Bancshares, Inc. was incorporated under the laws of the State of Maryland on April
11, 2003 to serve as the holding company of Old Line Bank. The primary business of Old Line
Bancshares, Inc. is to own all of the capital stock of Old Line Bank.
On May 22, 2003, the stockholders of Old Line Bank approved the reorganization of Old Line
Bank into a holding company structure. The reorganization became effective on September 15, 2003.
In connection with the reorganization, (i) Old Line Bank became our wholly-owned subsidiary and
(ii) each outstanding share (or fraction thereof) of Old Line Bank common stock was converted into
one share (or fraction thereof) of Old Line Bancshares, Inc. common stock, and the former holders
of Old Line Bank common stock became the holders of all our outstanding shares.
Our primary business is to own all of the capital stock of Old Line Bank. We also have an
approximately $1.2 million investment in a real estate investment limited liability company named
Pointer Ridge Office Investment, LLC (“Pointer Ridge”). We own 62.50% of Pointer Ridge.
Business of Old Line Bank
General
Old Line Bank is a trust company chartered under Subtitle 2 of Title 3 of the Financial
Institutions Article of the Annotated Code of Maryland. Old Line Bank was originally chartered in
1989 as a national bank under the title “Old Line National Bank.” In June 2002, Old Line Bank
converted to a Maryland-chartered trust company exercising the powers of a commercial bank, and
received a Certificate of Authority to do business from the Maryland Commissioner of Financial
Regulation.
Old Line Bank converted from a national bank to a Maryland-chartered trust company to reduce
certain federal, supervisory and application fees that were then applicable to Old Line National
Bank and to have a local primary regulator. Prior to the conversion, Old Line Bank’s primary
regulator was the Office of the Comptroller of the Currency. Currently, Old Line Bank’s primary
regulator is the Maryland Commissioner of Financial Regulation.
Old Line Bank does not exercise trust powers and its regulatory structure is the same as a
Maryland chartered commercial bank. Old Line Bank is a member of the Federal Reserve System and
the Federal Deposit Insurance Corporation insures our deposits.
We are headquartered in Bowie, Maryland, approximately 10 miles east of Andrews Air Force Base
and 20 miles east of Washington, D.C. We engage in a general commercial banking business, making
various types of loans and accepting deposits. We market our financial services to small to medium
sized businesses, entrepreneurs, professionals, consumers and high net worth clients. Our current
primary market area is the suburban Maryland (Washington, D.C. suburbs) counties of Prince
George’s, Charles, Anne Arundel and northern St. Mary’s. We also target customers throughout the
greater Washington, D.C. metropolitan area. Our branch offices generally operate six days per week
from 8:00 a.m. until 7:00 p.m. on weekdays and from 8:00 a.m. until noon on Saturday. None of our
branch offices are open on Sunday.
1
Our principal source of revenue is interest income and fees generated by lending and investing
funds on deposit. We typically balance the loan and investment portfolio towards loans. Generally
speaking, loans earn more attractive returns than investments and are a key source of product cross
sales and customer referrals. Our loan and investment strategies balance the need to maintain
adequate liquidity via excess cash or federal funds sold with opportunities to leverage our capital
appropriately.
We have based our strategic plan on the premise of enhancing stockholder value and growth
through branching and operating profits. Our short-term goals include maintaining credit quality,
creating an attractive branch network, expanding fee income, generating extensions of core banking
services and using technology to maximize stockholder value.
Recent Business Developments
Branch Expansion Developments
In 2009, we substantially completed our branch expansion efforts with the opening of two new
branch locations. On July 1, 2009, we opened a branch at 1641 State Route 3 North, Crofton,
Maryland in Anne Arundel County. We had initially executed a lease and applied to regulatory
authorities to open this branch in 2004, but its construction was delayed due to engineering and
permit delays. During July and August 2009, we hired the staff for this location.
In October 2009, we opened an additional branch in the Fairwood Office Park located at 12100
Annapolis Road, Suite 1, Glen Dale, Maryland. We hired the staff for this location during the
third quarter of 2009.
In the fourth quarter of 2009, we moved our Greenbelt (Prince George’s County) Maryland branch
that was opened in June 2007 on the 1st floor of an office building to a free standing
building at the southwest corner of the intersection of Kenilworth Avenue and Ivy Lane, Greenbelt,
Maryland. In April 2007, we hired the Branch Manager for this location and hired the remainder of
the staff in May and September of 2007.
Expansion of Commercial, Construction and Commercial Real Estate Lending
In December 2009, we added a team of four experienced, highly skilled loan officers to our
staff. These officers have a combined 50 years of commercial banking experience and were employed
by a large regional bank with offices in the suburban Maryland market prior to joining us. These
individuals have worked in our market area for many years, have worked together as a team for
several years and have a history of successfully generating a high volume of commercial,
construction and commercial real estate loans. This team operates from our Greenbelt, Maryland
branch location.
We anticipate the addition of these individuals and our new branches will cause an increase in
non-interest expenses in 2010. We also expect that as a result of the addition of these
individuals and branches, the bank will experience an increased level of loan and deposit growth in
2010 and beyond that will provide increased interest income that exceeds their non-interest
expenses.
2
Sale and Repurchase of Preferred Stock to the U.S. Treasury
On December 5, 2008, we issued $7 million of our Series A Preferred Stock and warrants to
purchase 141,892 shares of our common stock at $7.40 per share to the U.S. Department of the
Treasury (“U.S. Treasury”) pursuant to the Capital Purchase Program under the Troubled Asset Relief
Program implemented pursuant to the Emergency Economic Stabilization Act of 2008. Please see
“-Supervision and Regulation-The Emergency Economic Stabilization Act of 2008” for additional
information.
On July 15, 2009, we paid the U.S. Treasury $7,058,333 to repurchase the preferred stock
outlined above. The amount paid included the liquidation value of the preferred stock and $58,333
of accrued but unpaid dividends. We have also repurchased at a fair market value of $225,000 the
warrant to purchase 141,892 shares of our common stock that was issued to the U.S. Treasury in
conjunction with the issuance of the preferred stock.
Location and Market Area
We consider our current primary market area to consist of the suburban Maryland (Washington,
D.C. suburbs) counties of Prince George’s, Anne Arundel, Charles and northern St. Mary’s. The
economy in our current primary market area has focused on real estate development, high technology,
retail and the government sector.
Our headquarters and a branch are located at 1525 Pointer Ridge Place, Bowie, Prince George’s
County, Maryland. A critical component of our strategic plan and future growth is Prince George’s
County. Prince George’s County wraps around the eastern boundary of Washington, D.C. and offers
urban, suburban and rural settings for employers and residents. There are several national and
international airports less than an hour away, as is Baltimore. We currently have six branch
locations in Prince George’s County including our new Fairwood Office Park branch that opened in
October 2009.
Two of our branch offices are located in Waldorf, Maryland in Charles County. Just 15 miles
south of the Washington Capital Beltway, Charles County is the gateway to Southern Maryland. The
northern part of Charles County is the “development district” where the commercial, residential and
business growth is focused. Waldorf, White Plains and the planned community of St. Charles are
located here.
Two of our branch offices are located in Anne Arundel County, one in Annapolis that we opened
in September 2008 and our new branch that we opened in Crofton in July 2009. Anne Arundel County
borders the Chesapeake Bay and is situated in the high-tech corridor between Baltimore and
Washington, D.C. With over 534 miles of shoreline, it provides waterfront living to many
residential communities. Annapolis, the State Capital and home to the United States Naval Academy,
and Baltimore/Washington International Thurgood Marshal Airport (BWI) are located in Anne Arundel
County. Anne Arundel County has one of the strongest economies in the State of Maryland and its
unemployment rate is consistently below the national average.
Lending Activities
General. Our primary market focus is on making loans to small and medium size businesses,
entrepreneurs, professionals, consumers and high net worth clients in our primary market area. Our
lending activities consist generally of short to medium term commercial business loans, commercial
real estate loans, real estate construction loans, home equity loans and consumer installment
loans, both secured and unsecured. As a niche-lending product, we have provided luxury boat
financing to individuals, who generally tend to be high net worth individuals. These boats are
generally Coast Guard documented and have a homeport of record in the Chesapeake Bay or its
tributaries.
3
Credit Policies and Administration. We have adopted a comprehensive lending policy, which
includes stringent underwriting standards for all types of loans. Our lending staff follows
pricing guidelines established periodically by our management team. In an effort to manage risk,
prior to funding, the loan committee consisting of the President, Chief Credit Officer, Chief
Lending Officer 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 the concentrations of loans in the portfolio.
In addition to the normal repayment risks, all loans in the portfolio are subject to the state
of the economy and the related effects on the borrower and/or the real estate market. With the
exception of loans provided to finance luxury boats, generally longer-term loans have periodic
interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio
closely to ensure that we minimize past due loans and that we swiftly deal with potential problem
loans.
In addition to the internal business processes employed in the credit administration area, Old
Line Bank retains an outside, independent credit review firm to review the loan portfolio. This
firm performs a detailed annual review and an interim update at least once a year. We use the
results of the firm’s report to validate our internal loan ratings and we review their commentary
on specific loans and on our loan administration activities in order to improve our
operations.
Commercial Business Lending. Our commercial business lending consists of lines
of credit, revolving credit facilities, accounts receivable financing, term loans, equipment loans,
SBA loans, stand-by letters of credit and unsecured loans. We originate commercial loans for any
business purpose including the financing of leasehold improvements and equipment, the carrying of
accounts receivable, general working capital, contract administration 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 have a higher degree of risk than residential mortgage loans because
the availability of funds for repayment generally depends on the success of the business. They may
also involve higher average balances, increased difficulty monitoring and a higher risk of default
since their repayment generally depends on the successful operation of the borrower’s business. 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 usually includes
a review of the borrower’s annual tax returns and updated financial statements.
Commercial Real Estate Lending. We finance commercial real estate for our clients, usually
for owner occupied properties. We generally will finance owner-occupied commercial real estate at
a maximum loan–to-value of 85%. Our underwriting policies and processes focus on the clients’
ability to repay the loan as well as an assessment of the underlying real estate. We originate
commercial real estate loans on a fixed rate or adjustable rate basis. Usually, these rates adjust
during a three, five or seven year time period based on the then current treasury or prime rate
index. Repayment terms include amortization schedules from three years to a maximum of 25 years
with principal and interest payments due monthly and with all remaining principal due at maturity.
Commercial real estate lending entails significant additional risks as compared with
residential mortgage lending. Risks inherent in managing a 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. Our underwriting generally includes an analysis of the
borrower’s capacity to repay, the current collateral value, a cash flow analysis and review of the
character of the borrower and current and prospective conditions in the market. We generally limit
loans in this category to 75%-80% of the value of the property and require personal and/or
corporate guarantees. 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 will meet with the borrower and/or perform site
visits as required.
4
Real Estate Construction Lending. This segment of our loan portfolio consists of funds
advanced for construction of single family residences, multi-family housing and commercial
buildings. These loans 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 entails significant risks compared with residential mortgage lending.
These risks involve larger loan balances concentrated with single borrowers with funds advanced
upon the security of the land or the project under construction. The value of the project is
estimated prior to the completion of construction. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related loan-to-value ratios.
To mitigate these risks, we generally limit loan amounts to 80% of appraised values and obtain
first lien positions on the property. We generally only offer real estate construction financing
to experienced builders and 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 Lending. We offer a variety of consumer-oriented residential real
estate loans. The bulk of our portfolio is made up of 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 gives us 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 sub-prime residential real
estate loans.
Consumer Installment Lending
Luxury Boat Loans. 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 comprised of these loans ($13.1 million or 89.73% of
the consumer loans, excluding consumer real estate, and 4.91% of gross loans at December 31, 2009)
and would consider making such loans in the future if borrowers were to apply for them, we have not
originated any substantive new marine loans since the third quarter of 2007. Our average loan in
the luxury boat loan category is approximately $150,000, with a 15 year term and a fixed interest
rate. Historically, our internal analysis and industry statistics indicated that the average life
of these loans was approximately 42 months as the purchaser either traded or sold the vessel. We
believe that the current economic turmoil has extended the average life of these loans as borrowers
are not trading their boats for new ones or able to sell the boat (and pay off the related loan)
when they desire to do so. These loans entail greater risks than residential mortgage lending
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 individuals’ debt service should not exceed 36% of their gross income, they
must own their home, have stability of employment and residency, verifiable liquidity, satisfactory
prior credit repayment history and the loan to value ratio may not exceed 85%. To ascertain value,
we generally receive a survey of the boat from a qualified surveyor and/or a current purchase
agreement and compare the determined value to published industry values. The majority of these
boats are United States Coast Guard documented vessels and we obtain a lien on the vessel with a
first preferred ship mortgage, where applicable, or a security interest on the title. As a result
of these stringent guidelines, this segment of our portfolio has experienced minimal delinquency.
Since inception of the portfolio in 1997, only five accounts have experienced 30-day delinquency
with total losses in the portfolio of $97,000 from three accounts. The most recent loss occurred
during the third quarter of 2009 when we repossessed a boat. At the time of repossession, this
5
boat secured a loan of approximately $100,000. We have charged $50,000 to the allowance for loan
losses for anticipated losses we expect to incur on this transaction and we have included in other
assets $50,000 for the repossessed value of the boat. We anticipate we will sell the boat and we
do not expect to recognize any substantive additional losses on the boat.
Personal and Household Loans. 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 their 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 may present greater credit risk than residential mortgage loans because many
consumer loans 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 loan may not be repaid. Also, various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such
loans. However, in our opinion, many of these risks do not apply to the luxury boat loan portfolio
due to the credit quality and liquidity of the borrowers.
Lending Limit. As of December 31, 2009, our legal lending limit for loans to one borrower was
approximately $5.4 million. As part of our risk management strategy, we may attempt to participate
a portion of larger loans to other financial institutions. This strategy allows Old Line Bank to
maintain customer relationships yet reduce credit exposure. However, this strategy may not always
be available.
Old Line Marine
In February 2005, we established Old Line Marine as a division of Old Line Bank to serve as a
boat loan broker and to originate loans for Old Line Bank. In 2007, high gasoline prices and an
anemic economy negatively impacted the performance of the marine division. Because of losses
experienced in this division and because we did not foresee an imminent improvement in the marine
industry, in September 2007, we closed this division and released the employees associated with it.
Investments and Funding
We balance our liquidity needs based on loan and deposit growth via the investment portfolio,
purchased funds, and short term borrowings. It is our goal to provide adequate liquidity to
support our loan growth. In the event we have excess liquidity, we use investments to generate
positive earnings. In the event deposit growth does not fully support our loan growth, we can use
a combination of investment sales, federal funds, other purchased funds and short term borrowings
to augment our funding position.
We actively monitor our investment portfolio and we classify the majority of the portfolio as
“available for sale.” In general, under such a classification, we may sell investment instruments
as management deems appropriate. On a monthly basis, we “mark to market” the investment portfolio
through an adjustment to stockholders’ equity net of taxes. Additionally, we use the investment
portfolio to balance our asset and liability position. We invest in fixed rate or floating rate
instruments as necessary to reduce our interest rate risk exposure.
Other Banking Products
We offer our customers safe deposit boxes, wire transfer services, debit cards, automated
teller machines at all of our branch locations and credit cards through a third party processor.
Additionally, we provide Internet banking capabilities to our customers. With our Internet banking
service, our customers may view their accounts on-line and electronically remit bill payments. Our
commercial account services include direct deposit of payroll for our commercial clients’
employees, an overnight sweep service and remote deposit capture service.
6
Deposit Activities
Deposits are the major source of our funding. We offer a broad array of deposit products that
include demand, NOW, money market and savings accounts as well as certificates of deposit. We
believe that we pay competitive rates on our interest bearing deposits. As a relationship-oriented
organization, we generally seek to obtain deposit relationships with our loan clients.
As our overall balance sheet position dictates, we may become more or less competitive in our
interest rate structure. Prior to 2006, we did not use brokered deposits. In the first quarter of
2006, we did begin using brokered certificates of deposit through the Promontory Interfinancial
Network. Through this deposit matching network and its certificate of deposit account registry
service (CDARS), we obtained the ability to offer our customers access to FDIC-insured deposit
products in aggregate amounts exceeding current insurance limits. When we place funds through
CDARS on behalf of a customer, we receive matching deposits through the network. During 2007, 2008
and 2009, we also purchased brokered certificates of deposit from other sources.
Competition
The banking business is highly competitive. We compete with other commercial banks, savings
associations, credit unions, mortgage banking firms, consumer finance companies, securities
brokerage firms, insurance companies, money market mutual funds and other financial institutions
operating in our primary market area and elsewhere.
We believe that we have effectively leveraged our talents, contacts and location to achieve a
strong financial position. However, our primary market area is highly competitive and heavily
branched. Competition in our primary market area for loans to small and medium sized businesses,
entrepreneurs, professionals and high net worth clients is intense, and pricing is important. Most
of our competitors have substantially greater resources and lending limits than we do and offer
extensive and established branch networks and other services that we do not offer. Moreover,
larger institutions operating in our primary market area have access to borrowed funds at a lower
rate than is available to us. Deposit competition also is strong among institutions in our primary
market area. As a result, it is possible that to remain competitive we may need to pay above
market rates for deposits.
Employees
As of March 1, 2010, Old Line Bank had 73 full time and 10 part time employees. No collective
bargaining unit represents any of our employees and we believe that relations with our employees
are good. Old Line Bancshares, Inc. has no employees.
7
Supervision and Regulation
Old Line Bancshares, Inc. and Old Line Bank are subject to extensive regulation under state
and federal banking laws and regulations. These laws impose specific requirements and restrictions
on virtually all aspects of operations and generally are intended to protect depositors, not
stockholders. The following discussion is only a summary and readers should refer to particular
statutory and regulatory provisions for more detailed information. In addition, management cannot
predict the nature or the extent of the effect on business and earnings that new federal or state
legislation may have in the future.
Old Line Bancshares, Inc.
Old Line Bancshares, Inc. is a Maryland corporation registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended. We are subject to regulation and examination by
the Federal Reserve Board, and are required to file periodic reports and any additional information
that the Federal Reserve Board may require. The Bank Holding Company Act generally prohibits a
bank holding company from engaging in activities other than banking, managing or controlling banks
or other permissible subsidiaries and acquiring or retaining direct or indirect control of any
company engaged in any activities closely related to banking or managing or controlling banks.
The Federal Reserve Board must approve, among other things, the acquisition by a bank holding
company of control of more than 5% of the voting shares, or substantially all the assets, of any
bank, or the merger or consolidation by a bank holding company with another bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”)
repealed many of the restrictions on interstate acquisitions of banks by bank holding companies in
September 1995. As a result of the Riegle-Neal Act, subject to certain time and deposit base
requirements, we can acquire a bank located in Maryland or any other state, and a bank holding
company located outside of Maryland can acquire any Maryland-based bank holding company or bank.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by
statute on any extensions of credit to the bank holding company or any of its subsidiaries, or
investments in their stock or other securities, and on taking such stock or securities as
collateral for loans to any borrower. Further, a bank holding company and any of its subsidiary
banks are prohibited from engaging in certain tie-in arrangements in connection with the extension
of credit. In 1997, the Federal Reserve Board adopted amendments to its Regulation Y, creating
exceptions to the Bank Holding Company Act’s anti-tying prohibitions that give bank subsidiaries of
holding companies greater flexibility in packaging products and services with their affiliates.
In accordance with Federal Reserve Board policy, Old Line Bancshares, Inc. is expected to act
as a source of financial strength to Old Line Bank and to commit resources to support Old Line Bank
in circumstances in which Old Line Bancshares, Inc. might not otherwise do so. The Federal Reserve
Board may require a bank holding company to terminate any activity or relinquish control of a
non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s
determination that such activity or control constitutes a serious risk to the financial soundness
or stability of any subsidiary depository institution of the bank holding company. Further,
federal bank regulatory authorities have additional discretion to require a bank holding company to
divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid
the depository institution’s financial condition.
The Federal Reserve Board imposes risk-based capital measures on bank holding companies in
order to insure their capital adequacy.
Old Line Bancshares, Inc., as a bank holding company, is subject to dividend regulations of
the Federal Reserve System. In general, a small bank holding company that has a debt to equity
ratio greater than 1:1 is not expected to pay corporate dividends until such time as its debt to
equity ratio declines to 1:1 or less and its bank subsidiary is otherwise well managed, well
capitalized and not under any supervisory order. Old Line Bancshares, Inc. is a small bank holding
company, and does not have a debt to equity ratio that is greater than 1:1.
8
Under Maryland law, an existing bank holding company that desires to acquire a Maryland
state-chartered bank or trust company, a federally-chartered bank with its main office in Maryland,
or a bank holding company that has its principal place of business in Maryland, must file an
application with the Maryland Commissioner of Financial Regulation. In approving the application,
the Maryland Commissioner of Financial Regulation must consider whether the acquisition may be
detrimental to the safety and soundness of the entity being acquired or whether the acquisition may
result in an undue concentration of resources or a substantial reduction in competition in
Maryland. The Maryland Commissioner of Financial Regulation may not approve an acquisition if, on
consummation of the transaction, the acquiring company, together with all its insured depository
institution affiliates, would control 30% or more of the total amount of deposits of insured
depository institutions in Maryland. The Maryland Commissioner of Financial Regulation has
authority to adopt by regulation a procedure to waive this requirement for good cause. In a
transaction for which approval of the Maryland Commissioner of Financial Regulation is not required
due to an exemption under Maryland law, or for which federal law authorizes the transaction without
application to the Maryland Commissioner of Financial Regulation, the parties to the acquisition
must provide written notice to the Maryland Commissioner of Financial Regulation at least 15 days
before the effective date of the transaction.
The status of Old Line Bancshares, Inc. as a registered bank holding company under the Bank
Holding Company Act does not exempt it from certain federal and state laws and regulations
applicable to Maryland corporations generally, including, without limitation, certain provisions of
the federal securities laws.
Old Line Bank
Old Line Bank is a Maryland chartered trust company (with all powers of a commercial bank), is
a member of the Federal Reserve System (a “state member bank”) and the Deposit Insurance Fund of
the FDIC (“DIF”) insures its deposit accounts up to the maximum legal limits of the FDIC. It is
subject to regulation, supervision and regular examination by the Maryland Commissioner of
Financial Regulation and the Federal Reserve Board. The regulations of these various agencies
govern most aspects of Old Line Bank’s business, including required reserves against deposits,
loans, investments, mergers and acquisitions, borrowing, dividends and location and number of
branch offices. The laws and regulations governing Old Line Bank generally have been promulgated
to protect depositors and the deposit insurance funds, and not for the purpose of protecting
stockholders.
The following references to the laws and regulations which regulate Old Line Bank are brief
summaries thereof, do not purport to be complete, and are qualified in their entirety by reference
to such laws and regulations.
Branching and Interstate Banking
The federal banking agencies are authorized to approve interstate bank merger transactions
without regard to whether such transactions are prohibited by the law of any state, unless the home
state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal
Act by timely adopting a law which applies equally to all out-of-state banks and expressly
prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches
are permitted only if the law of the state in which the branch is located permits such
acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal
Act.
The Riegle-Neal Act authorizes the federal banking agencies to approve interstate branching de
novo by national and state banks in states that specifically allow for such branching. The District
of Columbia, Maryland and Virginia have all enacted laws that permit interstate acquisitions of
banks and bank branches and permit out-of-state banks to establish de novo branches.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act of 1999 (“GLBA”) substantially altered the statutory framework for
providing banking and other financial services in the United States of America. The GLBA, among
other things, eliminated many of the restrictions on affiliations among banks and securities firms,
insurance firms, and other financial service providers.
9
The GLBA also provides protections against the transfer and use by financial institutions of
consumers’ nonpublic personal information. A financial institution must provide to its customers,
at the beginning of the customer relationship and annually thereafter, the institution’s policies
and procedures regarding the handling of customers’ nonpublic personal financial information. The
privacy provisions generally prohibit a financial institution from providing a customer’s personal
financial information to unaffiliated third parties unless the institution discloses to the
customer that the information may be so provided and the customer is given the opportunity to opt
out of such disclosure.
Capital Adequacy Guidelines
The Federal Reserve Board and the FDIC have adopted risk based capital adequacy guidelines
pursuant to which they assess the adequacy of capital in examining and supervising banks and in
analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of
capital based on the risk inherent in various classes of assets and off-balance sheet items.
State member banks are expected to meet a minimum ratio of total qualifying capital (the sum
of core capital (Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of 8%. At
least half of this amount (4%) should be in the form of Tier 1 Capital. In general, this
requirement is similar to the capital that a bank must have in order to be considered “adequately
capitalized” under the prompt corrective action regulations. See “Prompt Corrective Action.” Old
Line Bank currently complies with this minimum requirement.
Tier 1 Capital generally consists of the sum of common stockholders’ equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind and amount of such
stock which may be included as Tier 1 Capital), less goodwill, without adjustment for changes in
the market value of securities classified as “available for sale”. Tier 2 Capital consists of the
following: hybrid capital instruments; perpetual preferred stock which is not otherwise eligible to
be included as Tier 1 Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted under the
risk-based guidelines to take into account different risk characteristics, with the categories
ranging from 0% (requiring no risk-based capital) for assets such as cash, to 100% for the bulk of
assets which are typically held by a commercial bank, including certain multi-family residential
and commercial real estate loans, commercial business loans and consumer loans.
Residential first mortgage loans on one to four family residential real estate and certain seasoned
multi-family residential real estate loans, which are not 90 days or more past-due or
non-performing and which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed
securities representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve Board has established
a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets) requirement for the
most highly-rated banks, with an additional cushion of at least 100 to 200 basis points for all
other banks, which effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% — 5.0% or more. The highest-rated banks are those that are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those which are considered
a strong banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement must, within 60 days of the date as of which it fails to comply with such requirement,
submit a reasonable plan describing the means and timing by which the bank will achieve its minimum
Leverage Capital Ratio requirement. A bank which fails to file such a plan is deemed to be
operating in an unsafe and unsound manner, and could be subject to a cease-and-desist order. Any
insured depository institution with a Leverage Capital Ratio that is less than 2.0% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit
Insurance Act (the “FDIA”) and is subject to potential termination of deposit insurance. However,
such an institution will not be subject to an enforcement proceeding solely on account of its
capital ratios if it has entered into and is in compliance with a written agreement to increase its
Leverage Capital Ratio and to take such other action as may be necessary for the institution to be
operated in a safe and sound manner. The capital regulations also provide, among other things, for
the issuance of a capital directive, which is a final order issued to a bank that fails to maintain
minimum capital or to restore its capital to the minimum capital requirement within a specified
time period.
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On September 3, 2009, the U. S. Treasury issued a policy statement (the “Treasury Policy
Statement”) entitled “Principles for Reforming the U.S. and International Regulatory Capital
Framework for Banking Firms.” The U.S. Treasury developed this statement in consultation with the
U.S. bank regulatory agencies and contemplates changes to the existing regulatory capital regime
that would involve substantial revisions to the regulatory capital and liquidity regime for
regulated banking organizations and other systemically important institutions. The Treasury Policy
Statement calls for, among other things, higher and stronger capital requirements for all banking
firms. The Treasury Policy Statement suggested that changes to the regulatory capital framework be
phased in over a period of several years. The recommended schedule provides for a comprehensive
international agreement by December 31, 2010, with the implementation of reforms by December 31,
2012, although it does remain possible that U.S. bank regulatory agencies could officially adopt,
or informally implement new capital standards at an earlier date.
On December 17, 2009, the Basel Committee on Banking Supervision (“Basel Committee”) issued a
set of proposals (the “Capital Proposals”) that would significantly revise the definitions of Tier
1 Capital and Tier 2 Capital, with the most significant changes being to Tier 1 Capital. Most
notably, the Capital Proposals would also re-emphasize that common equity is the predominant
component of Tier 1 Capital by adding a minimum common equity to risk-weighted assets ratio and
requiring that goodwill, general intangibles and certain other items that currently must be
deducted from Tier 1 Capital instead be deducted from common equity as a component of Tier 1
Capital. The Capital Proposals also leave open the possibility that the Basel Committee will
recommend changes to the minimum Tier 1 Capital and total capital ratios of 4.0% and 8.0%,
respectively.
Concurrently with the release of the Capital Proposals, the Basel Committee also released a
set of proposals related to liquidity risk exposure (the “Liquidity Proposals”, and together with
the Capital Proposals, the “2009 Basel Committee Proposals”). The Liquidity Proposals have three
key elements, including the implementation of (i) a “liquidity coverage ratio”, designed to ensure
that a bank maintains an adequate level of unencumbered, high-quality assets sufficient to meet the
bank’s liquidity needs over a 30-day time horizon under an acute liquidity stress scenario, (ii) a
“net stable funding ratio” designed to promote more medium and long term funding of the assets and
activities of banks over a one year time horizon, and (iii) a set of monitoring tools that the
Basel Committee indicates should be considered as the minimum types of information that banks
should report to supervisors and that supervisors should use in monitoring the liquidity risk
profiles of supervised entities.
Comments on the 2009 Basel Committee Proposals are due by April 16, 2010, with the expectation
that the Basel Committee will release a comprehensive set of proposals by December 31, 2010 and
that final provisions will be implemented by December 31, 2012. The U.S. bank regulators have
urged comment on the 2009 Basel Committee Proposals. Ultimate implementation of such proposals in
the U.S. will be subject to the discretion of the U.S. bank regulators and the regulations or
guidelines adopted by such agencies may differ from the 2009 Basel Committee Proposals and other
proposals that the Basel Committee may promulgate in the future.
Prompt Corrective Action
Under Section 38 of the FDIA, each federal banking agency is required to implement a system of
prompt corrective action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement the system of prompt corrective action
established by Section 38 of the FDIA. Under the regulations, a bank will be deemed to be: (i)
“well capitalized” if it has a Total Risk Based Capital Ratio of 10.0% or more, a Tier 1 Risk Based
Capital Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or more and is not subject to any
written capital order or directive; (ii) “adequately capitalized” if it has a Total Risk Based
Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a Tier 1
Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of “well capitalized;” (iii) “undercapitalized” if it has a Total Risk Based Capital
Ratio that is less than 8.0%, a Tier 1 Risk Based Capital Ratio that is less than 4.0% or a
Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
“significantly undercapitalized” if it has a Total Risk Based Capital Ratio that is less than 6.0%,
a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less
than 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
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An institution generally must file a written capital restoration plan which meets specified
requirements with an appropriate federal banking agency within 45 days of the date the institution
receives notice or is deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after receiving a capital
restoration plan, subject to extensions by the applicable agency.
An institution that is required to submit a capital restoration plan must concurrently submit
a performance guaranty by each company that controls the institution. Such guaranty will be limited
to the lesser of (i) an amount equal to 5.0% of the institution’s total assets at the time the
institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount
necessary at such time to restore the relevant capital measures of the institution to the levels
required for the institution to be classified as adequately capitalized. Such a guaranty will
expire after the federal banking agency notifies the institution that it has remained adequately
capitalized for each of four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any required performance
guaranty, or fails in any material respect to implement a capital restoration plan, will be subject
to the restrictions in Section 38 of the FDIA which are applicable to significantly
undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution becomes subject to the provisions
of Section 38 of the FDIA, which (i) restrict payment of capital distributions and management fees;
(ii) require that the appropriate federal banking agency monitor the condition of the institution
and its efforts to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain
expansion proposals. The appropriate federal banking agency for an undercapitalized institution
also may take any number of discretionary supervisory actions if the agency determines that any of
these actions is necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to specified procedures.
These discretionary supervisory actions include: requiring the institution to raise additional
capital, restricting transactions with affiliates, requiring divestiture of the institution or sale
of the institution to a willing purchaser, and any other supervisory action that the agency deems
appropriate. These and additional mandatory and permissive supervisory actions may be taken with
respect to significantly undercapitalized and critically undercapitalized institutions.
A “critically undercapitalized institution” will be placed in conservatorship or receivership
within 90 days unless the FDIC formally determines that forbearance from such action would better
protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking
regulatory agency makes specific further findings and certifies that the institution is viable and
is not expected to fail, an institution that remains critically undercapitalized on average during
the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in
receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after
a bank becomes critically undercapitalized unless extremely good cause is shown and the federal
regulators agree to an extension. In general, good cause is defined as capital that has been
raised and is immediately available for infusion into the bank except for certain technical
requirements that may delay the infusion for a period of time beyond the 90 day time period.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed
for an institution where: (i) an institution’s obligations exceed its assets; (ii) there is
substantial dissipation of the institution’s assets or earnings as a result of any violation of law
or any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition; (iv)
there is a willful violation of a cease-and-desist order; (v) the institution is unable to pay its
obligations in the ordinary course of business; (vi) losses or threatened losses deplete all or
substantially all of an institution’s capital, and there is no reasonable prospect of becoming
“adequately capitalized” without assistance; (vii) there is any violation of law or unsafe or
unsound practice or condition that is likely to cause insolvency or substantial dissipation of
assets or earnings, weaken the institution’s condition, or otherwise seriously prejudice the
interests of depositors or the insurance fund; (viii) an institution ceases to be insured; (ix) the
institution is undercapitalized and has no reasonable prospect that it will become adequately
capitalized, fails to become adequately capitalized when required to do so, or fails to submit or
materially implement a capital restoration plan; or (x) the institution is critically
undercapitalized or otherwise has substantially insufficient capital.
Currently, Old Line Bank is well capitalized.
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Deposit Insurance Assessments
The DIF insures substantially all of Old Line Bank’s deposits. The FDIC maintains a risk
based assessment system for determining deposit insurance premiums. The FDIC has established four
risk categories (I-IV), each subject to different premium rates, based upon an institution’s status
as well capitalized, adequately capitalized or under capitalized, and the institution’s supervisory
rating. In December 2008, the FDIC raised the then current assessment rates uniformly by 7 basis
points for the first quarter of 2009 assessment, which resulted in annualized assessment rates for
institutions in Risk Category 1 (well capitalized institutions, perceived as posing the least risk
to the insurance fund) from 12 to 14 basis points. In February 2009, the FDIC issued final rules
to amend the DIF restoration plan, change the risk-based assessment system and set assessment rates
for Risk Category 1 institutions beginning in the second quarter of 2009. As a result of this
final rule the annualized assessment rates for institutions in Risk Category 1 range from 12 to 16
basis points. Old Line Bank is a Risk Category 1 institution.
In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all
insured depository institutions totaling five basis points of each institution’s assets minus its
Tier 1 Capital as of June 30, 2009, not to exceed 10 basis points of the institution’s domestic
deposits. The special assessment was part of the FDIC’s efforts to rebuild the DIF. During the
year ended December 31, 2009, our FDIC insurance premiums increased $392,000 inclusive of the
$149,748 special assessment.
In November 2009, the FDIC issued a rule that required all insured depository institutions,
with limited exceptions, to prepay their estimated quarterly risk based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three basis
point increase in assessment rates effective on January 1, 2011. In December 2009, we paid $1.4
million in prepaid risk based assessments, which included $88,882 related to the fourth quarter of
2009 that we would have otherwise paid in the first quarter of 2010. This amount is included in
our deposit insurance expense for 2009. The accompanying consolidated balance sheet as of December
31, 2009, includes the remaining $1.3 million in pre-paid deposit insurance in other assets.
Under the FDIA, the FDIC may terminate insurance of deposits upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC.
The Emergency Economic Stabilization Act of 2008
In the third quarter of 2008, the Federal Reserve, the U.S. Treasury and the FDIC initiated
measures to stabilize the financial markets and to provide liquidity for financial institutions.
The Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008
and authorized the U.S. Treasury to provide funds to restore liquidity and stability to the U.S.
financial system. Under the authority of EESA, the U.S. Treasury instituted a voluntary capital
purchase program to encourage U.S. financial institutions to build capital to increase the flow of
financing to U.S. businesses and consumers to support the U.S. economy. Under the program, the
U.S. Treasury purchased senior preferred shares of financial institutions that pay cumulative
dividends at a rate of 5% per year for five years and thereafter at a rate of 9% per year. On
December 5, 2008, Old Line Bancshares issued to the U.S. Treasury $7 million of Series A Preferred
Stock and warrants to purchase 141,892 shares of our common stock at $7.40 per share. We elected
to participate in the capital purchase program at an amount equal to approximately 3% of our risk
weighted assets at the time.
On July 15, 2009, we repurchased from the U.S. Treasury the 7,000 shares of preferred stock
that we issued to them in December 2008. We also repurchased the warrant to purchase 141,892
shares of our common stock that was issued to the U.S. Treasury in conjunction with the issuance of
preferred stock.
Temporary Liquidity Guarantee Program
On November 21, 2008, the FDIC adopted a final rule relating to the Temporary Liquidity
Guarantee Program (“TLG Program”). The FDIC announced the TLG Program on October 14, 2008,
preceded by the determination of systemic risk by the Secretary of the Department of the Treasury
(after consultation with the President), as an initiative to counter the system wide crisis in the
nation’s financial sector. Under the TLG Program, the FDIC will (i) guarantee certain newly issued
senior unsecured debt issued by participating institutions,
13
through the earlier of maturity or December 31, 2012 (extended from June 30, 2012 by subsequent
amendment), and (ii) provide full FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5%
interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC insured
institutions through June 30, 2010 (extended from December 31, 2009, subject to an opt-out
provision, by subsequent amendment). The fee assessment for coverage of senior unsecured debt
ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the
debt. The fee assessment for deposit insurance coverage was 10 basis points per quarter during
2009 on amounts in covered accounts exceeding $250,000. During the six month extension period in
2010, the fee assessment increases to 15 basis points per quarter for Risk Category 1 institutions.
On December 5, 2008, Old Line Bank elected to participate in only the FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts and we elected to participate in the
six month extension period for these accounts.
Maryland Regulatory Assessment
The Maryland Commissioner of Financial Regulation in the Department of Labor, Licensing and
Regulation assesses state chartered banks to cover the expense of regulating banking institutions.
The Commissioner assesses each banking institution the sum of $1,000, plus $0.08 for each $1,000 of
assets of the institution over $1,000,000, as disclosed on the banking institution’s most recent
financial report. In 2009, we paid $37,940 to the Maryland Commissioner of Financial Regulation.
Regulatory Enforcement Authority
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) included
substantial enhancement to the enforcement powers available to federal banking regulators,
including the Federal Reserve Board. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-affiliated parties. In
general, these enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory authorities. FIRREA
significantly increased the amount of and grounds for civil money penalties and requires, except
under certain circumstances, public disclosure of final enforcement actions by the federal banking
agencies.
Transactions with Affiliates and Insiders
Maryland law imposes restrictions on certain transactions with affiliates of Maryland
commercial banks. Generally, under Maryland law, a director, officer or employee of a commercial
bank may not borrow, directly or indirectly, any money from the bank, unless the loan has been
approved by a resolution adopted by and recorded in the minutes of the board of directors of the
bank, or the executive committee of the bank, if that committee is authorized to make loans. If
the executive committee approves such a loan, the loan approval must be reported to the board of
directors at its next meeting. Certain commercial loans made to directors of a bank and certain
consumer loans made to non-officer employees of the bank are exempt from the law’s coverage.
In addition, Old Line Bank is subject to the provisions of Section 23A and 23B of the Federal
Reserve Act and Regulation W of the Federal Reserve Bank (collectively, “Regulation W”), which
limit the amount of loans or extensions of credit to, investments in, or certain other transactions
with, affiliates, and limits the amount of advances to third parties collateralized by the
securities or obligations of affiliates. Regulation W limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and surplus of Old Line Bank and also limits
the aggregate amount of transactions with all affiliates to 20% of capital and surplus. Loans and
certain other extensions of credit to affiliates are required to be secured by collateral in an
amount and of a type described in Regulation W, and the purchase of low quality assets from
affiliates is generally prohibited.
Regulation W, among other things, prohibits an institution from engaging in certain transactions
with certain affiliates (as defined in the Federal Reserve Act) unless the transactions are on
terms substantially the same, or at least as favorable to such institution and/or its subsidiaries,
as those prevailing at the time for comparable
14
transactions with non-affiliated entities. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit standards that in good
faith would be offered to or would apply to non-affiliated companies. In addition, under
Regulation W:
| • | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate; | ||
| • | covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and | ||
| • | with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit. |
Regulation W generally excludes non-bank and non-savings association subsidiaries of banks
from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat
these subsidiaries as affiliates.
Old Line Bank also is subject to the restrictions contained in Sections 22(g) and 22(h) of the
Federal Reserve Act and the Federal Reserve Board’s Regulation O thereunder (collectively,
“Regulation O”), which govern loans and extensions of credit to executive officers, directors and
principal stockholders. Under Regulation O, loans to a director, an executive officer or a
greater-than-10% stockholder of a bank as well as certain affiliated interests of any of the
foregoing may not exceed, together with all other outstanding loans to such person and affiliated
interests, the loans-to-one-borrower limit applicable to national banks (generally 15% of the
institution’s unimpaired capital and surplus), and all loans to all such persons in the aggregate
may not exceed the institution’s unimpaired capital and unimpaired surplus. Regulation O also
prohibits the making of loans in an amount greater than $25,000 or 5% of capital and surplus but in
any event not over $500,000, to directors, executive officers and greater-than-10% stockholders of
a bank, and their respective affiliates, unless such loans are approved in advance by a majority of
the Board of Directors of the bank with any interested director not participating in the voting.
Further, Regulation O requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as those that are offered in comparable
transactions to unrelated third parties unless the loans are made pursuant to a benefit or
compensation program that is widely available to all employees of the bank and does not give
preference to insiders over other employees. Regulation O also prohibits a depository institution
from paying overdrafts over $1,000 of any of its executive officers or directors unless they are
paid pursuant to written pre-authorized extension of credit or transfer of funds plans.
All of Old Line Bank’s loans to its and Old Line Bancshares, Inc.’s executive officers,
directors and greater-than-10% stockholders, and affiliated interests of such persons, comply with
the requirements of Regulation W and Regulation O.
We have entered into banking transactions with our directors and executive officers and the
business and professional organizations in which they are associated in the ordinary course of
business. We make any loans and loan commitments in accordance with all applicable laws.
Loans to One Borrower
Old Line Bank is subject to the statutory and regulatory limits on the extension of credit to
one borrower. Generally, the maximum amount of total outstanding loans that a Maryland chartered
trust company may have to any one borrower at any one time is 15% of Old Line Bank’s unimpaired
capital and unimpaired surplus.
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Liquidity
Old Line Bank is subject to the reserve requirements imposed by the State of Maryland. A
Maryland commercial bank is required to have at all times a reserve equal to at least 15% of its
demand deposits. Old Line Bank is also subject to the reserve requirements of Federal Reserve
Board Regulation D, which applies to all depository institutions. Specifically, as of December 31,
2009, amounts in transaction accounts above $10.7 million and up to $55.2 million must have
reserves held against them in the ratio of three percent of the amount. Amounts above $55.2
million require reserves of 10 percent of the amount in excess of $55.2 million. The Maryland
reserve requirements may be used to satisfy the requirements of Federal Reserve Regulation D. Old
Line Bank is in compliance with its reserve requirements.
Dividends
Under Maryland law, Old Line Bank may declare a cash dividend, after providing for due or
accrued expenses, losses, interest, and taxes, from its undivided profits or, with the prior
approval of the Maryland Commissioner of Financial Regulation, from its surplus in excess of 100%
of its required capital stock. Also, if Old Line Bank’s surplus is less than 100% of its required
capital stock, cash dividends may not be paid in excess of 90% of net earnings. In addition to
these specific restrictions, the bank regulatory agencies have the ability to prohibit or limit
proposed dividends if such regulatory agencies determine the payment of such dividends would result
in Old Line Bank being in an unsafe and unsound condition.
Community Reinvestment Act
Old Line Bank is required to comply with the Community Reinvestment Act (“CRA”) regardless of
its capital condition. The CRA requires that, in connection with its examinations of Old Line
Bank, the Federal Reserve evaluates the record of Old Line Bank in meeting the credit needs of its
local community, including low and moderate income neighborhoods, consistent with the safe and
sound operation of the institution. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution’s discretion to develop the
types of products and services that it believes are best suited to its particular community,
consistent with the CRA. These factors are considered in, among other things, evaluating mergers,
acquisitions and applications to open a branch or facility. The CRA also requires all institutions
to make public disclosure of their CRA ratings. Old Line Bank received a “Satisfactory” rating in
its latest CRA examination.
USA Patriot Act
The USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of U.S.
anti-money laundering laws and regulations by imposing significant new compliance and due diligence
obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of
the United States. The Patriot Act requires financial institutions, including banks, to establish
anti-money laundering programs, including employee training and independent audit requirements,
meet minimum standards specified by the Act, follow minimum standards for customer identification
and maintenance of customer identification records, and regularly compare customer lists against
lists of suspected terrorists, terrorist organizations and money launderers. The U.S.
Treasury has issued a number of implementing regulations that apply to various requirements of the
USA Patriot Act to financial institutions such as Old Line Bank. Those regulations impose
obligations on financial institutions to maintain appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist financing.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could
have serious legal and reputational consequences for the institution. Old Line Bank has adopted
appropriate policies, procedures and controls to address compliance with the requirements of the
USA Patriot Act under the existing regulations and will continue to revise and update its policies,
procedures and controls to reflect changes required by the USA Patriot Act and Treasury’s
regulations.
The costs or other effects of the compliance burdens imposed by the Patriot Act or future
anti-terrorist, homeland security or anti-money laundering legislation or regulations cannot be
predicted with certainty.
16
Consumer Protection Laws
Old Line Bank is subject to a number of federal and state laws designed to protect borrowers
and promote lending to various sectors of the economy. These laws include the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the
Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures
Act, and various state law counterparts.
In addition, federal law currently contains extensive customer privacy protection provisions.
Under these provisions, a financial institution must provide to its customers, at the inception of
the customer relationship and annually thereafter, the institution’s policies and procedures
regarding the handling of customers’ nonpublic personal financial information. These provisions
also provide that, except for certain limited exceptions, a financial institution may not provide
such personal information to unaffiliated third parties unless the institution discloses to the
customer that such information may be so provided and the customer is given the opportunity to opt
out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances,
to obtain or attempt to obtain customer information of a financial nature by fraudulent or
deceptive means.
Effective July 1, 2010, a new federal banking rule under the Electronic Funds Transfer Act
will prohibit financial institutions from charging consumers fees for paying overdrafts on
automated teller machines (“ATM”) and one-time debit card transactions, unless a consumer consents,
or opts in, to the overdraft service for those types of transactions. If a consumer does not opt
in, the financial institution will deny any ATM transaction or debit that overdraws the consumer’s
account. This new rule does not cover overdrafts on the payment of checks and regular electronic
bill payments. Before opting in, the financial institution must provide the consumer a notice that
explains the financial institution’s overdraft services, including the fees associated with the
service, and the consumer’s choices. Financial institutions must provide consumers who do not opt
in with the same account terms, conditions and features (including pricing) that they provide to
consumers who do opt in.
Proposed Legislation and Regulatory Actions
New regulations and statutes are regularly proposed that contain wide-ranging proposals for
altering the structures, regulations, and competitive relationships of the nation’s financial
institutions. We cannot predict whether or in what form any proposed regulation or statute will be
adopted or the extent to which any new regulation or statute may affect our business.
Effect of Governmental Monetary Policies
Our earnings are affected by domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies. The Federal Reserve Board’s monetary policies
have had, and are likely to continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve
Board affect the levels of bank loans, investments and deposits through its control over the
issuance of United States government securities, its regulation of the discount rate applicable to
member banks and its influence over reserve requirements to which member banks are subject. We
cannot predict the nature or impact of future changes in monetary and fiscal policies.
17
Forward Looking Statements
Some of the matters discussed in this annual report including under the captions “Business of
Old Line Bancshares, Inc.,” “Business of Old Line Bank,” “Risk Factors”, and “Management’s
Discussion And Analysis Of Financial Condition And Results Of Operations” and elsewhere in this
annual report, including with respect to anticipated expansion and the opening of new branches,
growth of customer relationships and anticipated operating results, include forward-looking
statements. These forward-looking statements include statements regarding future revenues
(including changes in revenues), income and expenses, improved earnings and stockholder value,
liquidity, loan, deposit and asset growth, use of brokered deposits, payment and losses on
non-accrual loans, potential regulatory changes, the allowance for loan losses, interest rate
sensitivity, market risk, leasing of the second floor of our Waldorf branch, the status of the
unrealized losses in our investment portfolio and business, financial and other goals.
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. When you read a forward-looking statement, you should keep in mind the risk factors
described below and any other information contained in this annual report, which identifies a risk
or uncertainty. Our actual results and the actual outcome of our expectations and strategies could
be different from that described in this annual report 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 we undertake no obligation to make any
revisions to the forward-looking statements to reflect events or circumstances after the date of
this filing or to reflect the occurrence of unanticipated events.
| ITEM 1A. | Risk Factors |
You should consider carefully the following risks, along with other information contained in
this Form 10-K. The risks and uncertainties described below are not the only ones that may affect
us. Additional risks and uncertainties also may adversely affect our business and operations
including those discussed in Item 7-Management’s Discussion and Analysis of Financial Condition and
Results of Operations. If any of the following events actually occur, it could materially and
adversely affect our business and financial results.
If economic conditions deteriorate further, our borrowers’ ability to repay loans declines and
the value of the collateral securing our loans decreases, these conditions could adversely affect
our results of operations and financial condition. Changes in prevailing economic conditions,
including declining real estate values, changes in interest rates which may cause a decrease in
interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the
federal government and other significant external events may adversely affect our financial
results. Because a significant portion of our loan portfolio is comprised of real estate related
loans, continued decreases in real estate values could adversely affect the value of property used
as collateral for loans in our portfolio. Although the adverse economic climate during the past
two years has not severely impacted us due to our strict underwriting standards, further adverse
changes in the economy, including increased unemployment or the economy moving back into a
recession, could have a negative effect on the ability of our borrowers to make timely repayments
of their loans, which would have an adverse impact on our earnings.
If U.S. markets and economic conditions continue to deteriorate, our liquidity could be
adversely affected. Old Line Bank must maintain sufficient liquidity to ensure sufficient cash
flow is available to satisfy current and future financial obligations including demand for loans
and deposit withdrawals, funding of operating costs and other corporate purposes. We obtain
funding through deposits and various short-term and long-term wholesale borrowings, including
federal funds purchased, unsecured borrowings, brokered certificates of deposits and borrowings
from the Federal Home Loan Bank of Atlanta and others. Economic uncertainty and disruptions in the
financial system may adversely affect our liquidity. Dramatic declines in the housing market
during the past two years, falling real estate prices and increased foreclosures and unemployment,
have resulted in significant asset value write-downs by financial institutions, including
government-sponsored entities and investment banks. These investment write-downs have caused
financial institutions to seek additional capital. Should we experience a substantial deterioration
in our financial condition or should disruptions in the financial markets restrict our funding, it
would negatively impact our liquidity. To mitigate this risk, we closely monitor our liquidity and
maintain a line of credit with the Federal Home Loan Bank and have received approval to borrow from
the Federal Reserve Bank of Richmond.
18
Our need to comply with extensive and complex governmental regulation could have an adverse
effect on our business and our growth strategy. The banking industry is subject to extensive
regulation by state and federal banking authorities. Many of these regulations are intended to
protect depositors, the public or the FDIC insurance funds, not stockholders. Regulatory
requirements affect our lending practices, capital structure, investment practices, dividend
policy, ability to attract and retain personnel and many other aspects of our business. These
requirements may constrain our rate of growth and changes in regulations could adversely affect us.
The burden imposed by these federal and state regulations may place banks in general, and Old Line
Bank specifically, at a competitive disadvantage compared to less regulated competitors. In
addition, the cost of compliance with regulatory requirements could adversely affect our ability to
operate profitably.
In addition, because federal regulation of financial institutions changes regularly and is the
subject of constant legislative debate, we cannot forecast how federal regulation of financial
institutions may change in the future and impact our operations. In light of the performance of
and government intervention in the financial sector, we fully expect there will be significant
changes to the banking and financial institutions’ regulatory agencies in the near future. We
further anticipate that additional laws and regulations may be enacted in response to the ongoing
financial crisis that could have an impact on our operations. Changes in regulation and oversight,
including in the form of changes to statutes, regulations or regulatory policies or changes in
interpretation or implementation of statutes, regulations or policies, could affect the service and
products we offer, increase our operating expenses, increase compliance challenges and otherwise
adversely impact our financial performance and condition. In addition, the burden imposed by these
federal and state regulations may place banks in general, and Old Line Bank specifically, at a
competitive disadvantage compared to less regulated competitors.
Because Old Line Bank serves a limited market area in Maryland, economic downturn in our
market area could more adversely affect us than it affects our larger competitors that are more
geographically diverse. Our current primary market area consists of the suburban Maryland
(Washington, D.C. suburbs) counties of Prince George’s, Anne Arundel, Charles and northern St.
Mary’s. We have expanded in Prince George’s County and Anne Arundel County, Maryland and may
expand in contiguous northern and western counties, such as Montgomery County and Howard County,
Maryland. However, broad geographic diversification is not currently part of our community bank
focus. Overall, during 2008 and 2009, the business environment negatively impacted many businesses
and households in the United States and worldwide. Although the economic decline has not impacted
the suburban Maryland and Washington D.C. suburbs as adversely as other areas of the United States,
it has caused an increase in unemployment and business failures and a decline in property values.
As a result, if our market area continues to suffer an economic downturn, it may more severely
affect our business and financial condition than it affects larger bank competitors. Our larger
competitors serve more geographically diverse market areas, parts of which may not be affected by
the same economic conditions that may exist in our market area. Further, unexpected changes in the
national and local economy may adversely affect our ability to attract deposits and to make loans.
Such risks are beyond our control and may have a material adverse effect on our financial condition
and results of operations and, in turn, the value of our securities.
We depend on the services of key personnel. The loss of any of these personnel could disrupt
our operations and our business could suffer. Our success depends substantially on the skills and
abilities of our senior management team, including Mr. Cornelsen, our President and Chief Executive
Officer, Mr. Burnett, our Executive Vice President and Chief Lending Officer, Ms. Rush, our
Executive Vice President, Chief Financial Officer and Chief Credit Officer and Ms. Burnett, our
Executive Vice President and College Park Team Leader. They provide valuable services to us and
would be difficult to replace. Although we have entered into employment agreements with these
executives, with the exception of Ms. Burnett, the existence of such agreements does not assure
that we will retain their services. Further, Ms. Burnett is not party to an employment agreement
with us and could terminate her employment at any time.
Also, our growth and success and our anticipated future growth and success, in a large part,
is due and we anticipate will be due to the relationships maintained by our banking executives with
our customers. The loss of services of one or more of these executives or other key employees
could have a material adverse effect on our operations and our business could suffer. The
experienced commercial lenders that we have hired are not a party to any employment agreement with
us and they could terminate their employment with us at any time and for any reason.
19
The federal agencies that regulate us are currently considering placing restrictions on
executive compensation. This could cause the employment contracts with our management team to no
longer be valid and this may effectively make our senior executive officers employees at will and
could harm our ability to retain these individuals and our ability to attract and retain other key
employees.
Our growth and expansion strategy may not be successful. Our ability to grow depends upon our
ability to attract new deposits, identify loan and investment opportunities and maintain adequate
capital levels. We may also grow through acquisitions of existing financial institutions or
branches thereof. There are no guarantees that our expansion strategies will be successful. Also,
in order to effectively manage our anticipated and/or actual loan growth we have and may continue
to make additional investments in equipment and personnel, which also will increase our
non-interest expense.
We opened a new branch in Crofton in Anne Arundel County, Maryland and a new branch in Bowie
in Prince George’s County, Maryland during 2009. With respect to these branches or any other
branches that we may open, we may not be able to correctly identify profitable or growing markets
for such new branches. If we were to acquire another financial institution or branch thereof, we
may not be able to integrate the institution or branch into our operations. Also, the costs to
start up new branch facilities or to acquire existing financial institutions or branches thereof,
and the additional costs to operate these facilities, will increase our non-interest expense. It
may also be difficult to adequately and profitably manage the anticipated growth from the new
branches or acquisitions and we may not be able to maintain the relatively low levels of
charge-offs and nonperforming loans that we have experienced.
If we grow too quickly and are not able to control costs and maintain asset quality, growth
could materially and adversely affect our financial performance.
Our focus on commercial and real estate loans may increase the risk of credit losses. We
offer a variety of loans including commercial business loans, commercial real estate loans,
construction loans, home equity loans and consumer loans. We secure many of our loans with real
estate (both residential and commercial) in the Maryland suburbs of Washington, D.C. During 2008
and 2009, property values declined in our market, energy prices were volatile, and there were
rising private sector layoffs and unemployment, which caused consumer lending to slow. Although we
believe our credit underwriting adequately considers these factors, further weakness in the economy
and the real estate market could adversely affect our customers’ ability to repay their loans,
which in turn could adversely impact us.
Our concentrations of loans in various categories may also increase the risk of credit losses.
We currently invest more than 25% of our capital in various loan types and industry segments,
including commercial real estate loans, marine loans and loans to the hospitality industry
(hotels/motels). While recent declines in the local commercial real estate market have not caused
the collateral securing our loans to exceed acceptable loan to value ratios, a further
deterioration in the commercial real estate market could cause deterioration in the collateral
securing these loans and/or a decline in our customers’ earning capacity. This could negatively
impact us. Although we have made a large portion of our hospitality loans to long-term, well
established operators in strategic locations, a continued decline in the occupancy rate in these
facilities could negatively impact their earnings. This could adversely impact their ability to
repay their loan which would adversely impact our net income.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings
will decrease. We maintain an allowance for loan losses that we believe is adequate for absorbing
any potential losses in our loan portfolio. Management, through a periodic review and
consideration of the loan portfolio, determines the amount of the allowance for loan losses.
Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan
portfolio, even under normal economic conditions, we cannot predict such losses with certainty.
The unprecedented volatility experienced in the financial and capital markets during the last two
to three years makes this determination even more difficult as processes we use to estimate the
allowance for loan losses may no longer be dependable because they rely on complex judgments,
including forecasts of economic conditions that may not be accurate. As a result, we cannot be
sure that our allowance is or will be adequate in the future. If management’s assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future
losses, our earnings will suffer.
20
As of December 31, 2009, commercial and industrial, construction, and commercial real estate
mortgage loans comprise approximately 85.78% of our loan portfolio. These types of loans are
generally viewed as having more risk of default than residential real estate or consumer loans and
typically have larger balances than residential real estate loans and consumer loans. A
deterioration of one or a few of these loans could cause a significant increase in non-performing
loans. Such an increase could result in a net loss of earnings from these loans, an increase in
the provision for loan losses and an increase in loan charge-offs, all of which could have a
material adverse effect on our financial condition and results of operations.
Our profitability depends on interest rates and changes in monetary policy may impact us. Our
results of operations depend to a large extent on our “net interest income,” which is the
difference between the interest expense incurred in connection with our interest bearing
liabilities, such as interest on deposit accounts, and the interest income received from our
interest earning assets, such as loans and investment securities. Interest rates, because they are
influenced by, among other things, expectations about future events, including the level of
economic activity, federal monetary and fiscal policy, and geo-political stability, are not
predictable or controllable. Additionally, competitive factors heavily influence the interest
rates we can earn on our loan and investment portfolios and the interest rates we pay on our
deposits. Community banks are often at a competitive disadvantage in managing their cost of funds
compared to the large regional, super-regional or national banks that have access to the national
and international capital markets. These factors influence our ability to maintain a stable net
interest margin.
We seek to maintain a neutral position in terms of the volume of assets and liabilities that
mature or re-price during any period so that we may reasonably predict our net interest margin.
However, interest rate fluctuations, loan prepayments, loan production and deposit flows are
constantly changing and influence our ability to maintain this neutral position. Generally
speaking, our earnings are more sensitive to fluctuations in interest rates the greater the
variance in the volume of assets and liabilities that mature and re-price in any period. The
extent and duration of the sensitivity will depend on the cumulative variance over time, the
velocity and direction of interest rates, and whether we are more asset sensitive. Accordingly, we
may not be successful in maintaining this neutral position and, as a result, our net interest
margin may suffer.
The market value of our investments could negatively impact stockholders’ equity. We have
designated approximately 82.83% of our investment securities portfolio (and 7.84% of total assets)
at December 31, 2009 as available for sale. Temporary unrealized gains and losses in the estimated
value of the available for sale portfolio are “marked to market” and are reflected as a separate
item in stockholders’ equity, net of taxes. As of December 31, 2009, we had temporary unrealized
gains in our available for sale portfolio of $368,880 (net of taxes). As a result of the recent
economic recession and the continued economic slowdown, several municipalities have reported budget
deficits and companies have reported lower earnings. These budget deficits and lower earnings
could cause temporary and other-than temporary impairment charges in our investment securities
portfolio and cause us to report lower net income and a decline in stockholders’ equity.
Old Line Bank faces substantial competition which could adversely affect our growth and
operating results. Old Line Bank operates in a competitive market for financial services and faces
intense competition from other financial institutions both in making loans and in attracting
deposits. Many of these financial institutions have been in business for many years, are
significantly larger, have established customer bases, have greater financial resources and lending
limits than Old Line Bank, and are able to offer certain services that we are not able to offer.
If Old Line Bank cannot attract deposits and make loans at a sufficient level, its operating
results will suffer, as will its opportunities for growth.
We face limits on our ability to lend. We are limited in the amount we can loan to a single
borrower by the amount of our capital. Generally, under current law, we may lend up to 15% of our
unimpaired capital and surplus to any one borrower. As of December 31, 2009, we were able to lend
approximately $5.4 million to any one borrower. This amount is significantly less than that of
many of our competitors and may discourage potential borrowers who have credit needs in excess of
our legal lending limit from doing business with us. We generally try to accommodate larger loans
by selling participations in those loans to other financial institutions, but this strategy is not
always available. We may not be able to attract or maintain customers seeking larger loans and we
may not be able to sell participations in such loans on terms we consider favorable.
21
The costs of being a public company are proportionately higher for small companies like us due
to the requirement of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 and the related rules
and regulations promulgated by the Securities and Exchange Commission (“SEC”) have increased the
scope, complexity, and cost of corporate governance, reporting, and disclosure practices. These
regulations are applicable to our company. We expect to experience increasing compliance costs,
including costs related to internal controls, as a result of the Sarbanes-Oxley Act. These
necessary costs are proportionately higher for a company of our size and will affect our
profitability more than that of some of our larger competitors.
| Item 1B. | Unresolved Staff Comments |
Not applicable as we are not an accelerated filer or large accelerated filer.
| Item 2. | Properties |
Our headquarters is located at 1525 Pointer Ridge Place, Bowie, Maryland in Prince George’s
County. Pointer Ridge Office Investment, LLC, an entity in which we have a $1.2 million investment
and a 62.50% ownership interest owns this property. Frank Lucente, a director of Old Line
Bancshares, Inc. and Old Line Bank controls 12.50% of Pointer Ridge and controls the manager of
Pointer Ridge. On June 6, 2006, we executed leases for 2,557 square feet on the 1st
floor of the building for a new branch office, 5,449 square feet on the 3rd floor and
11,053 square feet on the 4th floor of this building. The leases which commenced on
July 1, 2006, are for thirteen years, with two, five-year renewal options. The current basic
monthly payment terms on the leases are for payments of $44,523 with 3% annual increases. The
basic monthly payments include our pro-rata share of taxes, insurances and common area maintenance
on the building with any deficiencies incurred incorporated into the following year’s basic monthly
payments. We eliminate 62.50% of these lease payments in consolidation.
In 2004, we finalized our purchase of our then current full service banking branch and office
facility located at 2995 Crain Highway in Waldorf, Maryland. In July 2006, we moved our
headquarters from this location to 1525 Pointer Ridge Place, Bowie, Maryland. We have retained our
branch office at 2995 Crain Highway. Since 2007, we have leased the second floor of this building
to a realtor. This tenant has notified us that it will not renew its lease and will vacate the
property in March 2010. Assuming that we can locate a new tenant, we plan to continue to lease
this space.
We maintain a branch operation at the Old Line Centre location, and have done so since 1989.
The lease, which commenced in August 1999, is for ten years with two, five-year renewal options.
Payment terms on the lease are $4,991 monthly with 1.5% annual increases. We pay our pro-rata
share of common area maintenance, taxes and insurance on the building. We have exercised the first
five-year renewal option.
We own our branch at 15808 Livingston Road in Accokeek, Maryland in Prince George’s County.
Our Clinton, Maryland, Prince George’s County branch, located at 7801 Old Branch Avenue, was
opened in September 2002 in leased space. The monthly lease payment on this facility is $2,725.
Exclusive of the monthly rent, we pay no utilities or other expenses associated with this facility.
The lease term is for a period of ten years, with three, five-year renewal options.
Our loan production office in College Park, Prince George’s County, Maryland is located in
leased space on the fourth floor of a four story building located at 9658 Baltimore Avenue. The
lease which commenced in August 2005 expires in February 2013. Payment terms on the lease are
$3,042 monthly, with 3% annual increases. We also lease space for a branch on the first floor of
this building. This lease commenced in January 2008 at $5,000 monthly with 3% annual increases.
The term for this space is 10 years with two five year renewal terms. We pay our pro-rata share of
taxes, insurance and common area maintenance associated with the building
In August 2004, we announced plans to open a branch in Crofton, Maryland. Due to engineering
and resultant permit delays, construction on the building was delayed. We opened this branch in
July of 2009. We pay lease payments of $6,816 monthly with 2.5% annual increases plus our pro-rata
share of operating expenses, taxes and insurance. The lease term is for 10 full calendar years
with automatic renewal for three additional terms of five years, unless the bank provides no less
than 180 days notice.
22
In June 2007, we opened a branch in Greenbelt, Maryland. Initially, we leased 2,700 square
feet of space on the 1st floor of an office building located at 6301 Ivy Lane,
Greenbelt, Prince George’s County, Maryland. The lease had a term of five years. After providing
nine months written notice and paying a termination fee, Old Line Bank had the option to terminate
the lease after the 2nd anniversary of the commencement date. In January 2009, we
notified the landlord of our intent to terminate this lease in August 2009, paid the termination
fee of $33,909 and moved this branch to the new facility in the fourth quarter of 2009 as outlined
below.
On January 31, 2007, Old Line Bank also entered into a lease agreement to lease approximately
33,000 square feet of ground area located at the southwest corner of the intersection of Kenilworth
Avenue and Ivy Lane in Greenbelt, Prince George’s County, Maryland. In 2009, Old Line Bank
constructed a free standing bank building on the land. The lease commenced in July 2009 and has an
initial term of 30 years with two successive renewal periods of ten years. Old Line Bank moved the
6301 Ivy Lane, Greenbelt, Maryland branch into this new facility in the fourth quarter of 2009. We
pay $8,825 per month for this lease plus taxes, insurance and operating expenses.
In May 2008, we executed a lease agreement to lease 1,620 square feet of space in a store unit
located at 167-U Jennifer Road, Annapolis, Maryland in Anne Arundel County. In September 2008, we
opened this branch. The lease has an initial term of 5 years with one renewal option of five
years. The monthly installments of this lease are $5,284 with 3% annual increases. We also pay
taxes, insurance, utilities and our pro-rata share of common area maintenance.
In July 2007, we identified a site for a second branch location at 12100 Annapolis Road, Glen
Dale, Maryland in Prince George’s County. In 2009, we purchased the pad site located in the
Fairwood Office Park, constructed a 2,863 square foot branch and opened this branch in October
2009.
| Item 3. | Legal Proceedings |
From time to time, Old Line Bancshares, Inc. or Old Line Bank may be involved in litigation
relating to claims arising out of its normal course of business. As of December 31, 2009, we did
not have any material pending legal matters or litigation for Old Line Bank or Old Line Bancshares,
Inc.
| Item 4. | (Removed and Reserved) |
23
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Stock Prices
The table below shows the high and low sales information as reported on the Nasdaq Capital
Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, and may not represent actual transactions.
| Sale Price Range | ||||||||
| High | Low | |||||||
2009 |
||||||||
First Quarter |
$ | 6.60 | $ | 4.03 | ||||
Second Quarter |
6.98 | 5.21 | ||||||
Third Quarter |
7.25 | 5.90 | ||||||
Fourth Quarter |
6.77 | 6.00 | ||||||
2008 |
||||||||
First Quarter |
$ | 9.35 | $ | 7.51 | ||||
Second Quarter |
8.75 | 6.71 | ||||||
Third Quarter |
8.00 | 6.01 | ||||||
Fourth Quarter |
8.00 | 5.59 | ||||||
As of December 31, 2009, there were 3,862,364 shares of common stock issued and outstanding
held by approximately 250 stockholders of record. There were 299,270 shares of common stock
issuable on the exercise of outstanding stock options, 247,070 of which were exercisable. The
remaining 52,200 are exercisable as follows:
| Date Exercisable | # of Shares | |||
January 22, 2010 |
16,883 | |||
January 31, 2010 |
12,433 | |||
May 7, 2010 |
2,000 | |||
January 22, 2011 |
16,884 | |||
May 7, 2011 |
2,000 | |||
May 7, 2012 |
2,000 | |||
Total |
52,200 | |||
24
Dividends
We have paid the following dividends on our common stock during the years indicated:
| 2009 | 2008 | |||||||
March |
$ | 0.030 | $ | 0.030 | ||||
June |
0.030 | 0.030 | ||||||
September |
0.030 | 0.030 | ||||||
December |
0.030 | 0.030 | ||||||
Total |
$ | 0.120 | $ | 0.120 | ||||
Our ability to pay dividends in the future will depend on the ability of Old Line Bank to pay
dividends to us. Old Line Bank’s ability to continue paying dividends will depend on Old Line
Bank’s compliance with certain dividend regulations imposed upon us by bank regulatory authorities.
In addition, we will consider a number of other factors, including our income and financial
condition, tax considerations, and general business conditions before deciding to pay additional
dividends in the future. We can provide no assurance that we will continue to pay dividends to our
stockholders.
Issuer Purchases of Equity Securities
We did not repurchase any of our securities during the quarter ended December 31, 2009.
25
| Item 6. | Selected Financial Data |
The following table summarizes Old Line Bancshares, Inc.’s selected financial information and
other financial data. The selected balance sheet and statement of income data are derived from our
audited financial statements. You should read this information together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our financial
statements and the related notes included elsewhere in this report. Results for past periods are
not necessarily indicative of results that may be expected for any future period.
| December 31, | 2009 | 2008 | 2007 | |||||||||
| (Dollars in thousands, except per share data) | ||||||||||||
Earnings and dividends: |
||||||||||||
Interest revenue |
$ | 17,096 | $ | 15,424 | $ | 14,554 | ||||||
Interest expense |
5,580 | 5,910 | 6,263 | |||||||||
Net interest income |
11,516 | 9,514 | 8,291 | |||||||||
Provision for loan losses |
900 | 415 | 318 | |||||||||
Non-interest revenue |
1,820 | 964 | 1,173 | |||||||||
Non-interest expense |
9,257 | 7,373 | 6,774 | |||||||||
Income taxes |
1,056 | 939 | 789 | |||||||||
Net income |
2,123 | 1,751 | 1,583 | |||||||||
Less: Net income (loss) attributable to the non-controlling interest |
87 | (5 | ) | — | ||||||||
Net income attributable to Old Line Bancshares, Inc. |
2,036 | 1,756 | 1,583 | |||||||||
Net income available to common stockholders |
1,550 | 1,727 | 1,583 | |||||||||
Per common share data |
||||||||||||
Basic earnings |
$ | 0.40 | $ | 0.44 | $ | 0.37 | ||||||
Diluted earnings |
0.40 | 0.44 | 0.37 | |||||||||
Dividends paid |
0.12 | 0.12 | 0.12 | |||||||||
Common stockholders book value, period end |
9.31 | $ | 8.98 | $ | 8.50 | |||||||
Average common shares outstanding |
||||||||||||
Basic |
3,862,364 | 3,919,903 | 4,237,266 | |||||||||
Diluted |
3,869,466 | 3,923,223 | 4,243,304 | |||||||||
Common shares outstanding, period end |
3,862,364 | 3,862,364 | 4,075,849 | |||||||||
Balance Sheet Data: |
||||||||||||
Total assets |
$ | 357,219 | $ | 317,731 | $ | 245,211 | ||||||
Total loans, less allowance for loan losses |
265,009 | 231,054 | 201,942 | |||||||||
Total investment securities |
33,819 | 37,569 | 11,695 | |||||||||
Total deposits |
286,348 | 231,431 | 177,812 | |||||||||
Stockholders’ equity |
35,941 | 41,687 | 34,631 | |||||||||
Performance Ratios: |
||||||||||||
Return on average assets |
0.60 | % | 0.64 | % | 0.69 | % | ||||||
Return on average stockholders’ equity |
5.13 | % | 5.04 | % | 4.46 | % | ||||||
Total ending equity to total ending assets |
10.1 | % | 13.1 | % | 14.1 | % | ||||||
Net interest margin (1) |
3.77 | % | 3.80 | % | 3.98 | % | ||||||
Dividend payout ratio for period |
22.7 | % | 26.8 | % | 31.9 | % | ||||||
Asset Quality Ratios: |
||||||||||||
Allowance to period-end loans |
0.93 | % | 0.85 | % | 0.78 | % | ||||||
Non-performing assets to total assets |
0.44 | % | 0.27 | % | 0.43 | % | ||||||
Non-performing assets to allowance for loan losses |
63.93 | % | 42.88 | % | 66.88 | % | ||||||
Capital Ratios: |
||||||||||||
Tier I risk-based capital |
12.8 | % | 16.6 | % | 15.6 | % | ||||||
Total risk-based capital |
13.7 | % | 17.4 | % | 16.3 | % | ||||||
Leverage capital ratio |
10.0 | % | 14.0 | % | 14.6 | % | ||||||
| (1) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operating-Reconciliation of Non-GAAP Measures.” |
26
| Item 7. | 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 $1.2 million investment in a real estate investment limited liability company named
Pointer Ridge Office Investment, LLC (Pointer Ridge). We own 62.50% of Pointer Ridge. Frank
Lucente, one of our directors and a director of Old Line Bank, controls 12.50% 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
During one of the most challenging economic periods in the last thirty years, we are pleased
to report continued profitability for 2009. Net income attributable to Old Line Bancshares, Inc.
increased $280,032 or 15.95% for the year ended December 31, 2009. After inclusion of the
dividends and accretion on the preferred stock issued under the U.S. Treasury Department’s Capital
Purchase Program in December 2008, net income available to common stockholders was $1.6 million or
$0.40 per basic and diluted common share for the year ending December 31, 2009.
The following events occurred during 2009.
| • | We maintained asset quality with total non-performing assets of $1.6 million (0.44% of total assets) and two other loans totaling approximately $581,000 past due between 30 and 89 days at year end. | ||
| • | We increased the provision for loan losses by $485,000 from $415,000 to $900,000. | ||
| • | The loan portfolio grew $33.9 million or 14.67%. | ||
| • | Total deposits grew $54.9 million or 23.73%. | ||
| • | We maintained liquidity and by all regulatory measures remained “well capitalized”. | ||
| • | We recognized an increase in earnings on our investment in Pointer Ridge of approximately $145,000 inclusive of a non-recurring lease termination fee of approximately $158,000 recognized in the quarter ended March 31, 2009. | ||
| • | We recorded an approximately $159,000 gain from sale on investments. | ||
| • | We incurred a $392,000 increase in FDIC insurance premiums inclusive of a $149,748 special assessment. |
27
| • | We enhanced our core data processing system. | ||
| • | We repurchased from the U.S. Treasury 7,000 shares of preferred stock and the warrant to purchase 141,892 share of our common stock that we issued to them in December 2008. | ||
| • | We opened new branch locations in Crofton and Glen Dale, Maryland and moved our Greenbelt location to a permanent building. | ||
| • | We added a team of four highly skilled loan officers to our staff. |
The following summarizes the highlights of our financial performance for the twelve month
period ended December 31, 2009 compared to the twelve month period ended December 31, 2008 (000’s):
| Year Ended December 31, 2009 | 2009 | 2008 | $ Change | % Change | ||||||||||||
Net income available to common stockholders |
$ | 1,550 | $ | 1,727 | $ | (177 | ) | (10.25 | )% | |||||||
Interest revenue |
17,096 | 15,424 | 1,672 | 10.84 | ||||||||||||
Interest expense |
5,580 | 5,910 | (330 | ) | (5.58 | ) | ||||||||||
Net interest income after provision for loan losses |
10,616 | 9,100 | 1,516 | 16.66 | ||||||||||||
Non-interest revenue |
1,820 | 964 | 856 | 88.80 | ||||||||||||
Non-interest expense |
9,257 | 7,373 | 1,884 | 25.55 | ||||||||||||
Average total loans |
254,562 | 217,550 | 37,012 | 17.01 | ||||||||||||
Average interest earning assets |
308,416 | 252,027 | 56,389 | 22.37 | ||||||||||||
Average total interest bearing deposits |
221,651 | 165,596 | 56,055 | 33.85 | ||||||||||||
Average non-interest bearing deposits |
39,410 | 36,039 | 3,371 | 9.35 | ||||||||||||
Net Interest Margin (1) |
3.77 | % | 3.80 | % | ||||||||||||
Return on average equity |
5.13 | % | 5.04 | % | ||||||||||||
Basic earnings per common share |
$ | 0.40 | $ | 0.44 | $ | (0.04 | ) | (9.09 | %) | |||||||
Diluted earnings per common share |
0.40 | 0.44 | (0.04 | ) | (9.09 | %) | ||||||||||
| (1) | See “Reconciliation of Non-GAAP Measures” |
Growth Strategy
We have based our strategic plan on the premise of enhancing stockholder value and growth
through branching and operating profits. Our short-term goals include maintaining credit quality,
creating an attractive branch network, expanding fee income, generating extensions of core banking
services and using technology to maximize stockholder value. In the past 24 months, we have
expanded in Prince George’s County and Anne Arundel County, Maryland.
We opened a branch at 167-U Jennifer Road, Annapolis, Maryland in Anne Arundel County in
September 2008. We hired the staff for this branch during the months of August and September of
2008. In February 2008, we opened a branch in Prince George’s County at 9658 Baltimore Avenue,
College Park, Maryland in the same building as the loan production office that houses one of our
teams of loan officers. We hired the Branch Manager and staff for this location in February 2008.
On July 1, 2009, we opened a branch at 1641 State Route 3 North, Crofton, Maryland in Anne Arundel
County. During July and August of 2009, we hired the staff for this location. In October 2009, we
opened our branch in the Fairwood Office Park located at 12100 Annapolis Road, Suite 1, Glen Dale,
Maryland. We hired the staff for this location during the third quarter of 2009.
28
As previously reported, in December 2008, we increased our ownership in Pointer Ridge Office
Investment, LLC from 50.00% to 62.50%. As a result, we now consolidate their results of operations
and financial performance. During 2009, this consolidation caused an approximately $567,283
increase in non-interest revenue, a $413,610 increase in interest expense, a $526,494 reduction in
occupancy expense and an $87,215 increase in non-interest expense.
While many of our peer banks have experienced devastating financial losses, high delinquencies
and record levels of charge-offs, we have managed to maintain profitability and asset quality in an
extremely challenging environment while incurring increased FDIC insurance cost, increased
operating costs associated with the new branches and a $485,000 increase in the loan loss provision
for the twelve month period. We continue to remain cautiously optimistic that we will continue to
successfully navigate through this difficult period. However, we also recognize that we are not
immune to losses in our loan portfolio. If the unemployment rate continues to remain high and real
estate values decline further, we anticipate that even our strong borrowers may experience
financial difficulties as they continue to cope with declining revenues, diminishing cash flows and
depreciating collateral values in their businesses. Therefore, we expect that we will continue to
maintain a higher allowance for loan losses than we have historically required.
Although the current economic climate continues to present significant challenges for our
industry, we anticipate the bank will experience loan and deposit growth during 2010. We do expect
that the current economic climate will cause a slower rate of loan growth in the future than we
have historically experienced.
With the opening of the Fairwood branch as discussed above, we have substantially completed
our current branch expansion. Accordingly, we don’t anticipate opening any additional branches in
the immediate future, although should we identify new branch locations that will support our long
term growth plans we may open additional branches.
Because of the new branches and the additional loan officers, we anticipate salaries and
benefits expenses and other operating expenses will increase in 2010. We anticipate that, over
time, income generated from the branches will offset any increase in expenses. We also expect that
in 2010 Pointer Ridge will operate at a slight loss. We believe with these 10 branches, our lending
staff, our corporate infrastructure and our solid balance sheet and strong capital position, we are
positioned to focus our future efforts on improving earnings per share and enhancing stockholder
value by capitalizing on the many opportunities available in the market.
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. In
2007, we began offering selected commercial customers the ability to remotely capture their
deposits and electronically transmit them to us. This service has modestly increased equipment
cost, reduced courier fees, and positively impacted deposit growth.
In order to support our growth, provide improved management information capabilities and
enhance the products and services we deliver to our customers, during the 1st quarter of
2009, we began enhancing our core data processing systems. We completed this process in April
2009. We anticipate that this new system will cause data processing costs to moderately increase.
We will continue to evaluate cost effective ways that technology can enhance our management,
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 currently have no specific plans to acquire
existing financial institutions or branches thereof or to hire additional loan officers.
29
Repayment of Troubled Asset Relief Program (TARP) Investment
On July 15, 2009, we repurchased from the U.S. Treasury 7,000 shares of preferred stock that
we issued to them in December 2008 under the U.S. Treasury’s Capital Purchase Program through the
Troubled Asset Relief Program. We paid the U.S. Treasury $7,058,333 to repurchase the preferred
stock which reflects the liquidation value of the preferred stock and $58,333 of accrued but unpaid
dividends. We have also repurchased at a fair market value of $225,000 the warrant to purchase
141,892 shares of our common stock that was issued to the U.S. Treasury in conjunction with the
issuance of the preferred stock. For the twelve month period ended
December 31, 2009, we recorded approximately $486,000 for the dividend due and the accretion of the
preferred stock. After careful consideration, we determined that we would repay the U.S. Treasury
and believe this repayment will be in the best long term interest of our stockholders.
Results of Operations
Net Interest Income
Net interest income is the difference between income on interest earning assets and the cost
of funds supporting those assets. Earning assets are comprised primarily of loans, investments,
and federal funds sold; interest bearing deposits and other borrowings make up the cost of funds.
Non-interest bearing deposits and capital are also funding sources. Changes in the volume and mix
of earning assets and funding sources along with changes in associated interest rates determine
changes in net interest income.
2009 compared to 2008
Net interest income after provision for loan losses for the year ended December 31, 2009
amounted to $10.6 million, which was $1.5 million or 16.48% greater than the 2008 level of $9.1
million. As discussed below and outlined in detail in the Rate/Volume Analysis, these changes were
the result of interest earning assets growing at a faster rate than interest-bearing liabilities.
A decline in interest rates on these interest earning assets partially offset this growth. The
interest rate on interest bearing deposits also declined at a faster rate than the rate on interest
earning assets. Changes in the federal funds rate and the prime rate affect the interest rates on
interest earning assets, net interest income and net interest margin.
The prime interest rate, which is the rate offered on loans to borrowers with strong credit,
began 2008 at 7.25% and decreased 200 basis points in the first quarter, 25 basis points in the
second quarter, 175 basis points in the fourth quarter and at year end 2008 was 3.25%. During
2009, the prime interest rate remained unchanged at 3.25% for the entire period. The intended
federal funds rate has also moved in a similar manner to the prime interest rate. It began 2008 at
4.25% and decreased 200 basis points in the first quarter, 25 basis points in the second quarter
and 175 to 200 basis points in the fourth quarter and ended the year of 2008 at zero to 0.25%.
During 2009, the intended federal funds rate remained at zero to 0.25% for the entire period.
We offset the effect on net interest income caused by these declines in interest rates
primarily by growing total average interest earning assets $56.4 million to $308.4 million for the
year ended December 31, 2009 from $252.0 million for the year ended December 31, 2008. The growth
in average interest earning assets derived primarily from a $37.1 million increase in average total
loans, an $18.9 million growth in average investment securities and a $13.9 million increase in
average interest bearing deposits in other banks. The growth in net interest income that derived
from the increase in total average interest earning assets was also offset by growth in average
interest bearing deposits which grew to $221.7 million from $165.6 million.
Our net interest margin was 3.77% for the year ended December 31, 2009, as compared to 3.80%
for the year ended December 31, 2008. The decrease in the net interest margin is the result of
several components. The yield on average interest-earning assets declined during the period 57
basis points from 6.15% in 2008 to 5.58% in 2009. This decrease was primarily because of the lower
federal funds interest yield and the lower prime rate during the year. As outlined above, we
partially offset these rate reductions through growth in the loan portfolio. As a result of this
growth, there were a higher percentage of funds invested in higher yielding commercial and mortgage
loans during the period. The yield on borrowed funds increased 39 basis points during the period.
The consolidation of Pointer Ridge’s assets, liabilities, and equity was the primary cause of the
increase in the cost of borrowed funds.
With our new branches and increased recognition in the 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
30
2010. 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 2010.
We also believe that we will maintain or improve the net interest margin during 2010. As a result
of this growth and maintenance of the net interest margin, we expect that net interest income will
increase during 2010, although there can be no guarantee that this will be the case.
2008 compared to 2007
Net interest income after provision for loan losses for the year ended December 31, 2008
amounted to $9.1 million, which was $1.1 million or 13.75% greater than the 2007 level of $8.0
million. The increase was primarily attributable to a 19.66% or $41.4 million increase in total
average interest earning assets to $252.0 million for the twelve months ended December 31, 2008
from $210.6 million for the twelve months ended December 31, 2007.
Interest revenue increased from $14.6 million for the year ended December 31, 2007 to $15.4
million for the year ended December 31, 2008. As discussed below and outlined in detail in the
Rate/Volume Analysis, these changes were the result of substantial increases in earning assets. The
increase in interest bearing assets was primarily caused by a $44.6 million increase in average
total loans. As a result of this growth, there were a higher percentage of funds invested in
higher yielding commercial and mortgage loans during the period.
In order to fund this loan growth, we deployed funds from lower yielding investment securities
and federal funds sold. The growth in average total loans was attributable to the business
development efforts of the entire Old Line Bank lending team and directors and the expansion of our
branch network. We believe that the continued expansion of our branch network provides us with
increased name recognition and new opportunities that contributed to our growth.
Interest expense for all interest bearing liabilities amounted to $5.9 million in 2008,
which was $353,224 lower than the 2007 level of $6.3 million. Although average interest bearing
deposits grew $24.7 million during the period and average borrowed funds increased $18.4 million,
the rate paid on these funds decreased during the year.
Our net interest margin was 3.80% for the year ended December 31, 2008, as compared to 3.98%
for the year ended December 31, 2007. The decrease in the net interest margin is the result of
several components. The yield on average interest-earning assets decreased 81 basis points during
the period from 6.96% in 2007 to 6.15% in 2008, and average interest-earning assets grew by $41.4
million. During the period, interest rates declined dramatically and we experienced a 103 basis
point decrease of the yield on average interest-bearing liabilities from 3.98% in 2007 to 2.95% in
2008.
This decrease was because of the rapid reduction in the federal funds interest rate that the
Federal Reserve implemented. We partially offset these rate reductions through growth in the loan
portfolio, movement of federal funds into higher yielding investments and increased reliance on
short term, low cost borrowing. During November and December of 2008, we moved funds from Federal
Funds to higher earning investments and loans and placed more reliance on short term, low interest
rate borrowings for loan funding.
31
The following table illustrates average balances of total interest earning assets and
total interest bearing liabilities for the periods indicated, showing the average distribution
of assets, liabilities, stockholders’ equity and related income, expense and corresponding
weighted average yields and rates. The average balances used in this table and other
statistical data were calculated using average daily balances.
| Average Balances, Interest and Yields | ||||||||||||||||||||||||||||||||||||
| Twelve Months Ended December 31, | 2009 | 2008 | 2007 | |||||||||||||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||||||||||||||
| balance | Interest | Yield | balance | Interest | Yield | balance | Interest | Yield | ||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Federal funds sold(1) |
$ | 458,457 | $ | 1,149 | 0.25 | % | $ | 13,342,150 | $ | 290,788 | 2.18 | % | $ | 21,525,420 | $ | 1,142,707 | 5.31 | % | ||||||||||||||||||
Interest bearing deposits |
17,004,299 | 270,290 | 1.59 | 3,116,699 | 104,560 | 3.35 | 498,630 | 25,556 | 5.13 | |||||||||||||||||||||||||||
Investment securities(1)(2) |
||||||||||||||||||||||||||||||||||||
U.S. Treasury |
187,658 | 7,647 | 4.07 | 2,072,573 | 73,061 | 3.53 | 3,621,923 | 121,196 | 3.35 | |||||||||||||||||||||||||||
U.S. government agency |
8,411,754 | 313,654 | 3.73 | 4,896,926 | 192,271 | 3.93 | 7,347,989 | 302,119 | 4.11 | |||||||||||||||||||||||||||
Mortgage backed securities |
24,642,044 | 1,059,386 | 4.30 | 7,799,475 | 356,398 | 4.57 | 1,247,089 | 48,946 | 3.92 | |||||||||||||||||||||||||||
Municipal securities |
2,540,562 | 126,752 | 4.99 | 2,875,141 | 140,893 | 4.90 | 3,240,786 | 159,015 | 4.91 | |||||||||||||||||||||||||||
Other |
2,886,213 | 72,150 | 2.50 | 2,124,236 | 92,723 | 4.37 | 1,477,894 | 84,859 | 5.74 | |||||||||||||||||||||||||||
Total investment securities |
38,668,231 | 1,579,589 | 4.08 | 19,768,351 | 855,346 | 4.33 | 16,935,681 | 716,135 | 4.23 | |||||||||||||||||||||||||||
Loans:(1) |
||||||||||||||||||||||||||||||||||||
Commercial |
70,966,468 | 4,168,203 | 5.87 | 62,783,300 | 4,234,175 | 6.74 | 44,125,513 | 3,654,176 | 8.28 | |||||||||||||||||||||||||||
Mortgage |
168,196,382 | 10,346,433 | 6.15 | 137,944,563 | 9,109,972 | 6.60 | 108,513,579 | 8,039,542 | 7.41 | |||||||||||||||||||||||||||
Consumer |
15,399,539 | 856,562 | 5.56 | 16,821,749 | 896,398 | 5.33 | 20,363,658 | 1,074,436 | 5.28 | |||||||||||||||||||||||||||
Total loans |
254,562,389 | 15,371,198 | 6.04 | 217,549,612 | 14,240,545 | 6.55 | 173,002,750 | 12,768,154 | 7.38 | |||||||||||||||||||||||||||
Allowance for loan losses |
2,277,747 | — | 1,749,885 | — | 1,405,182 | — | ||||||||||||||||||||||||||||||
Total loans, net of allowance |
252,284,642 | 15,371,198 | 6.09 | 215,799,727 | 14,240,545 | 6.60 | 171,597,568 | 12,768,154 | 7.44 | |||||||||||||||||||||||||||
Total interest earning assets(1) |
308,415,629 | 17,222,226 | 5.58 | 252,026,927 | 15,491,239 | 6.15 | 210,557,299 | 14,652,552 | 6.96 | |||||||||||||||||||||||||||
Non-interest bearing cash |
7,104,387 | 4,369,508 | 3,800,713 | |||||||||||||||||||||||||||||||||
Premises and equipment |
14,548,001 | 5,157,011 | 4,186,529 | |||||||||||||||||||||||||||||||||
Other assets |
11,904,806 | 11,107,525 | 10,030,452 | |||||||||||||||||||||||||||||||||
Total assets(1) |
$ | 341,972,823 | $ | 272,660,971 | $ | 228,574,993 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity: |
||||||||||||||||||||||||||||||||||||
Interest bearing deposits |
||||||||||||||||||||||||||||||||||||
Savings |
$ | 6,853,343 | 25,602 | 0.37 | $ | 6,436,599 | 39,492 | 0.61 | $ | 8,250,010 | 55,660 | 0.67 | ||||||||||||||||||||||||
Money market and NOW |
33,931,390 | 171,476 | 0.51 | 34,046,098 | 321,164 | 0.94 | 28,382,013 | 588,824 | 2.07 | |||||||||||||||||||||||||||
Other time deposits |
180,866,687 | 4,356,021 | 2.41 | 125,113,791 | 4,740,952 | 3.79 | 104,244,760 | 5,045,070 | 4.84 | |||||||||||||||||||||||||||
Total interest bearing deposits |
221,651,420 | 4,553,099 | 2.05 | 165,596,488 | 5,101,608 | 3.08 | 140,876,783 | 5,689,554 | 4.04 | |||||||||||||||||||||||||||
Borrowed funds |
37,817,464 | 1,026,755 | 2.72 | 34,754,155 | 808,127 | 2.33 | 16,423,688 | 573,405 | 3.49 | |||||||||||||||||||||||||||
Total interest bearing liabilities |
259,468,884 | 5,579,854 | 2.15 | 200,350,643 | 5,909,735 | 2.95 | 157,300,471 | 6,262,959 | 3.98 | |||||||||||||||||||||||||||
Non-interest bearing deposits |
39,410,471 | 36,039,280 | 34,561,334 | |||||||||||||||||||||||||||||||||
| 298,879,355 | 5,579,854 | 1.87 | 236,389,923 | 5,909,735 | 2.50 | 191,861,805 | 6,262,959 | 3.26 | ||||||||||||||||||||||||||||
Other liabilities |
3,390,944 | 1,450,813 | 1,249,573 | |||||||||||||||||||||||||||||||||
Non-controlling interest |
692,144 | — | — | |||||||||||||||||||||||||||||||||
Stockholders’ equity |
39,010,380 | 34,820,235 | 35,463,615 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity |
$ | 341,972,823 | $ | 272,660,971 | $ | 228,574,993 | ||||||||||||||||||||||||||||||
Net interest spread(1) |
3.43 | 3.20 | 2.98 | % | ||||||||||||||||||||||||||||||||
Net interest income(1) |
$ | 11,642,372 | 3.77 | % | $ | 9,581,504 | 3.80 | % | $ | 8,389,593 | 3.98 | |||||||||||||||||||||||||
| 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. |
32
The following table describes the impact on our interest income and expense resulting from
changes in average balances and average rates for the periods indicated. The change in interest
income due to both volume and rate is reported with the rate variance.
Rate/Volume Variance Analysis
| Twelve Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||||||||||
| 2009 compared to 2008 | 2008 compared to 2007 | |||||||||||||||||||||||
| Variance due to: | Variance due to: | |||||||||||||||||||||||
| Total | Rate | Volume | Total | Rate | Volume | |||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Federal funds sold(1) |
$ | (289,639 | ) | $ | (138,510 | ) | $ | (151,129 | ) | $ | (851,919 | ) | $ | (517,342 | ) | $ | (334,577 | ) | ||||||
Interest bearing deposits |
165,730 | (80,912 | ) | 246,642 | 79,004 | (11,704 | ) | 90,708 | ||||||||||||||||
Investment Securities(1) |
||||||||||||||||||||||||
U.S. Treasury |
(65,414 | ) | 9,878 | (75,292 | ) | (48,135 | ) | 6,190 | (54,325 | ) | ||||||||||||||
U.S. government agency |
121,383 | (10,132 | ) | 131,515 | (109,848 | ) | (13,039 | ) | (96,809 | ) | ||||||||||||||
Mortgage backed securities |
702,988 | (22,306 | ) | 725,294 | 307,452 | 9,296 | 298,156 | |||||||||||||||||
Municipal securities |
(14,141 | ) | 2,512 | (16,653 | ) | (18,122 | ) | (203 | ) | (17,919 | ) | |||||||||||||
Other |
(20,573 | ) | (47,347 | ) | 26,774 | 7,864 | (23,531 | ) | 31,395 | |||||||||||||||
Loans: |
||||||||||||||||||||||||
Commercial |
(65,972 | ) | (582,060 | ) | 516,088 | 579,999 | (766,923 | ) | 1,346,922 | |||||||||||||||
Mortgage |
1,236,461 | (657,060 | ) | 1,893,521 | 1,070,430 | (942,512 | ) | 2,012,942 | ||||||||||||||||
Consumer |
(39,836 | ) | 38,138 | (77,974 | ) | (178,038 | ) | 10,630 | (188,668 | ) | ||||||||||||||
Total interest revenue (1) |
1,730,987 | (1,487,799 | ) | 3,218,786 | 838,687 | (2,249,138 | ) | 3,087,825 | ||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Savings |
(13,890 | ) | (16,305 | ) | 2,415 | (16,168 | ) | (4,709 | ) | (11,459 | ) | |||||||||||||
Money market and NOW |
(149,688 | ) | (148,610 | ) | (1,078 | ) | (267,660 | ) | (368,202 | ) | 100,542 | |||||||||||||
Other time deposits |
(384,931 | ) | (2,074,050 | ) | 1,689,119 | (304,118 | ) | (1,210,217 | ) | 906,099 | ||||||||||||||
Borrowed funds |
218,628 | 143,283 | 75,345 | 234,722 | (241,040 | ) | 475,762 | |||||||||||||||||
Total interest expense |
(329,881 | ) | (2,095,682 | ) | 1,765,801 | (353,224 | ) | (1,824,168 | ) | 1,470,944 | ||||||||||||||
Net interest income(1) |
$ | 2,060,868 | $ | 607,883 | $ | 1,452,985 | $ | 1,191,911 | $ | (424,970 | ) | $ | 1,616,881 | |||||||||||
| 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
33
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 $900,000 for the year ended December 31, 2009. This
represented a $485,000 or 116.87% increase as compared to the year ended December 31, 2008. We
increased the provision for loan losses because we believe that although our asset quality remains
strong, the longer the weaknesses in the economy exist the more difficult it becomes for even our
strong borrowers to maintain profitability consistent with prior periods.
At year end, we had $1.6 million in non-performing real estate loans. We also have two loans
totaling approximately $581,000 past due between 30-89 days. As outlined below, we are currently
working towards resolution with all of these borrowers.
The provision for loan losses was $415,000 for the year ended December 31, 2008, as compared
to $318,000 for the year ended December 31, 2007, an increase of $97,000 or 30.50%. We increased
the provision for loan losses because the real estate industry encountered difficulties, there was
significant turbulence in the financial markets, unemployment was rising, and there was evidence of
weakness in the general economy. After completing the analysis outlined below, we determined
during the twelve month period ended December 31, 2008 that there were changes in economic factors
that directly impacted the quality of the loan portfolio and warranted a higher provision.
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,
mortgage loans (commercial real estate, residential real estate and real estate construction) and
commercial loans. We apply loss ratios to each category of loan other than commercial loans
(including letters of credit and unused commitments). We further divide commercial loans by risk
rating and apply loss ratios by risk rating, to determine estimated loss amounts. We evaluate
delinquent loans and loans for which management has knowledge about possible credit problems of the
borrower or knowledge of problems with loan collateral separately and assign loss amounts based
upon the evaluation.
We determine loss ratios for installment and other consumer loans (other than boat loans),
boat loans and mortgage loans (commercial real estate, residential real estate and real estate
construction) based upon a review of prior 18 months delinquency trends for the category, the three
year loss ratio for the category, peer group loss ratios and industry standards.
With respect to commercial loans, management assigns a risk rating of one through eight to
each loan at inception, with a risk rating of one having the least amount of risk and a risk rating
of eight having the greatest amount of risk. For commercial loans of less than $250,000, we may
review the risk rating annually based on, among other things, the borrower’s financial condition,
cash flow and ongoing financial viability; the collateral securing the loan; the borrower’s
industry and payment history. We review the risk rating for all commercial loans in excess of
$250,000 at least annually. We evaluate loans with a risk rating of five or greater separately and
assign loss amounts based upon the evaluation. For loans with risk ratings between one and four,
we determine loss ratios based upon a review of prior 18 months delinquency trends, the three year
loss ratio, peer group loss ratios and industry standards.
34
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. As discussed above, in 2008 and 2009 we increased our provision for loan losses for the
periods in all segments of our portfolio as a result of economic considerations. We consider
qualitative or environmental factors that are likely to cause estimated credit losses associated
with our existing portfolio to differ from historical loss experience. These factors include, but
are not limited to, changes in lending policies and procedures, changes in the nature and volume of
the loan portfolio, changes in the experience, ability and depth of lending management and the
effect of other external factors such as competition and legal and regulatory requirements on the
level of estimated credit losses in our existing portfolio.
In the event that our review of the adequacy of the allowance results in any unallocated
amounts, we reallocate such amounts to our loan categories based on the percentage that each
category represents to total gross loans. We have risk management practices designed to ensure
timely identification of changes in loan risk profiles. However, undetected losses inherently
exist within the portfolio. We believe that the allocation of the unallocated portion of the
reserve in the manner described above is appropriate. 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
December 31, 2009, we had three loans totaling $1.6 million past due and classified as non-accrual.
The first loan has a balance of $810,291 and is the same loan that we reported in our December 31,
2008 financial statements. During 2009, we received $40,384 in payments on this loan. In the
4th quarter of 2009, we proceeded with obtaining a “lift stay” on this property and are
waiting for ratification. Once received, we plan to foreclose on this property. The second loan
is in the amount of $223,169. The value of the collateral is sufficient to provide repayment. We
have foreclosed on the property and were waiting for ratification from the court as of December 31,
2009. In March 2010, we received ratification and we anticipate that we will hold the real estate
for future sale. The third loan is a land development loan secured by real estate in the amount of
$553,039. The borrower on this loan has filed bankruptcy. A recent appraisal of the property
securing this loan indicates that the value of the collateral is sufficient to provide repayment.
We plan to proceed with foreclosure on this property. We do not believe that any of these loans
are impaired and we have not designated a specific allowance for any of these non-accrual loans.
The total non-accrued interest on these loans at December 31, 2009 was $190,701.
During the year ended December 31, 2009, we charged off a loan in the amount of approximately
$195,000 to the allowance for loan losses. This charge-off was the result of one land developer
who was unable to meet all of his financial obligations and advised us that he could no longer make
any of his payments and there was no remaining value in the underlying collateral. During the
third quarter, we also repossessed a boat with a loan balance of approximately $100,000. We
charged $50,000 to the allowance for loan losses for anticipated losses on this repossession and
have recorded the remaining value of the boat in other assets. We plan to sell this boat.
In July 2009, we charged an additional $150,000 to the allowance for loan losses for the
deficiency balance due on a $700,000 loan that was in non-accrual status until December 2009. In
July, we restructured the remaining $550,000 of the loan balance and the borrower began remitting
monthly payments. The borrower has submitted six monthly payments in a timely manner. As a
result, we have taken this loan out of non-accrual status and we now classify it as an accrual
loan. The remaining $7,000 charged to the allowance for loan losses in 2009 and the total $18,440
in 2008 and the $12,149 in 2007 were comprised of various immaterial deficiencies on several loans.
35
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 is sufficient to absorb losses on
non-performing assets, or that the allowance will be sufficient to cover losses on non-performing
assets in the future.
The allowance for loan losses represents 0.93% of total loans at December 31, 2009, 0.85% at
December 31, 2008, and 0.78% at December 31, 2007. 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 represents an analysis of the allowance for loan losses for the periods
indicated:
Allowance for Loan Losses
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Balance, beginning of period |
$ | 1,983,751 | $ | 1,586,737 | $ | 1,280,396 | ||||||
Provision for loan losses |
900,000 | 415,000 | 318,000 | |||||||||
Chargeoffs: |
||||||||||||
Commercial |
— | — | (6,064 | ) | ||||||||
Mortgage |
(344,825 | ) | — | — | ||||||||
Consumer |
(57,210 | ) | (18,440 | ) | (6,085 | ) | ||||||
Total chargeoffs |
(402,035 | ) | (18,440 | ) | (12,149 | ) | ||||||
Recoveries: |
||||||||||||
Consumer |
— | 454 | 490 | |||||||||
Total recoveries |
— | 454 | 490 | |||||||||
Net (chargeoffs) recoveries |
(402,035 | ) | (17,986 | ) | (11,659 | ) | ||||||
Balance, end of period |
$ | 2,481,716 | $ | 1,983,751 | $ | 1,586,737 | ||||||
Ratio of allowance for loan losses to: |
||||||||||||
Total gross loans |
0.93 | % | 0.85 | % | 0.78 | % | ||||||
Non-accrual loans |
156.43 | % | 233.19 | % | 145.93 | % | ||||||
Ratio of net-chargeoffs during period to
average loans outstanding during period |
0.158 | % | 0.008 | % | 0.007 | % | ||||||
36
The following table provides a breakdown of the allowance for loan losses:
Allocation of Allowance for Loan Losses
| December 31, | 2009 | 2008 | 2007 | |||||||||||||||||||||
| % of Loans | % of Loans | % of Loans | ||||||||||||||||||||||
| in Each | in Each | in Each | ||||||||||||||||||||||
| Amount | Category | Amount | Category | Amount | Category | |||||||||||||||||||
Consumer |
$ | 10,319 | 0.57 | % | $ | 13,391 | 0.50 | % | $ | 10,236 | 0.46 | % | ||||||||||||
Boat |
81,417 | 4.91 | 94,910 | 6.22 | 106,405 | 8.66 | ||||||||||||||||||
Mortgage |
1,845,126 | 66.74 | 1,348,850 | 63.21 | 1,080,897 | 63.56 | ||||||||||||||||||
Commercial |
544,854 | 27.78 | 526,600 | 30.07 | 389,199 | 27.32 | ||||||||||||||||||
Total |
$ | 2,481,716 | 100.00 | % | $ | 1,983,751 | 100.00 | % | $ | 1,586,737 | 100.00 | % | ||||||||||||
Non-interest Revenue
2009 compared to 2008
Non-interest revenue totaled $1.8 million for the twelve months ended December 31, 2009, an
increase of $855,835 or 88.79%. Non-interest revenue for the twelve months ended December 31,
2009 and December 31, 2008 included fee income from service charges on deposit accounts, gains on
sales of investment securities, earnings on bank owned life insurance, income from our investment
in real estate LLC (Pointer Ridge) and other fees and commissions.
The following table outlines the changes in non-interest revenue for the twelve month periods.
| Years Ended December 31, | 2009 | 2008 | $ Change | % Change | ||||||||||||
Service charges on deposit accounts |
$ | 307,012 | $ | 311,268 | $ | (4,256 | ) | (1.37 | )% | |||||||
Net gains on sales of investment securities |
158,551 | (3,081 | ) | 161,632 | ||||||||||||
Earnings on bank owned life insurance |
376,165 | 366,785 | 9,380 | 2.56 | ||||||||||||
Income (loss) on investment in real estate LLC |
— | 3,741 | (3,741 | ) | (100.00 | ) | ||||||||||
Pointer Ridge rent and other revenue |
567,283 | 53,738 | 513,545 | 955.65 | ||||||||||||
Other fees and commissions |
410,756 | 231,481 | 179,275 | 77.45 | ||||||||||||
Total non-interest revenue |
$ | 1,819,767 | $ | 963,932 | $ | 855,835 | 88.79 | % | ||||||||
37
Although the number of customers increased, service charges on deposit accounts remained
relatively stable because these customers used lower cost services. In an effort to minimize call
and prepayment risk and manage future interest rate risk, we elected to sell available-for-sale
securities during 2009. We recorded gains on these investments because the decline in market
interest rates caused an increase in the securities’ value. In 2008, we sold a security because it
no longer met our investment guidelines. The interest rates for these types of securities had
increased which caused the security value to decline and we experienced a loss. Other fees and
commissions increased primarily because we issued a higher dollar value of letters of credit that
caused letter of credit fees to increase. We also had higher loan fees as a result of an increase
in expired loan commitments and an increase in the number of loans that we settled during the year.
As previously outlined, in November 2008, we acquired an additional 12.50% membership interest
in Pointer Ridge. As a result of this purchase, our membership interest increased from 50.00% to
62.50%. 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. This consolidation caused the earnings on our investment in real estate
LLC to decline and Pointer Ridge rent and other revenue to increase during 2009.
Because of the new lenders we have hired and the new branches that we have opened, we expect
that customer relationships will grow during 2010. We anticipate this growth will cause an
increase in service charges on deposit accounts. We believe the demand in the commercial real
estate market will remain slow during 2010. As a result, we expect other loan fees which are
included in other fees and commissions will either remain consistent with 2009 or decline slightly.
As a result of declining interest rates, we expect our earnings on bank owned life insurance will
decline slightly during 2010. We anticipate that Pointer Ridge will have a decline in earnings in
2010 and operate at a loss. In December 2008, one of the primary tenants in the Pointer Ridge
building departed. In 2009, Pointer Ridge leased the space to a new tenant that has since departed
and there are currently vacancies in the building. In 2009, Pointer Ridge also negotiated a
settlement from the prior tenant. Therefore, we recorded a one time gain from this settlement in
2009.
2008 compared to 2007
Non-interest revenue totaled $963,932 for the twelve months ended December 31, 2008, a
decrease of $209,382 or 17.85%. Non-interest revenue for the twelve months ended December 31, 2008
and December 31, 2007 included fee income from service charges on deposit accounts, earnings on
bank owned life insurance, income from our investment in real estate LLC (Pointer Ridge) and other
fees and commissions. For the period ended December 31, 2007, non-interest revenue also included
broker origination fees from the marine division.
The following table outlines the changes in non-interest revenue for the twelve month periods.
| $ | % | |||||||||||||||
| Years Ended December 31, | 2008 | 2007 | Change | Change | ||||||||||||
Service charges on deposit accounts |
$ | 311,268 | $ | 292,610 | $ | 18,658 | 6.38 | % | ||||||||
Marine division broker origination fees |
— | 272,349 | (272,349 | ) | (100.00 | ) | ||||||||||
Earnings on bank owned life insurance |
366,785 | 340,853 | 25,932 | 7.61 | ||||||||||||
Income (loss) on investment in real estate LLC |
3,741 | 24,100 | (20,359 | ) | (84.48 | ) | ||||||||||
Other fees and commissions |
282,138 | 243,402 | 38,736 | 15.91 | ||||||||||||
Total non-interest revenue |
$ | 963,932 | $ | 1,173,314 | $ | (209,382 | ) | (17.85 | )% | |||||||
Service charges on deposit accounts increased due to increases in the number of customers and
the services they used. We did not earn any marine division broker origination fees during the
period because we closed this division at the end of the third quarter of 2007. Earnings on bank
owned life insurance increased because we invested an additional $4 million in February 2007. As a
result, we had an additional thirty days of interest income on the investment in 2008. Other fees
and commissions increased because of the consolidation of Pointer Ridge’s results of operations
from the date of acquisition as outlined below. Other fees and commissions also increased
38
because in April 2007, we began leasing the Waldorf office space that we vacated in July 2006
and because of increases in loan income received from the repayment of a non-accrual loan. The
consolidation of Pointer Ridge’s results of operations, as discussed above, caused the earnings on
our investment in real estate LLC to decline and other fees and commissions to increase in 2008.
Pointer Ridge’s earnings declined during the year because it had two tenants that did not pay
their rent in a timely manner and they recorded a reserve for these uncollected rents.
Additionally, operating expenses on the building increased during the year.
Non-interest Expense
2009 compared to 2008
Non-interest expense for the twelve months ended December 31, 2009 increased 25.55% or $1.9
million relative to the amount reported in 2008. The following chart outlines the changes in
non-interest expenses for the period.
| $ | % | |||||||||||||||
| Years Ended December 31, | 2009 | 2008 | Change | Change | ||||||||||||
Salaries |
$ | 4,037,027 | $ | 3,316,219 | $ | 720,808 | 21.74 | % | ||||||||
Employee benefits |
1,012,014 | 923,666 | 88,348 | 9.56 | ||||||||||||
Occupancy |
1,085,768 | 1,124,838 | (39,070 | ) | (3.47 | ) | ||||||||||
Equipment |
354,531 | 313,133 | 41,398 | 13.22 | ||||||||||||
Data processing |
340,870 | 269,632 | 71,238 | 26.42 | ||||||||||||
FDIC Insurance and State of Maryland assessments |
561,850 | 151,149 | 410,701 | 271.72 | ||||||||||||
Pointer Ridge other operating |
66,458 | 24,414 | 42,044 | 172.21 | ||||||||||||
Other operating |
1,798,363 | 1,249,727 | 548,636 | 43.90 | ||||||||||||
Total non-interest expenses |
$ | 9,256,881 | $ | 7,372,778 | $ | 1,884,103 | 25.55 | % | ||||||||
Salaries, employee benefits, equipment, data processing expenses, and other operating expenses
increased primarily because of increased operating expenses from the two branches that we opened in
2008, two additional branches opened in 2009 and the new lending team that we hired in December
2009. As a result of the consolidation of Pointer Ridge, these increases and increases in
occupancy expenses due to the new branches were partially offset by the elimination of $526,494 of
rental expenses paid to Pointer Ridge. Benefits also increased because of the increase in stock
option expenses for options granted in the first quarter of 2009. There were no options granted in
2008. In April of 2009, we converted our core data processing system to a new service provider.
In addition to the impact from the new branches, the conversion also caused an increase in data
processing costs. Non-interest expenses also increased because of a $410,701 increase in FDIC
insurance premiums and Maryland State assessments, inclusive of the approximately $149,000 special
assessment.
For 2010, we anticipate non-interest expenses will increase. We will incur increased rent
expense related to the new Fairwood, Crofton, College Park and Annapolis locations and increased
operational expenses associated with these branches. We will also incur increased data processing
costs because of these new branches and our new core processing system and increased FDIC insurance
premiums.
39
2008 compared to 2007
The following chart outlines the non-interest expenses for the years ended December 31, 2008
and 2007.
| $ | % | |||||||||||||||
| Years Ended December 31, | 2008 | 2007 | Change | Change | ||||||||||||
Salaries |
$ | 3,316,219 | $ | 3,045,932 | $ | 270,287 | 8.87 | % | ||||||||
Employee benefits |
923,666 | 953,554 | (29,888 | ) | (3.13 | ) | ||||||||||
Occupancy |
1,124,838 | 934,277 | 190,561 | 20.40 | ||||||||||||
Equipment |
313,133 | 248,182 | 64,951 | 26.17 | ||||||||||||
Data processing |
269,632 | 221,107 | 48,525 | 21.95 | ||||||||||||
Other operating |
1,425,290 | 1,371,499 | 53,791 | 3.92 | ||||||||||||
Total non-interest expenses |
$ | 7,372,778 | $ | 6,774,551 | $ | 598,227 | 8.83 | % | ||||||||
Salary and benefit expenses increased primarily because we opened the College Park, Greenbelt
and Annapolis branches during the year and we hired new loan officers in April and September 2007.
These increases were partially offset by the reduction in salary expense that we realized when we
closed the marine division late in the third quarter of 2007 and terminated the employees
associated with it. Additionally, stock based compensation expenses decreased from $173,714 in
2007 to $104,541 for the same period in 2008. The stock based compensation expense decreased
because the Board of Directors did not receive any vested options in 2008 and they received 10,000
vested options in 2007.
Occupancy and equipment expenses increased because of the opening of the new Greenbelt branch
in June 2007, the College Park branch in February 2008, the Annapolis branch in September 2008, and
annual rental increases. Data processing costs increased because of the new locations, new
services provided by our data processor, and contractual increases. Other operating expenses
increased primarily because of increased FDIC and state of Maryland insurance assessments, higher
audit and exam fees, and increased business development expenses. The elimination of the costs
associated with the marine division partially offset these increases.
Income Taxes
2009 compared to 2008
Income tax expense was $1,055,522 (33.20% of pre-tax income) for the year ended December 31,
2009 compared to $939,383 (34.91% of pre-tax income) for the same period in 2008. The decrease in
the effective tax rate is primarily due to higher tax exempt interest income.
2008 Compared to 2007
Income tax expense was $939,383 (34.91% of pre-tax income) for the year ended December 31,
2008 compared to $789,053 (33.26% of pre-tax income) for the same period in 2007. The increase in
the effective tax rate is primarily due to a decrease in interest on tax exempt securities as a
percent of pre-tax income during the period and an increase in the state tax rate.
Net Income Available to Common Stockholders
2009 compared to 2008
Net income attributable to Old Line Bancshares increased $280,032 or 15.95% for the twelve
month period ended December 31, 2009 to $2.0 million from $1.8 million for the twelve month period
ended December 31, 2008.
After inclusion of the dividends and accretion on the preferred stock issued under the U.S.
Treasury’s Capital Purchase Program in December 2008, net income available to common stockholders
for the twelve month period
40
was $1.6 million. Earnings per basic and diluted common share were
$0.40 for the twelve months ended December 31, 2009 and $0.44 for the same period in 2008. The
increase in net income was the result of a $1.5 million increase in net interest income after
provision for loan losses and an $855,835 increase in non-interest revenue. This was partially
offset by a $1.9 million increase in non-interest expense and a $116,139 increase in income taxes.
Earnings per share decreased on a basic and diluted basis because of dividends and accretion on the
preferred stock. This was partially offset by higher earnings and because we repurchased 217,085
shares of common stock during the year ended December 31, 2008 that caused the average number of
common shares outstanding during 2009 to decline to 3,862,364 from 3,919,903 for the same period in
2008.
2008 Compared to 2007
Net income available to common shareholders was $1.7 million or $0.44 per basic and diluted
common share for the twelve month period ending December 31, 2008, an increase of $143,680 or 9.08%
compared to net income of $1.6 million or $0.37 per basic and diluted common share for the same
period in 2007. The increase in net income was the result of a $1.1 million increase in net
interest income after provision for loan losses. This was partially offset by a $209,382 decrease
in non-interest revenue, a $598,227 increase in non-interest expense, the new 5% preferred stock
dividend payable to the U.S. Treasury for its $7 million investment, and a $150,330 increase in
income taxes. Earnings per share increased on a basic and diluted basis because of higher earnings
and because we repurchased 217,085 shares of common stock during the twelve month period ended
December 31, 2008 and 185,950 shares of common stock in the 4th quarter of 2007 that
caused the average number of common shares outstanding to decline to 3,919,903 from 4,237,266 for
the same period in 2007.
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 significant 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, 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 December 31, 2009 amounted to $33.8 million, a decrease of $3.8
million, or 10.11%, from the December 31, 2008 amount of $37.6 million. Available for sale
investment securities decreased to $28.0 million at December 31, 2009 from $29.6 million at
December 31, 2008. The decrease in the available for sale investment securities occurred primarily
because we deployed these funds into loans or other interest bearing deposits. Held to maturity
securities at December 31, 2009 decreased to $5.8 million from the $8.0 million balance on December
31, 2008 because securities matured or were called during the period. The fair value of available
for sale securities included net unrealized gains of $609,165 at December 31, 2009 (reflected as
unrealized gains of $368,880 in stockholders’ equity after deferred taxes) as compared to net
unrealized gains of $648,356 ($392,611 net of taxes) as of December 31, 2008. In general, the
decrease in fair value was the result of increasing market rates. We have evaluated securities
with unrealized losses for an extended period of time and determined that these losses are
temporary because, at this point in time, we expect to hold them until maturity. We have no intent
or plan to sell these securities, it is not likely that we will have to sell these securities and
we have not identified any portion of the loss that is a result of credit deterioration in the
issuer of the security. As the maturity date moves closer
and/or interest rates decline, the unrealized losses in the portfolio will decline or
dissipate.
41
The investment securities at December 31, 2008 amounted to $37.6 million, an increase of $25.9
million, or 221.24%, from the December 31, 2007 amount of $11.7 million. Available for sale
investment securities increased to $29.6 million at December 31, 2008 from $9.4 million at December
31, 2007. Held to maturity securities at December 31, 2008 increased to $8.0 million from $2.3
million. The increase in the available for sale investment and held to maturity securities
occurred because as liquidity concerns in the market began to dissipate and interest rates
declined, in the fourth quarter, we used federal funds to purchase securities. The fair value of
available for sale securities included net unrealized gains of $648,356 at December 31, 2008
(reflected as unrealized gains of $392,611 in stockholders’ equity after deferred taxes) as
compared to net unrealized losses of $49,127 ($29,749 net of taxes) as of December 31, 2007. In
general, the increase in fair value was a result of maturities, decreasing interest rates on
investments and changes in investment ratings. As required, we have evaluated securities with
unrealized losses for an extended period of time and determined that these losses are temporary
because, at this point in time, we expect to hold them until maturity. As the maturity date moves
closer and/or interest rates decline, we expect the unrealized losses in the portfolio will decline
or dissipate.
The following table sets forth a summary of the investment securities portfolio as of the
periods indicated. Available for sale securities are reported at estimated fair value; held to
maturity securities are reported at amortized cost.
Investment Securities
(Dollars in thousands)
(Dollars in thousands)
| December 31, | 2009 | 2008 | 2007 | |||||||||
Available For Sale Securities |
||||||||||||
U.S. Treasury |
$ | — | $ | — | $ | 998 | ||||||
U.S. government agency |
7,291 | 10,898 | 4,472 | |||||||||
Municipal securities |
2,275 | 2,443 | 2,914 | |||||||||
Mortgage backed |
18,447 | 16,225 | 1,009 | |||||||||
Total Available for Sale Securities |
$ | 28,013 | $ | 29,566 | $ | 9,393 | ||||||
Held To Maturity Securities |
||||||||||||
U.S. Treasury |
$ | — | $ | 500 | $ | 2,001 | ||||||
Municipal securities |
301 | 301 | 301 | |||||||||
Mortgage-backed |
5,506 | 7,202 | — | |||||||||
Total Held to Maturity Securities |
$ | 5,807 | $ | 8,003 | $ | 2,302 | ||||||
Equity Securities |
$ | 2,958 | $ | 2,127 | $ | 2,080 | ||||||
42
The following table shows the maturities for the securities portfolio at December 31, 2009 and
2008:
Fair Value, Amortized Cost and Weighted Average Yield
| Available for Sale | Held to Maturity | |||||||||||||||||||||||
| Amortized | Fair | Weighted Average | Amortized | Fair | Weighted Average | |||||||||||||||||||
| December 31, 2009 | Cost | Value | Yield | Cost | Value | Yield | ||||||||||||||||||
Maturing |
||||||||||||||||||||||||
Less than 3 months |
$ | 250,039 | $ | 250,398 | 2.55 | % | $ | — | $ | — | ||||||||||||||
Over 3 months through 1 year |
1,394,559 | 1,413,114 | 3.22 | % | — | — | ||||||||||||||||||
Over one to five years |
4,440,360 | 4,621,900 | 4.00 | % | 99,927 | 100,210 | 3.50 | % | ||||||||||||||||
Over five to ten years |
8,567,790 | 8,760,477 | 3.32 | % | 2,279,892 | 2,373,515 | 4.40 | % | ||||||||||||||||
Over ten years |
12,751,035 | 12,967,059 | 4.16 | % | 3,426,688 | 3,603,040 | 4.78 | % | ||||||||||||||||
| $ | 27,403,783 | $ | 28,012,948 | $ | 5,806,507 | $ | 6,076,765 | |||||||||||||||||
Pledged Securities |
$ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Available for Sale | Held to Maturity | |||||||||||||||||||||||
| Amortized | Fair | Weighted Average | Amortized | Fair | WeightedAverage | |||||||||||||||||||
| December 31, 2008 | Cost | Value | Yield | Cost | Value | Yield | ||||||||||||||||||
Maturing |
||||||||||||||||||||||||
Over 3 months through 1 year |
$ | 1,150,265 | $ | 1,171,205 | 3.18 | % | $ | 499,942 | $ | 507,031 | 3.91 | % | ||||||||||||
Over one to five years |
11,635,121 | 11,957,725 | 3.88 | % | 99,881 | 100,075 | 3.50 | % | ||||||||||||||||
Over five to ten years |
8,995,942 | 9,249,654 | 4.69 | % | 2,051,611 | 2,091,071 | 4.47 | % | ||||||||||||||||
Over ten years |
7,136,292 | 7,187,392 | 4.43 | % | 5,351,957 | 5,536,836 | 4.68 | % | ||||||||||||||||
| $ | 28,917,620 | $ | 29,565,976 | $ | 8,003,391 | $ | 8,235,013 | |||||||||||||||||
Pledged Securities |
$ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Contractual maturities of mortgage-backed securities are not reliable indicators of their
expected life because mortgage borrowers have the right to prepay mortgages at any time.
Additionally, the issuer may call the callable agency securities listed above prior to the
contractual maturity.
43
Investment in real estate LLC
On November 17, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.50% membership
interest in Pointer Ridge, a real estate investment limited liability company. As a result of this
purchase, our membership interest increased from 50.00% to 62.50%. 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. The
following table summarizes the condensed Balance Sheets and Statements of Income for Pointer Ridge.
| Pointer Ridge Office Investment, LLC | ||||||||||||
| December 31, | 2009 | 2008 | 2007 | |||||||||
Balance Sheets |
||||||||||||
Current assets |
$ | 891,233 | $ | 540,105 | $ | 440,256 | ||||||
Non-current assets |
7,432,268 | 7,619,352 | 7,815,892 | |||||||||
Liabilities |
6,480,230 | 6,548,760 | 6,644,206 | |||||||||
Equity |
1,843,271 | 1,610,697 | 1,611,942 | |||||||||
Statements of Income |
||||||||||||
Revenue |
$ | 1,239,137 | $ | 1,014,136 | $ | 941,520 | ||||||
Expenses |
1,006,563 | 1,019,577 | 893,320 | |||||||||
Net income (loss) |
$ | 232,574 | $ | (5,441 | ) | $ | 48,200 | |||||
We purchased Chesapeake Custom Homes, L.L.C.’s 12.50% membership interest at the book value
which was equivalent to the fair value. Accordingly, we did not record any goodwill with this
purchase.
We lease space for our headquarters office and branch location in the building owned by
Pointer Ridge at 1525 Pointer Ridge Place, Bowie, Maryland. We eliminate these lease payments in
consolidation. Frank Lucente, a director of Old Line Bancshares, Inc. and Old Line Bank, controls
12.50% of Pointer Ridge and controls the manager of Pointer Ridge.
Loan Portfolio
Loans secured by real estate or luxury boats comprise the majority of the loan portfolio. Old
Line Bank’s loan customers are generally located in the greater Washington, D.C. metropolitan area.
The loan portfolio, net of allowance, unearned fees and origination costs, increased $33.9
million or 14.67% to $265.0 million at December 31, 2009 from $231.1 million at December 31, 2008.
Commercial business loans increased by $4.2 million (6.00%), commercial real estate loans increased
by $13.2 million (11.91%), residential real estate loans (generally home equity and fixed rate home
improvement loans) increased by $10.6 million (82.81%), real estate construction loans (primarily
commercial real estate construction) increased by $7.5 million (32.05%) and consumer loans
decreased by $1.0 million (6.41%) from their respective balances at December 31, 2008.
The loan portfolio, net of allowance, unearned fees and origination costs increased $29.2
million or 14.46% to $231.1 million at December 31, 2008 from $201.9 million at December 31,
2007. Commercial business loans increased by $14.5 million (26.13%), commercial real estate loans
(generally owner-occupied) increased by $14.8 million (15.42%), residential real estate loans
(generally home equity and fixed rate home improvement loans) increased by $1.6 million (14.29%),
real estate construction loans increased by $1.5 million (6.85%) and consumer loans decreased by
$2.9 million (15.68%) from their respective balances at December 31, 2007.
During 2009, we received scheduled loan payoffs on construction loans that negatively
impacted our loan growth for the period. In spite of these payoffs, we experienced a 14.67%
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
44
the entire team will continue to focus their efforts on business development during 2010 and
continue to grow the loan portfolio. However, continued deterioration in the economic climate 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)
| December 31, | 2009 | 2008 | 2007 | |||||||||||||||||||||
Real Estate |
||||||||||||||||||||||||
Commercial |
$ | 124,002 | 46.44 | % | $ | 110,826 | 47.63 | % | $ | 96,018 | 47.26 | % | ||||||||||||
Construction |
30,872 | 11.56 | 23,422 | 10.07 | 21,905 | 10.78 | ||||||||||||||||||
Residential |
23,350 | 8.74 | 12,820 | 5.51 | 11,227 | 5.53 | ||||||||||||||||||
Commercial |
74,175 | 27.78 | 69,961 | 30.07 | 55,513 | 27.32 | ||||||||||||||||||
Consumer |
14,622 | 5.48 | 15,638 | 6.72 | 18,528 | 9.11 | ||||||||||||||||||
| 267,021 | 100.00 | % | 232,667 | 100.00 | % | 203,191 | 100.00 | % | ||||||||||||||||
Allowance for loan
losses |
(2,481 | ) | (1,983 | ) | (1,586 | ) | ||||||||||||||||||
Deferred loan costs, net |
469 | 370 | 337 | |||||||||||||||||||||
| $ | 265,009 | $ | 231,054 | $ | 201,942 | |||||||||||||||||||
The following table presents the maturities or re-pricing periods of selected loans
outstanding at December 31, 2009:
| Loan Maturity Distribution at December 31, 2009 | ||||||||||||||||
| 1 year or less | 1-5 years | After 5 years | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Real Estate |
||||||||||||||||
Commercial |
$ | 26,577 | $ | 78,954 | $ | 18,471 | $ | 124,002 | ||||||||
Construction |
21,022 | 9,730 | 120 | 30,872 | ||||||||||||
Residential |
14,577 | 7,880 | 893 | 23,350 | ||||||||||||
Commercial |
38,954 | 33,573 | 1,648 | 74,175 | ||||||||||||
Consumer |
680 | 982 | 12,960 | 14,622 | ||||||||||||
Total Loans |
$ | 101,810 | $ | 131,119 | $ | 34,092 | $ | 267,021 | ||||||||
Fixed Rates |
$ | 19,841 | $ | 46,545 | $ | 27,858 | $ | 94,244 | ||||||||
Variable Rates |
81,969 | 84,574 | 6,234 | 172,777 | ||||||||||||
Total Loans |
$ | 101,810 | $ | 131,119 | $ | 34,092 | $ | 267,021 | ||||||||
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.
45
The following table outlines those 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
(Dollars in thousands)
| Years Ended December 31, | 2009 | 2008 | ||||||||||||||
| # of | # of | |||||||||||||||
| Borrowers | Borrowers | |||||||||||||||
Hotels |
1 | $ | 1,741 | 3 | $ | 8,563 | ||||||||||
Owner occupied |
— | 1 | 2,882 | |||||||||||||
Single family
acquisition &
development |
2 | 4,028 | 5 | 5,889 | ||||||||||||
| 3 | $ | 5,769 | 9 | $ | 17,334 | |||||||||||
At inception, the total loan and commitment amount were equivalent to an appraised 80% or less
“as is” or “as developed” loan to value. We continually monitor these loans and where appropriate
have received new appraisals on these properties, additional collateral, a payment on the
principal, or have downgraded the risk rating on the loan and increased our loan loss provision
accordingly. In certain cases, these loans have experienced a delay in the project either as a
result of delays in receiving regulatory approvals or the borrower has elected to delay the project
because the current economic climate has caused real estate values to decline. Although payments
on these loans are current, management monitors their performance closely.
At year end, with the exception of the three non-accrual loans and two loans that were 30-89
days past due, all of our loans were performing in accordance with contractual terms. Management
has identified eight additional potential problem loans totaling $6.2 million. Management has
concerns either about the ability of these borrowers to continue to comply with repayment terms
because of the borrower’s potential operating or financial difficulties or the underlying
collateral has experienced a decline in value. These weaknesses have caused management to heighten
the attention given to these credits. During the 1st quarter of 2010, we placed one of
these loans in the amount of $442,242 on non-accrual status. We proceeded with foreclosure on the
real estate that secures this loan. At the foreclosure, there was a buyer for the property and we
anticipate we will have no significant losses on this loan.
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 December
31, 2009, we had three loans totaling $1.6 million that were 90 days past due and were classified
as non-accrual compared to one loan in the amount of $850,675 at December 31, 2008.
During the first quarter of 2008, the borrower on the first non-accrual loan that has a
balance of $810,291 began remitting payments and advised us that the borrower planned to make all
past due interest and principal current prior to June 30, 2009. Through October 2008, the borrower
remitted regular payments plus a portion of the arrearage. In November 2008, the borrower
requested a revision to this repayment schedule with full repayment of all past due amounts to
occur by May 2010. In October 2009, the Borrower re-entered bankruptcy under Chapter 11 of the
United States Bankruptcy Code. A commercial real estate property secures this loan. We have a
hearing scheduled to obtain a “lift stay” on the property. Assuming the court provides the “lift
stay” on the property, we plan to proceed with foreclosure on the property. The loan to value at
inception of this loan was 80% and a recent appraisal indicates that the current loan principal to
value is less than 80%. As of December 31, 2009, the interest
not accrued on this loan was $149,406 none of which was included in net income for the twelve
months ended December 31, 2009. We have not designated a specific allowance for this non-accrual
loan.
46
The second loan is in the amount of approximately $223,000. The value of the collateral is
sufficient to provide repayment and we do not consider this loan impaired. We have proceeded with
foreclosure and received ratification of the foreclosure in March 2010. We have not designated a
specific allowance for this non-accrual loan. As of December 31, 2009, the non-accrued interest
due on this loan was $32,582 none of which was included in net income in the twelve month period
ended December 31, 2009.
The third loan in the amount of $553,039 is a land development loan secured by real estate.
The borrower on this loan has filed bankruptcy. A recent appraisal of the property securing this
loan indicates that the value of the collateral is sufficient to provide repayment and we do not
consider this loan impaired. We plan to proceed with foreclosure on this property. The total
non-accrued interest on this loan at December 31, 2009 was $8,713 none of which was included in net
income in the twelve month period ended December 31, 2009.
In March 2009, we reported that the borrower on an approximately $700,000 residential real
estate mortgage filed bankruptcy. After receipt of an appraisal on the property, we have
restructured this loan. In July, we charged $150,000 of the previously reported $175,000 allocated
allowance to the allowance for loan losses. The borrower has reaffirmed $550,000 of the debt and
began remitting payments. We returned this loan to accrual status in December after six months of
satisfactory repayment history.
47
The table below presents a breakdown of the non-performing loans and accruing past due loans
at December 31, 2009.
Non-Accrual and Past Due Loans
(Dollars in thousands)
| Year Ended December 31, | 2009 | 2008 | ||||||||||||||||||||||
| # of | Account | Interest Not | # of | Account | Interest Not | |||||||||||||||||||
| Borrowers | Balance | Accrued | Borrowers | Balance | Accrued | |||||||||||||||||||
Real Estate |
||||||||||||||||||||||||
Commercial |
3 | $ | 1,586 | $ | 191 | 1 | $ | 851 | $ | 86 | ||||||||||||||
Construction |
— | — | — | — | ||||||||||||||||||||
Residential |
— | — | — | — | ||||||||||||||||||||
Commercial |
— | — | — | — | ||||||||||||||||||||
Consumer |
— | — | — | — | ||||||||||||||||||||
Total non-performing assets |
3 | $ | 1,586 | $ | 191 | 1 | $ | 851 | $ | 86 | ||||||||||||||
Non-performing assets as
a percentage of: |
||||||||||||||||||||||||
Total gross loans |
0.59 | % | 0.37 | % | ||||||||||||||||||||
Total assets |
0.44 | % | 0.27 | % | ||||||||||||||||||||
Accruing past due loans: |
||||||||||||||||||||||||
30-89 days past due |
2 | $ | 581 | — | ||||||||||||||||||||
90 or more days past due |
— | — | ||||||||||||||||||||||
Total accruing past due loans |
2 | $ | 581 | — | ||||||||||||||||||||
Ratio of accruing past due
loans to total loans: |
||||||||||||||||||||||||
30-89 days past due |
0.22 | % | — | % | ||||||||||||||||||||
90 or more days past due |
— | — | ||||||||||||||||||||||
Total accruing past due loans |
0.22 | % | — | % | ||||||||||||||||||||
We classify any property acquired as a result of foreclosure on a mortgage loan as
foreclosed real estate and record it at the lower of the unpaid principal balance or fair value at
the date of acquisition and subsequently carry the loan at the lower of cost or net realizable
value. We charge any required write-down of the loan to its net realizable value against the
allowance for loan losses at the time of foreclosure. We charge to expense any subsequent
adjustments to net realizable value. Upon foreclosure, Old Line Bank generally requires an
appraisal of the property and, thereafter, appraisals of the property on at least an annual basis
and external inspections on at least a quarterly basis. As of December 31, 2009, 2008, and 2007,
we held no real estate acquired as a result of foreclosure.
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
48
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.
As of December 31, 2009 we had no impaired loans as outlined above and one restructured loan.
At December 31, 2008, the only restructured loan was the $810,291 loan outlined above. A continued
decline in the economy may adversely affect our asset quality.
Bank owned life insurance
In June 2005, we purchased $3.3 million of BOLI on the lives of our executive officers,
Messrs. Cornelsen and Burnett and Ms. Rush. With a new $4 million investment made in February
2007, we increased the insurance on Messrs. Cornelsen and Burnett and expanded the coverage of the
insurance policies to insure the lives of several other officers of Old Line Bank. We anticipate
the earnings on these policies will partially offset 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. Higher rates caused increased
earnings during 2009 and the cash surrender value of the insurance policies increased by $326,840.
There are no post retirement death benefits associated with the BOLI policies.
On January 3, 2006, Old Line Bank entered into Salary Continuation Agreements and Supplemental
Life Insurance Agreements, with Mr. Cornelsen, Mr. Burnett and Ms. Rush and started accruing for
the related post retirement benefits. Under these agreements, benefits accrue over time from the
date of the agreement until the executive reaches the age of 65. Upon full vesting of the benefit,
the executives will be paid the following annual amounts for 15 years: Mr. Cornelsen — $159,738;
Mr. Burnett — $24,651; and Ms. Rush — $77,783. Mr. Burnett will receive an additional $5,895 per
year if he continues his employment with us until he reaches age 68. Under the Supplemental Life
Insurance Agreements, Old Line Bank is obligated to cause the payment of death benefits to the
executives’ designated beneficiaries in the following amounts: Mr. Cornelsen—$1.3 million;
Mr. Burnett—$703,465; Ms. Rush—$797,618 ; and all other officers-$1.8 million. Old Line Bank has
funded these obligations through the BOLI outlined above. There is no obligation to provide any of
the insured executives’ beneficiaries post retirement benefits from the BOLI.
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 December 31, 2009, the deposit portfolio had grown to $286.3 million, a $54.9 million or
23.73% increase over the December 31, 2008 level of $231.4 million. Noninterest-bearing deposits
increased $1.0 million during the period to $40.9 million from $39.9 million primarily due to the
establishment of new customer demand deposit accounts and expansion of existing demand deposit
accounts. Interest-bearing deposits grew $53.9 million to $245.5 million from $191.6 million.
Approximately $40.3 million of the increase in interest bearing deposits was in certificates of
deposit, $11.5 million was in money market accounts and $2.1 million was in savings accounts. The
growth in these categories was the result of expansion of existing customer relationships and new
customers. Although we offer competitive interest rates on our interest bearing deposits, we
believe that our growth in these deposits is a result of the customers’ desire to bank with a
quality institution versus high rates.
At December 31, 2008, the deposit portfolio had grown to $231.4 million, a $53.6 million or
30.15% increase over the December 31, 2007 level of $177.8 million. Non-interest bearing deposits
increased $4.8 million during the period to $39.9 million from $35.1 million primarily due to
increases in commercial checking accounts that was caused by new accounts established in our
branches. Interest-bearing deposits grew $48.9 million to $191.6 million from $142.7 million. The
growth in interest-bearing deposits was in certificates of deposit which grew $52.0 million from
$102.2 million to $154.2 million. A $2.0 million decline in money market and NOW and a $1.1
million decline in savings accounts partially offset this growth. Certificate of deposit accounts
grew due to new customer relationships and the transfer of funds from savings accounts.
49
In the first quarter of 2006, we began acquiring brokered certificate of deposits through the
Promontory Interfinancial Network. Through this deposit matching network and its certificate of
deposit account registry service (CDARS), we obtained the ability to offer our customers access to
FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we
place funds through CDARS on behalf of a customer, we receive matching deposits through the
network’s reciprocal deposit program. We can also place deposits through this network without
receiving matching deposits. At December 31, 2009, we had $31.8 million in CDARS through the
reciprocal deposit program compared to $13.5 million at December 31, 2008. At December 31, 2009,
we had received $25.2 million in deposits through the CDARS network that were not reciprocal
deposits. We had $5 million in other brokered certificates of deposit as of December 31, 2008 and $0 as of December
31, 2009 and 2007. 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.
The following is a summary of the maturity distribution of certificates of deposit as of
December 31, 2009.
| Certificate of Deposit Maturity Distribution | ||||||||||||||||
| December 31, 2009 | ||||||||||||||||
| Three Months | ||||||||||||||||
| Three Months | to | Over | ||||||||||||||
| or | Twelve | Twelve | ||||||||||||||
| Less | Months | Months | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Certificates of deposit |
||||||||||||||||
Less than $100,000 |
$ | 55,536 | $ | 54,587 | $ | 22,458 | $ | 132,581 | ||||||||
Greater than or
equal to $100,000 |
8,249 | 27,846 | 25,785 | 61,880 | ||||||||||||
Total |
$ | 63,785 | $ | 82,433 | $ | 48,243 | $ | 194,461 | ||||||||
Borrowings
Old Line Bank has available lines of credit, including overnight federal funds and repurchase
agreements from its correspondent banks totaling $32.0 million as of December 31, 2009. Old Line
Bank has an additional secured line of credit from the Federal Home Loan Bank of Atlanta (FHLB) of
$103.7 million at December 31, 2009 and $85.4 million at December 31, 2008. 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. Therefore, we have
provided collateral to support up to $39.3 million of borrowings. Of this, we had borrowed $15
million at December 31, 2009, 2008, and 2007. We may increase availability by providing additional
collateral.
Short term borrowings consisted of short term promissory notes issued to Old Line Bank’s
customers, federal funds purchased and advances from the FHLB. Old Line Bank has an enhancement to
the basic non-interest bearing demand deposit account for its commercial clients. This service
electronically sweeps excess funds from the customer’s account into an interest bearing Master Note
with Old Line Bank. These Master Notes re-price daily and have maturities of 270 days or less. At
December 31, 2009, Old Line Bank had $11.1 million outstanding in these short term promissory notes
with an average interest rate of 0.50%. At December 31, 2008, Old Line Bank had $17.8 million
outstanding with an average interest rate of 0.50%. At December 31, 2009 and 2008, Old Line Bank
did not have any borrowings in overnight federal funds with the FHLB or any other short term
borrowings.
At December 31, 2009 and December 31, 2008, Old Line Bank had three advances in the amount of
$5.0 million each, from the FHLB totaling $15.0 million. On November 24, 2007, Old Line Bank
borrowed $5.0 million with an interest rate of 3.66%. Interest is due on the 23rd day
of each February, May, August and November,
50
commencing on February 23, 2008. On November 23, 2008, or any interest payment date thereafter,
the FHLB has the option to convert the interest rate on this advance from a fixed rate to a three
(3) month London Interbank Offer Rate (LIBOR) based variable rate. Old Line Bank must pay this
advance in full on November 23, 2010.
On December 12, 2007, Old Line Bank borrowed another $5.0 million from the FHLB. The interest
rate on this advance is 3.3575% and interest is payable on the 12th day of each March,
June, September and December, commencing on March 12, 2008. On December 12, 2008, or any interest
payment date thereafter, the FHLB has the option to convert the interest rate on this advance to a
fixed rate based on the three (3) month LIBOR. The maturity date on this advance is December 12,
2012.
On December 19, 2007, Old Line Bank borrowed an additional $5.0 million from the FHLB. The
interest rate on this borrowing is 3.119% and is payable on the 19th day of each month.
On January 22, 2008 or any interest payment date thereafter, the FHLB has the option to convert the
interest rate on this advance from a fixed rate to a one (1) month LIBOR based variable rate. This
borrowing matures on December 19, 2012.
As outlined previously, as a result of increasing our membership interest in Pointer Ridge to
62.50%, we have consolidated their results of operation from the date of acquisition. Prior to the
date of acquisition, we accounted for our investment in Pointer Ridge using the equity method. On
August 25, 2006, Pointer Ridge entered into an Amended and Restated Promissory Note in the
principal amount of $6.6 million. This loan accrues interest at a rate of 6.28% through September
5, 2016. After September 5, 2016, the rate adjusts to the greater of (i) 6.28% plus 200 basis
points or (ii) the Treasury Rate (as defined in the Amended Promissory Note) plus 200 basis points.
At December 31, 2009 and 2008, Pointer Ridge had borrowed $6.5 million under the Amended
Promissory Note. We have guaranteed to the lender payment of up to 62.50% of the loan payment plus
any costs the lender incurs resulting from any omissions or alleged acts or omissions by Pointer
Ridge arising out of or relating to misapplication or misappropriation of money, rents received
after an event of default, waste or damage to the property, failure to maintain insurance, fraud or
material misrepresentation, filing of bankruptcy or Pointer Ridge’s failure to maintain its status
as a single purpose entity.
For additional information about our borrowings, see Notes 10 and 11 to our consolidated
financial statements.
Liquidity
Our overall asset/liability strategy takes into account our need to maintain adequate
liquidity to fund asset growth and deposit runoff. Our management monitors the liquidity position
daily in conjunction with Federal Reserve guidelines. We have credit lines unsecured and secured
available from several correspondent banks totaling $32.0 million. Additionally, we may borrow
funds from the Federal Home Loan Bank of Atlanta 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 or pledge investment
securities to create additional liquidity. From time to time we may sell or participate out loans
to create additional liquidity as required. Additional sources of liquidity include funds held in
time deposits and cash from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks, federal funds sold and time
deposits in other banks. On December 31, 2009, we had $7.4 million in cash and due from banks,
$4.0 million in interest bearing accounts with other banks, $81,138 in federal funds sold and
overnight investments and $15.0 million in time deposits in other banks. As of December 31, 2008,
we had $8.8 million in cash and due from banks, $2.1 million in federal funds sold and other
overnight investments and $13.3 million in time deposits in other banks. Federal funds decreased
because we deployed these funds to loans.
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.
51
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 turmoil in the financial markets occurs and our depositors lose confidence in us, we could
experience liquidity issues.
Capital
Our stockholders’ equity amounted to $36.6 million at December 31, 2009 and $42.3 million at
December 31, 2008. We are considered “well capitalized” under the risk-based capital guidelines
adopted by the Federal Reserve. Stockholders’ equity decreased during the twelve month period
primarily because of the $7.2 million repurchase of the preferred stock and warrant issued to the
U.S. Treasury, the net value of the dividends and accretion on the preferred stock of $485,993, the
$463,483 common stock cash dividend and the $23,731 after tax unrealized loss on available for
securities. These items were partially offset by net income attributable to Old Line Bancshares,
Inc. of $2.0 million and the $119,711 adjustment for stock based compensation awards. By all
regulatory measures, we remain well capitalized.
The following table shows Old Line Bancshares, Inc.’s regulatory capital ratios and the
minimum capital ratios currently required by its banking regulator to be “well capitalized.” For a
discussion of these capital requirements, see “Supervision and
Regulation — Capital Adequacy
Guidelines.”
Risk Based Capital Analysis
(Dollars in thousands)
| December 31, | 2009 | 2008 | 2007 | |||||||||
Tier 1 Capital |
||||||||||||
Preferred and common stock |
$ | 39 | $ | 7,043 | $ | 41 | ||||||
Additional paid-in capital |
29,035 | 28,839 | 30,465 | |||||||||
Retained earnings |
6,498 | 5,412 | 4,155 | |||||||||
Less: disallowed assets |
— | — | — | |||||||||
Total Tier 1 Capital |
$ | 35,572 | $ | 41,294 | $ | 34,661 | ||||||
Tier 2 Capital: |
||||||||||||
Allowance for loan losses |
2,482 | 1,984 | 1,587 | |||||||||
Total Risk Based Capital |
$ | 38,054 | $ | 43,278 | $ | 36,248 | ||||||
Risk weighted assets |
$ | 277,989 | $ | 248,555 | $ | 222,033 | ||||||
| Regulatory | ||||||||||||||||
| Minimum | ||||||||||||||||
Capital Ratios: |
||||||||||||||||
Tier 1 risk based capital
ratio |
12.8 | % | 16.6 | % | 15.6 | % | 4.00 | % | ||||||||
Total risk based capital
ratio |
13.7 | % | 17.4 | % | 16.3 | % | 8.00 | % | ||||||||
Leverage ratio |
10.0 | % | 14.0 | % | 14.6 | % | 4.00 | % | ||||||||
52
Return on Average Assets and Average Equity
The ratio of net income to average equity and average assets and certain other ratios are as
follows:
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Average total assets |
$ | 341,973 | $ | 272,661 | $ | 228,575 | ||||||
Average equity |
39,010 | 34,820 | 35,464 | |||||||||
Net income attributable to Old
Line Bancshares, Inc. |
2,036 | 1,756 | 1,583 | |||||||||
Cash dividends declared common
stock |
463 | 470 | 505 | |||||||||
Dividend payout ratio for period |
22.74 | % | 26.77 | % | 31.91 | % | ||||||
Return on average assets |
0.60 | % | 0.64 | % | 0.69 | % | ||||||
Return on average equity |
5.13 | % | 5.04 | % | 4.46 | % | ||||||
Average stockholders’ equity to
average total assets |
11.41 | % | 12.77 | % | 15.52 | % | ||||||
53
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements
We are 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. We use these financial instruments to meet the financing
needs of our customers. These financial instruments involve, to varying degrees, elements of
credit, interest rate, and liquidity risk. These do not represent unusual risks and management
does not anticipate any losses which would have a material effect on Old Line Bancshares, Inc. We
also have operating lease obligations.
Outstanding loan commitments and lines and letters of credit at December 31 of 2009, 2008 and
2007 are as follows:
| December 31, | 2009 | 2008 | 2007 | |||||||||
| (Dollars in thousands) | ||||||||||||
Commitments to
extend credit and
available credit lines: |
||||||||||||
Commercial |
$ | 21,153 | $ | 23,074 | $ | 15,506 | ||||||
Real
estate-undisbursed
development and
construction |
14,573 | 21,981 | 35,966 | |||||||||
Consumer |
9,015 | 6,379 | 6,142 | |||||||||
| $ | 44,741 | $ | 51,434 | $ | 57,614 | |||||||
Standby letters of credit |
$ | 3,883 | $ | 1,583 | $ | 1,634 | ||||||
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. We generally require collateral to support
financial instruments with credit risk on the same basis as we do for balance sheet instruments.
Management generally bases the collateral required on the 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
we expect many of the commitments to expire without being drawn upon, and since it is unlikely that
customers will draw upon their lines of credit in full at any time, the total commitment amount or
line of credit amount does not necessarily represent future cash requirements. We evaluate each
customer’s credit-worthiness on a case-by-case basis. During this period of economic turmoil, we
have re-evaluated many of our commitments to extend credit. Because we conservatively underwrite
these facilities at inception, we have not had 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 $14.6 million, or
32.66% of the $44.7 million, are generally short-term and turn over rapidly, with principal
repayment from permanent financing arrangements upon completion of construction or from sales of
the properties financed.
Standby letters of credit are conditional commitments issued to guarantee the performance of a
customer to a third party. Our exposure to credit loss in the event of nonperformance by the
customer is the contract amount of the commitment. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. 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.
54
We have various financial obligations, including contractual obligations and commitments.
The following table presents, as of December 31, 2009, significant fixed and determinable
contractual obligations to third parties by payment date.
Contractual Obligations
(Dollars in thousands)
(Dollars in thousands)
| Within | One to | Three to | Over | |||||||||||||||||
| one year | three years | five years | five years | Total | ||||||||||||||||
Noninterest-bearing
deposits |
$ | 40,883 | $ | — | $ | — | $ | — | $ | 40,883 | ||||||||||
Interest-bearing deposits |
197,739 | 42,527 | 5,716 | — | 245,982 | |||||||||||||||
Short-term borrowings |
16,149 | — | — | — | 16,149 | |||||||||||||||
Long-term borrowings |
— | 10,000 | — | 6,454 | 16,454 | |||||||||||||||
Purchase obligations |
1,446,791 | 721,742 | 702,844 | — | 2,871,377 | |||||||||||||||
Operating leases |
650 | 1,327 | 1,157 | 9,245 | 12,379 | |||||||||||||||
Total |
$ | 1,702,212 | $ | 775,596 | $ | 709,717 | $ | 15,699 | $ | 3,203,224 | ||||||||||
Our operating lease obligations represent rental payments for eight branches, a loan
production office and our main office. We lease our main office and our Bowie branch location from
Pointer Ridge. We have excluded 62.50% of these lease payments in consolidation. The
interest-bearing obligations include accrued interest. Purchase obligations amounts represent
estimated obligations under agreements to purchase goods or services that are enforceable and
legally binding. In 2009, the purchase obligations amounts include principal and interest due on
participation loans, estimated obligations under data processing contracts, income tax payable and
accounts payable for goods and services. In subsequent years, the purchase obligations amounts
primarily relate to estimated obligations under data processing contracts.
55
Reconciliation of Non-GAAP Measures
Below is a reconciliation of the FTE adjustments and the GAAP basis information presented in
this report:
Twelve months ended December 31, 2009
| Net | ||||||||||||
| Net Interest | Interest | |||||||||||
| Income | Yield | Spread | ||||||||||
GAAP net interest income |
$ | 11,516,002 | 3.73 | % | 3.39 | % | ||||||
Tax equivalent adjustment |
||||||||||||
Federal funds sold |
1 | — | — | |||||||||
Investment securities |
59,779 | 0.02 | 0.02 | |||||||||
Loans |
66,590 | 0.02 | 0.02 | |||||||||
Total tax equivalent adjustment |
126,370 | 0.04 | 0.04 | |||||||||
Tax equivalent interest yield |
$ | 11,642,372 | 3.77 | % | 3.43 | % | ||||||
Twelve months ended December 31, 2008
| Net | ||||||||||||
| Net Interest | Interest | |||||||||||
| Income | Yield | Spread | ||||||||||
GAAP net interest income |
$ | 9,514,501 | 3.77 | % | 3.17 | % | ||||||
Tax equivalent adjustment |
||||||||||||
Federal funds sold |
5,169 | 0.00 | 0.00 | |||||||||
Investment securities |
61,834 | 0.03 | 0.03 | |||||||||
Loans |
— | — | — | |||||||||
Total tax equivalent adjustment |
67,003 | 0.03 | 0.03 | |||||||||
Tax equivalent interest yield |
$ | 9,581,504 | 3.80 | % | 3.20 | % | ||||||
Twelve months ended December 31, 2007
| Net | ||||||||||||
| Net Interest | Interest | |||||||||||
| Income | Yield | Spread | ||||||||||
GAAP net interest income |
$ | 8,291,399 | 3.94 | % | 2.94 | % | ||||||
Tax equivalent adjustment |
||||||||||||
Federal funds sold |
25,885 | 0.01 | 0.01 | |||||||||
Investment securities |
72,309 | 0.03 | 0.03 | |||||||||
Loans |
— | — | — | |||||||||
Total tax equivalent adjustment |
98,194 | 0.04 | 0.04 | |||||||||
Tax equivalent interest yield |
$ | 8,389,593 | 3.98 | % | 2.98 | % | ||||||
56
Impact of Inflation and Changing Prices and Seasonality
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 price index. As discussed in Item 7A, 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.
The fair values and the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by other third-party sources,
when available.
The most significant accounting policies that we follow are presented in Note 1 to the
consolidated financial statements. These policies, along with the disclosures presented in the
other financial statement notes and in this financial review, provide information on how we value
significant assets and liabilities in the financial statements and how we determine those values.
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 allowance for loan losses as the accounting area that requires the most
subjective or complex judgments, and as such could be most subject to revision as new information
becomes available.
The allowance for loan losses represents management’s best estimate of the losses known and
inherent in the loan 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). Determining
the amount of the allowance for loan losses is considered a critical accounting estimate because it
requires significant estimates, assumptions, and judgments. The loan portfolio also represents the
largest asset type on the consolidated balance sheets.
We evaluate the adequacy of the allowance for loan losses based upon loan categories except
for delinquent loans and loans for which management has knowledge about possible credit problems of
the borrower or knowledge of problems with loan collateral, which management evaluates separately
and assigns loss amounts based upon the evaluation. We apply loss ratios to each category of loan
other than commercial loans (including letters of credit and unused commitments), where we further
divide the loans by risk rating and apply loss ratios by risk rating, to
57
determine estimated loss amounts. Categories of loans are installment and other consumer
loans (other than boat loans), boat loans, mortgage loans (commercial real estate, residential real
estate and real estate construction) and commercial loans.
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 the “Provision for Loan Losses” section of
this financial review.
New Authoritative Accounting Guidance
On July 1, 2009, the Accounting Standards Codification (“ASC”) became the Federal Accounting
Standards Board’s (“FASB”) officially recognized source of authoritative U.S. generally accepted
accounting principles applicable to all public and non-public companies, non-governmental entities,
superseding existing FASB, ACIPA, EITF and related literature. Rules and interpretive releases of
the SEC under the authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. All other accounting literature is considered non-authoritative. The switch to
the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section, and Paragraph structure.
FASB ASC Topic 260-Earnings Per Share. On January 1, 2009, we adopted new authoritative
accounting guidance under FASB ASC Topic 260-Earnings Per Share which provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and entities shall include these
participating securities in the computation of earnings per share pursuant to the two-class method.
We adopted ASC Topic 260 and it did not have any impact on our consolidated results of operations
or financial position.
FASB ASC Topic 320-Investments-Debt and Equity Securities. New authoritative accounting
guidance under ASC Topic 320-Investments-Debt and Equity Securities (i) changes existing guidance
for determining whether an impairment is other than temporary to debt securities and (ii) replaces
the existing requirement that the entity’s management assert it has both the intent and ability to
hold an impaired security until recovery with a requirement that management assert: (a) it does not
have the intent to sell the security; and (b) it is more likely than not it will not have to sell
the security before recovery of its cost basis. Under ASC Topic 320, entities that deem that the
declines in the fair value of held-to-maturity and available-for-sale securities below their cost
are other than temporary will reflect these other than temporary losses in earnings as realized
losses to the extent the impairment is related to credit losses. Entities will record the amount
of the impairment related to other factors in other comprehensive income. ASC Topic 320 became
effective for interim and annual reporting periods ended after June 15, 2009. Adoption of this new
guidance did not have a material impact on our consolidated results of operations or financial
position.
FASB ASC Topic 715-Compensation Retirement Benefits. New authoritative guidance under ASC
Topic 715-Compensation Retirement Benefits provides guidance related to an employer’s disclosure
about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC
Topic 715, disclosures should provide users of financial statements with an understanding of how
managers of the plan make allocation decisions, the factors that are pertinent to an understanding
of investment policies and strategies, the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period and
significant concentrations of risk within plan assets. ASC Topic 715 becomes effective for
financial statements beginning with
58
the financial statements for the year ended December 31, 2009. Adoption of this guidance did not
have a material impact on our consolidated results of operations or financial position.
FASB ASC Topic 805- Business Combinations. The new authoritative guidance under ASC Topic 805
Business Combinations became applicable to how we account for business combinations closing on or
after January 1, 2009. ASC Topic 805 applies to all transactions and other events in which one
entity obtains control over one or more other businesses. ASC Topic 805 requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition date. The acquirer
must recognize and measure at fair value contingent consideration when the acquirer can determine
the amount of that consideration beyond a reasonable doubt. The fair value approach replaces the
cost-allocation process required under previous accounting guidance whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities assumed based on their
estimated fair value. ASC Topic 805 requires the acquirer to expense acquisition related costs as
incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. If the acquirer cannot reasonably estimate
the value of the asset or liability, the acquirer would generally recognize the value of the asset
or liability in accordance with ASC Topic 450-Contingencies. Under ASC Topic 805, in order for the
acquirer to accrue for a restructuring plan in purchase accounting it must meet the requirements of
ASC Topic 420-Exit or Disposal Cost Obligations. The acquirer is to recognize contingencies at
fair value, unless the contingencies are not likely to materialize, in which case, the acquirer
should not recognize anything in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of ASC Topic 450-Contingencies. We did
not have any business combination closing on or after January 1, 2009 and the adoption of ASC Topic
805 did not impact our consolidated results of operations or financial condition.
FASB ASC Topic 810-Consolidation. New authoritative guidance under ASC Topic 810 amended
prior guidance to establish accounting and reporting standards for the non-controlling interest in
a subsidiary and for the deconsolidation of a subsidiary. Under ASC Topic 810, a non-controlling
interest in a subsidiary, which is sometimes referred to as a minority interest, is an ownership
interest in the consolidated entity that the consolidated entity should report as a component of
equity in the consolidated financial statements. Among other requirements, ASC Topic 810 requires
consolidated net income be reported at amounts attributable to both the parent and non-controlling
interest. It also requires disclosure, on the consolidated income statement, of the amounts of
consolidated net income attributable to the parent and to the non-controlling interest. ASC Topic
810 became effective on January 1, 2009, and it affected the way we reported the non-controlling
interest in Pointer Ridge, but it did not have a material impact on our consolidated results of
operations or financial position.
Further new authoritative guidance under ASC Topic 810 amends prior guidance to change how a
company determines when an entity that is insufficiently capitalized or is not controlled though
voting (or similar rights) should be consolidated. ASC Topic 810 requires a company to determine
whether to consolidate an entity 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. The new authoritative guidance 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 effect on the entity’s financial
statements. The new authoritative guidance under ASC Topic 810 will be effective January 1, 2010
and we do not expect that it will have a material impact on our consolidated results of operations
or financial position.
FASB ASC Topic 820-Fair Value Measurements and Disclosures. New authoritative guidance under
ASC Topic 820-Fair Value Measurements and Disclosures affirms that the objective of fair value when
the market for an asset is not active is the price that the company would receive to sell the asset
in an orderly transaction, and clarifies and includes additional factors for determining whether
there is a significant decrease in market activity for an asset when the market for that asset is
not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction
was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance
to expand certain disclosure requirements. We adopted the new accounting guidance under ASC Topic
820 during the first quarter of 2009. Adoption of the new guidance did not have a material impact
on our consolidated results of operations or financial position.
59
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under
ASC Topic 820 provides guidance for measuring fair value of a liability in circumstances in which a
quoted price in an active market for the identical liability is not available. In such instances,
a reporting entity must measure fair value utilizing a valuation technique that uses (i) the quoted
price of the identical liability when traded as an asset, (ii) quoted prices for similar
liabilities or similar liabilities when traded as assets, iii) another valuation technique that is
consistent with the existing principles of ASC Topic 820, such as an income approach or market
approach. The new accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability. The
forgoing new authoritative guidance under ASC Topic 820 was effective for our financial statements
beginning October 1, 2009 and it did not have a significant impact on our consolidated results of
operations or financial position.
FASB ASC Topic 825-Financial Instruments. New authoritative accounting guidance under ASC
Topic 825 Financial Instruments requires an entity to provide disclosures about fair value of
financial instruments in interim financial information and amends prior guidance to require these
disclosures in summarized financial information at interim reporting periods. We include the new
interim disclosures required under Topic 825 in the Notes to Consolidated Financial Statements
FASB ASC Topic 855-Subsequent Events. New authoritative guidance under ASC Topic 855
Subsequent Events establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before an entity issues financial statements or the entity
has the financial statements available for issuance. ASC Topic 855 defines (i) the period after
the balance sheet during which a reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements, and (iii) the disclosures an entity
should make about events or transactions that occurred after the balance sheet date. This new
authoritative guidance under ASC Topic 855 became effective for financial statements for periods
ending after June 15, 2009 and did not have a material impact on our consolidated results of
operation or financial position.
FASB ASC Topic 860-Transfers and Servicing. New authoritative guidance under ASC Topic
860-Transfers and Servicing 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. The new authoritative accounting guidance
eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also requires additional
disclosures about all continuing involvements with transferred financial assets including
information about gains and losses resulting from transfers during the period. The new
authoritative guidance under ASC Topic 860 will be effective January 1, 2010 and we do not expect
that it will have a material impact on our consolidated results of operation or financial position.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair
value of a financial instrument. Various factors, including interest rates, foreign exchange
rates, commodity prices, or equity prices, may cause these changes. We are subject to market risk
primarily through the effect of changes in interest rates on our portfolio of assets and
liabilities. Foreign exchange rates, commodity prices, or equity prices do not pose significant
market risk to us.
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.
60
The Asset and Liability Committee establishes policies to control interest rate sensitivity.
Interest rate sensitivity is the volatility of a bank’s earnings resulting from movements in market
interest rates. Management monitors rate sensitivity in order to reduce vulnerability to interest
rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity.
Monthly financial reports supply management with information to evaluate and manage rate
sensitivity and adherence to policy. Old Line Bank’s asset/liability policy’s goal is to manage
assets and liabilities in a manner that stabilizes net interest income and net economic value
within a broad range of interest rate environments. Adjustments to the mix of assets and
liabilities are made periodically in an effort to achieve dependable, steady growth in net interest
income regardless of the behavior of interest rates in general.
As part of the interest rate risk sensitivity analysis, the Asset and Liability Committee
examines the extent to which Old Line Bank’s assets and liabilities are interest rate sensitive and
monitors the interest rate sensitivity gap. An interest rate sensitive asset or liability is one
that, within a defined time period, either matures or experiences an interest rate change in line
with general market rates. The interest rate sensitivity gap is the difference between
interest-earning assets and interest-bearing liabilities scheduled to mature or re-price within
such time period. A gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect net interest income,
while a positive gap would tend to result in an increase in net interest income. During a period of declining interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to adversely affect net interest income. If
re-pricing of assets and liabilities were equally flexible and moved concurrently, the impact of
any increase or decrease in interest rates on net interest income would be minimal.
Old Line Bank currently has a negative gap over the short term, which suggests that the net
interest income 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.
61
The table below presents Old Line Bank’s interest rate sensitivity at December 31, 2009.
Because certain categories of securities and loans are prepaid before their maturity date even
without regard to interest rate fluctuations, we have made certain assumptions to calculate the
expected maturity of securities and loans.
| Interest Sensitivity Analysis | ||||||||||||||||||||
| December 31, 2009 | ||||||||||||||||||||
| Maturing or Repricing | ||||||||||||||||||||
| Within | 4-12 | 1-5 | Over | |||||||||||||||||
| 3 Months | Months | Years | 5 Years | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Interest Earning Assets: |
||||||||||||||||||||
Investment securities |
$ | 250 | $ | 1,413 | $ | 4,722 | $ | 27,435 | $ | 33,820 | ||||||||||
Time deposits in other banks |
8,407 | 6,624 | — | — | 15,031 | |||||||||||||||
Loans |
75,468 | 26,342 | 131,119 | 34,092 | 267,021 | |||||||||||||||
Federal funds sold |
81 | — | — | — | 81 | |||||||||||||||
Total interest earning assets |
84,206 | 34,379 | 135,841 | 61,527 | 315,953 | |||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||
Interest-bearing transaction deposits |
29,095 | 14,330 | — | — | 43,425 | |||||||||||||||
Savings accounts |
2,527 | 2,526 | 2,526 | — | 7,579 | |||||||||||||||
Time deposits |
63,785 | 82,433 | 48,243 | — | 194,461 | |||||||||||||||
Total interest-bearing deposits |
95,407 | 99,289 | 50,769 | — | 245,465 | |||||||||||||||
FHLB advances |
15,000 | — | — | — | 15,000 | |||||||||||||||
Other borrowings |
11,150 | — | — | — | 11,150 | |||||||||||||||
Total interest-bearing liabilities |
121,557 | 99,289 | 50,769 | — | 271,615 | |||||||||||||||
Period Gap |
$ | (37,351 | ) | $ | (64,910 | ) | $ | 85,072 | $ | 61,527 | $ | 44,338 | ||||||||
Cumulative Gap |
$ | (37,351 | ) | $ | (102,261 | ) | $ | (17,189 | ) | $ | 44,338 | |||||||||
Cumulative Gap/Total Assets |
(10.46 | %) | (28.63 | %) | (4.81 | %) | 12.41 | % | ||||||||||||
62
| Item 8. | Financial Statements |
The following consolidated financial statements are filed with this report:
Report
of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2009, 2008 and 2007
Consolidated Statements of Income — For the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Changes in Stockholders’ Equity — For the years ended December
31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows — For the years ended December 31, 2009, 2008 and
2007
Notes to Consolidated Financial Statements
63
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Old Line Bancshares, Inc.
Bowie, Maryland
Old Line Bancshares, Inc.
Bowie, Maryland
We have audited the accompanying consolidated balance sheets of Old Line Bancshares, Inc. and
Subsidiaries as of December 31, 2009, 2008, and 2007, and the related consolidated statements of
income, changes in stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2009. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board in the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Old Line Bancshares, Inc. and Subsidiaries as of
December 31, 2009, 2008, and 2007, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
Baltimore, Maryland
March 22, 2010
March 22, 2010
101 E. Chesapeake Avenue, Suite 300, Baltimore, Maryland 21286
410-583-6990 FAX 410-583-7061
Website: www.Rowles.com
410-583-6990 FAX 410-583-7061
Website: www.Rowles.com
64
| December 31, | 2009 | 2008 | 2007 | |||||||||
| Assets |
||||||||||||
Cash and due from banks |
$ | 7,402,137 | $ | 8,823,170 | $ | 3,172,089 | ||||||
Interest bearing accounts |
3,953,312 | — | — | |||||||||
Federal funds sold |
81,138 | 2,140,525 | 9,822,079 | |||||||||
Total cash and cash equivalents |
11,436,587 | 10,963,695 | 12,994,168 | |||||||||
Time deposits in other banks |
15,031,102 | 13,267,000 | 2,000,000 | |||||||||
Investment securities available for sale |
28,012,948 | 29,565,976 | 9,393,356 | |||||||||
Investment securities held to maturity |
5,806,507 | 8,003,391 | 2,301,591 | |||||||||
Loans, less allowance for loan losses |
265,008,669 | 231,053,618 | 201,941,667 | |||||||||
Restricted equity securities at cost |
2,957,650 | 2,126,550 | 2,080,250 | |||||||||
Investment in real estate LLC |
— | — | 805,971 | |||||||||
Premises and equipment |
17,326,099 | 12,388,046 | 4,207,395 | |||||||||
Accrued interest receivable |
1,055,249 | 1,091,560 | 918,078 | |||||||||
Prepaid income taxes |
— | 35,649 | — | |||||||||
Deferred income taxes |
178,574 | — | 161,940 | |||||||||
Bank owned life insurance |
8,422,879 | 8,096,039 | 7,769,290 | |||||||||
Other assets |
1,982,262 | 1,139,101 | 637,570 | |||||||||
Total assets |
$ | 357,218,526 | $ | 317,730,625 | $ | 245,211,276 | ||||||
| Liabilities and Stockholders’ Equity |
||||||||||||
Deposits |
||||||||||||
Non-interest bearing |
$ | 40,883,419 | $ | 39,880,119 | $ | 35,141,289 | ||||||
Interest bearing |
245,464,373 | 191,550,521 | 142,670,944 | |||||||||
Total deposits |
286,347,792 | 231,430,640 | 177,812,233 | |||||||||
Short term borrowings |
16,149,939 | 17,773,934 | 16,347,096 | |||||||||
Long term borrowings |
16,454,067 | 21,531,133 | 15,000,000 | |||||||||
Accrued interest payable |
517,889 | 625,446 | 693,868 | |||||||||
Income tax payable |
175,543 | — | 238,226 | |||||||||
Deferred income taxes |
— | 65,651 | — | |||||||||
Other liabilities |
941,165 | 4,012,968 | 488,599 | |||||||||
Total liabilities |
320,586,395 | 275,439,772 | 210,580,022 | |||||||||
Stockholders’ equity |
||||||||||||
Preferred stock, par value $0.01 per share and additional
paid in
capital; 7,000 shares issued and outstanding in 2008 |
— | 6,703,591 | — | |||||||||
Common stock, par value $0.01 per share; authorized
15,000,000 shares;
issued and outstanding 3,862,364 in 2009 and 2008 and
4,075,849 in 2007 |
38,624 | 38,624 | 40,758 | |||||||||
Additional paid-in capital |
29,034,954 | 28,838,810 | 30,465,013 | |||||||||
Warrants to purchase 141,892 shares of common stock |
— | 301,434 | — | |||||||||
Retained earnings |
6,498,446 | 5,411,772 | 4,155,232 | |||||||||
Accumulated other comprehensive income |
368,880 | 392,611 | (29,749 | ) | ||||||||
Total Old Line Bancshares, Inc. stockholders’ equity |
35,940,904 | 41,686,842 | 34,631,254 | |||||||||
Non-controlling interest |
691,227 | 604,011 | — | |||||||||
Total stockholders’ equity |
36,632,131 | 42,290,853 | 34,631,254 | |||||||||
Total liabilities and stockholders’ equity |
$ | 357,218,526 | $ | 317,730,625 | $ | 245,211,276 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
65
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Interest revenue |
||||||||||||
Loans, including fees |
$ | 15,304,608 | $ | 14,240,545 | $ | 12,768,154 | ||||||
U.S. Treasury securities |
7,230 | 69,079 | 115,597 | |||||||||
U.S. government agency securities |
296,560 | 181,792 | 288,161 | |||||||||
Mortgage backed securities |
1,059,386 | 356,398 | 48,946 | |||||||||
Municipal securities |
84,797 | 95,822 | 107,852 | |||||||||
Federal funds sold |
1,148 | 285,619 | 1,116,822 | |||||||||
Other |
342,127 | 194,981 | 108,826 | |||||||||
Total interest revenue |
17,095,856 | 15,424,236 | 14,554,358 | |||||||||
Interest expense |
||||||||||||
Deposits |
4,553,099 | 5,101,608 | 5,689,554 | |||||||||
Borrowed funds |
1,026,755 | 808,127 | 573,405 | |||||||||
Total interest expense |
5,579,854 | 5,909,735 | 6,262,959 | |||||||||
Net interest income |
11,516,002 | 9,514,501 | 8,291,399 | |||||||||
Provision for loan losses |
900,000 | 415,000 | 318,000 | |||||||||
Net interest income after provision for
loan losses |
10,616,002 | 9,099,501 | 7,973,399 | |||||||||
Non-interest revenue |
||||||||||||
Service charges on deposit accounts |
307,012 | 311,268 | 292,610 | |||||||||
Marine division broker origination fees |
— | — | 272,349 | |||||||||
Net gains on sales of investment securities |
158,551 | (3,081 | ) | — | ||||||||
Earnings on bank owned life insurance |
376,165 | 366,785 | 340,853 | |||||||||
Income on investment in real estate LLC |
— | 3,741 | 24,100 | |||||||||
Other fees and commissions |
978,039 | 285,219 | 243,402 | |||||||||
Total non-interest revenue |
1,819,767 | 963,932 | 1,173,314 | |||||||||
Non-interest expense |
||||||||||||
Salaries |
4,037,027 | 3,316,219 | 3,045,932 | |||||||||
Employee benefits |
1,012,014 | 923,666 | 953,554 | |||||||||
Occupancy |
1,085,768 | 1,124,838 | 934,277 | |||||||||
Equipment |
354,531 | 313,133 | 248,182 | |||||||||
Data processing |
340,870 | 269,632 | 221,107 | |||||||||
FDIC insurance and State of Maryland
assessments |
561,850 | 151,149 | 87,766 | |||||||||
Other operating |
1,864,821 | 1,274,141 | 1,283,733 | |||||||||
Total non-interest expense |
9,256,881 | 7,372,778 | 6,774,551 | |||||||||
Income before income taxes |
3,178,888 | 2,690,655 | 2,372,162 | |||||||||
Income taxes |
1,055,522 | 939,383 | 789,053 | |||||||||
Net income |
2,123,366 | 1,751,272 | 1,583,109 | |||||||||
Less: Net income (loss) attributable to
the non-controlling interest |
87,216 | (4,846 | ) | — | ||||||||
Net income attributable to Old Line
Bancshares, Inc. |
2,036,150 | 1,756,118 | 1,583,109 | |||||||||
Preferred stock dividends and discount
accretion |
485,993 | 29,329 | — | |||||||||
Net income available to common stockholders |
$ | 1,550,157 | $ | 1,726,789 | $ | 1,583,109 | ||||||
Basic earnings per common share |
$ | 0.40 | $ | 0.44 | $ | 0.37 | ||||||
Diluted earnings per common share |
0.40 | 0.44 | 0.37 | |||||||||
Dividend per common share |
0.12 | 0.12 | 0.12 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements
66
| Preferred | Accumulated | |||||||||||||||||||||||||||||||
| stock | Additional | other | ||||||||||||||||||||||||||||||
| & | Common stock | paid-in | Retained | comprehensive | Comprehensive | Non-controlling | ||||||||||||||||||||||||||
| warrants | Shares | Par value | capital | earnings | income | income | interest | |||||||||||||||||||||||||
Balance, December 31, 2006 |
$ | — | 4,253,699 | $ | 42,537 | $ | 31,868,025 | $ | 3,077,313 | $ | (171,921 | ) | $ | — | ||||||||||||||||||
Common stock repurchased |
— | (185,950 | ) | (1,860 | ) | (1,621,238 | ) | — | — | — | ||||||||||||||||||||||
Net income attributable
to Old Line Bancshares, Inc. |
— | — | — | — | 1,583,109 | — | 1,583,109 | — | ||||||||||||||||||||||||
Unrealized gain on
securities available for sale,
net of income taxes of $92,590 |
— | — | — | — | — | 142,172 | 142,172 | — | ||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | $ | 1,725,281 | — | |||||||||||||||||||||||
Stock based compensation awards |
— | — | — | 173,714 | — | — | — | |||||||||||||||||||||||||
Common stock cash dividend
$0.12 per share |
— | — | — | — | (505,190 | ) | — | — | ||||||||||||||||||||||||
Stock options exercised including
tax benefit of $6,345 |
— | 8,100 | 81 | 44,512 | — | — | — | |||||||||||||||||||||||||
Balance, December 31, 2007 |
— | 4,075,849 | 40,758 | 30,465,013 | 4,155,232 | (29,749 | ) | — | ||||||||||||||||||||||||
Common stock repurchased |
— | (217,085 | ) | (2,170 | ) | (1,749,485 | ) | — | — | — | ||||||||||||||||||||||
Net income attributable
to Old Line Bancshares, Inc. |
— | — | — | — | 1,756,118 | — | 1,756,118 | — | ||||||||||||||||||||||||
Unrealized gain on
securities available for sale,
net of income taxes of $275,122 |
— | — | — | — | — | 422,360 | 422,360 | — | ||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | $ | 2,178,478 | — | |||||||||||||||||||||||
Recognition of non-controlling interest |
608,857 | |||||||||||||||||||||||||||||||
Net income (loss) attributable
to non-controlling interest |
— | — | — | — | — | — | (4,846 | ) | ||||||||||||||||||||||||
Stock based compensation awards |
— | — | — | 104,541 | — | — | — | |||||||||||||||||||||||||
Common stock cash dividend
$0.12 per share |
— | — | — | — | (470,249 | ) | — | — | ||||||||||||||||||||||||
Issuance of preferred stock & warrants |
7,000,000 | — | — | — | — | — | — | |||||||||||||||||||||||||
Preferred stock dividend payable
and accretion |
5,025 | — | — | — | (29,329 | ) | — | — | ||||||||||||||||||||||||
Stock options exercised including
tax benefit of $2,777 |
— | 3,600 | 36 | 18,741 | — | — | — | |||||||||||||||||||||||||
Balance, December 31, 2008 |
$ | 7,005,025 | 3,862,364 | $ | 38,624 | $ | 28,838,810 | $ | 5,411,772 | $ | 392,611 | $ | 604,011 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
67
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Continued)
Consolidated Statements of Changes in Stockholders’ Equity (Continued)
| Preferred | Accumulated | |||||||||||||||||||||||||||||||
| stock | Additional | other | ||||||||||||||||||||||||||||||
| & | Common stock | paid-in | Retained | comprehensive | Comprehensive | Non-controlling | ||||||||||||||||||||||||||
| warrants | Shares | Par value | capital | earnings | income | income | interest | |||||||||||||||||||||||||
Balance, December 31, 2008 |
$ | 7,005,025 | 3,862,364 | $ | 38,624 | $ | 28,838,810 | $ | 5,411,772 | $ | 392,611 | — | $ | 604,011 | ||||||||||||||||||
Net income attributable
to Old Line Bancshares, Inc. |
— | — | — | — | 2,036,150 | — | 2,036,150 | — | ||||||||||||||||||||||||
Unrealized loss on
securities available for sale,
net of income tax benefit of $15,458 |
— | — | — | — | — | (23,731 | ) | (23,731 | ) | — | ||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | $ | 2,012,419 | — | |||||||||||||||||||||||
Net income attributable
to non-controlling interest |
— | — | — | — | — | — | 87,216 | |||||||||||||||||||||||||
Stock based compensation awards |
— | — | — | 119,711 | — | — | — | |||||||||||||||||||||||||
Common stock cash dividend
$0.12 per share |
— | — | — | — | (463,483 | ) | — | — | ||||||||||||||||||||||||
Repayment of preferred stock and
warrant |
(7,301,433 | ) | — | — | 76,433 | — | — | — | ||||||||||||||||||||||||
Preferred stock dividend and
accretion |
296,408 | — | — | — | (485,993 | ) | — | — | ||||||||||||||||||||||||
Balance, December 31, 2009 |
$ | — | 3,862,364 | $ | 38,624 | $ | 29,034,954 | $ | 6,498,446 | $ | 368,880 | $ | 691,227 | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
68
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities |
||||||||||||
Interest received |
$ | 17,125,737 | $ | 15,224,058 | $ | 14,349,483 | ||||||
Fees and commissions received |
1,339,179 | 438,955 | 853,995 | |||||||||
Interest paid |
(5,687,411 | ) | (5,978,157 | ) | (6,198,648 | ) | ||||||
Cash paid to suppliers and employees |
(12,328,485 | ) | (3,101,842 | ) | (6,636,141 | ) | ||||||
Income taxes paid |
(1,073,097 | ) | (1,260,789 | ) | (909,184 | ) | ||||||
| (624,077 | ) | 5,322,225 | 1,459,505 | |||||||||
Cash flows from investing activities |
||||||||||||
Net change in time deposits in other banks |
(1,764,102 | ) | (11,267,000 | ) | (2,000,000 | ) | ||||||
Purchase of investment securities |
||||||||||||
Held to maturity |
— | (8,237,285 | ) | — | ||||||||
Available for sale |
(12,868,441 | ) | (27,029,054 | ) | — | |||||||
Proceeds from disposal of investment securities |
||||||||||||
Held to maturity at maturity or call |
2,203,921 | 2,539,088 | 500,000 | |||||||||
Available for sale at maturity or call |
10,197,347 | 7,399,382 | 4,952,894 | |||||||||
Available for sale sold |
4,243,654 | 141,919 | — | |||||||||
Loans made, net of principal collected |
(34,755,829 | ) | (29,494,324 | ) | (51,735,025 | ) | ||||||
Purchase of equity securities |
(831,100 | ) | (46,300 | ) | (504,700 | ) | ||||||
Investment in bank owned life insurance |
— | — | (4,000,000 | ) | ||||||||
Return of principal from (investment in) real estate LLC |
— | (205,050 | ) | 11,843 | ||||||||
Purchase of premises, equipment and software |
(5,642,201 | ) | (1,006,641 | ) | (630,950 | ) | ||||||
Proceeds from sale of premises and equipment |
— | 28,315 | 102,008 | |||||||||
| (39,216,751 | ) | (67,176,950 | ) | (53,303,930 | ) | |||||||
Cash flows from financing activities |
||||||||||||
Net increase (decrease) in |
||||||||||||
Time deposits |
40,266,481 | 52,043,034 | 7,316,708 | |||||||||
Other deposits |
14,650,671 | 1,575,373 | 823,680 | |||||||||
Short term borrowings |
(1,623,995 | ) | 1,408,972 | 7,153,705 | ||||||||
Long term borrowings |
(5,077,066 | ) | — | 12,000,000 | ||||||||
Proceeds from stock options exercised, including tax benefit |
— | 18,777 | 44,593 | |||||||||
Proceeds from issuance of preferred stock & warrants |
— | 7,000,000 | — | |||||||||
Repurchase of preferred stock & warrants |
(7,225,000 | ) | — | — | ||||||||
Repurchase of common stock |
— | (1,751,655 | ) | (1,623,098 | ) | |||||||
Cash dividends paid-preferred stock |
(213,888 | ) | — | — | ||||||||
Cash dividends paid-common stock |
(463,483 | ) | (470,249 | ) | (505,190 | ) | ||||||
| 40,313,720 | 59,824,252 | 25,210,398 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
472,892 | (2,030,473 | ) | (26,634,027 | ) | |||||||
Cash and cash equivalents at beginning of year |
10,963,695 | 12,994,168 | 39,628,195 | |||||||||
Cash and cash equivalents at end of year |
$ | 11,436,587 | $ | 10,963,695 | $ | 12,994,168 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
69
Old Line Bancshares, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Reconciliation of net income to net cash
provided (used) by operating activities |
||||||||||||
Net income |
$ | 2,123,365 | $ | 1,751,272 | $ | 1,583,109 | ||||||
Adjustments to reconcile net income to net
cash provided (used) by operating activities |
||||||||||||
Depreciation and amortization |
699,345 | 447,529 | 359,720 | |||||||||
Provision for loan losses |
900,000 | 415,000 | 318,000 | |||||||||
Loss on sale of equipment |
4,803 | 3,099 | 7,372 | |||||||||
Change in deferred loan fees net of costs |
(99,222 | ) | (32,627 | ) | (107,425 | ) | ||||||
(Gain) loss on sale of securities |
(158,551 | ) | 3,081 | — | ||||||||
Amortization of premiums and discounts |
92,792 | 5,931 | 4,162 | |||||||||
Deferred income taxes |
(228,766 | ) | (47,531 | ) | (23,861 | ) | ||||||
Stock based compensation awards |
119,711 | 104,541 | 173,714 | |||||||||
(Income) loss from investment in real estate LLC |
— | 3,741 | (24,100 | ) | ||||||||
Increase (decrease) in |
||||||||||||
Accrued interest payable |
(107,557 | ) | (68,422 | ) | 64,311 | |||||||
Income tax payable |
175,543 | (238,226 | ) | (96,270 | ) | |||||||
Other liabilities |
(3,047,499 | ) | 3,941,133 | 3,181 | ||||||||
Decrease (increase) in |
||||||||||||
Accrued interest receivable |
36,311 | (173,482 | ) | (97,450 | ) | |||||||
Bank owned life insurance |
(326,840 | ) | (326,749 | ) | (311,225 | ) | ||||||
Prepaid income taxes |
35,649 | (35,649 | ) | — | ||||||||
Other assets |
(843,161 | ) | (430,416 | ) | (393,733 | ) | ||||||
| $ | (624,077 | ) | $ | 5,322,225 | $ | 1,459,505 | ||||||
On November 1, 2008, Old Line Bancshares, Inc. acquired a 12.5% membership interest in Pointer
Ridge, LLC. As a result of this purchase, our membership interest in Pointer Ridge increased to
62.5%. The fair values of the non-cash assets acquired and liabilities assumed were $7.7 million
and $6.6 million.
The accompanying notes are an integral part of these consolidated financial statements
70
| 1. | Summary of Significant Accounting Policies | |
| Organization and Description of Business-Old Line Bancshares, Inc. (Bancshares) is the holding company for Old Line Bank (Bank). We provide a full range of banking services to customers located in Anne Arundel, Charles, Prince George’s 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 Bancshares, its wholly owned subsidiary, Old Line Bank, and its majority owned membership interest in 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 reported the income of Pointer Ridge attributable to Bancshares from the date of our acquisition of majority interest on the consolidated statement of income. | ||
| Use of estimates-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. | ||
| Cash and cash equivalents-For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, we purchase and sell federal funds for one-day periods. | ||
| Time deposits in other banks-We record time deposits in other banks at cost. All time deposits in other banks mature within one year. | ||
| Investment securities-As we purchase 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. | ||
| Stock options-We account for individual stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock-based compensation expense at the date of grant. For the years ended December 31, 2009, 2008 and 2007, we recorded stock-based compensation expense of $119,711, $104,541, and $173,714 respectively. |
71
| 1. | Summary of Significant Accounting Policies (Continued) | |
| We may only recognize tax benefits for options that ordinarily will result in a tax deduction when the grant is exercised (non-qualified options). For the year ended December 31, 2009, we recognized an $8,298 tax benefit associated with the portion of the expense that was related to the issuance of non-qualified options. There were no non-qualified options included in the expense calculation for the year ended December 31, 2008. For the year ended December 31, 2007, we recognized a $12,141 tax benefit. | ||
| Premises and equipment-We record premises and equipment at cost less accumulated depreciation. Generally we compute depreciation using the straight-line method over the estimated useful life of the assets. | ||
| Foreclosed real estate-We record real estate acquired through foreclosure at the lower of cost or fair market value on the date acquired. We charge losses incurred at the time of acquisition of the property to the allowance for loan losses. We include subsequent reductions in the estimated value of the property in non-interest expense. | ||
| Advertising-We expense advertising costs over the life of ad campaigns. We expense general purpose advertising as we incur it. | ||
| Loans and allowance for loan losses-We report loans at face value plus deferred origination costs, less deferred origination fees and the allowance for loan losses. We accrue interest on loans based on the principal amounts outstanding. We amortize origination fees and costs to income over the terms of the loans using an approximate interest method. | ||
| We discontinue the accrual of interest when any portion of the principal or interest is ninety days past due and collateral is insufficient to discharge the debt in full. Based on current information, we consider loans impaired when management determines that it is unlikely that the borrower will make principal and interest payments according to contractual terms. Generally, we do not review loans for impairment until we have discontinued the accrual of interest. We consider several factors in determining impairment including payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Usually, we do not classify loans that experience insignificant payment delays and payment shortfalls as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis. We consider all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. We measure impairment on a loan by loan basis for commercial and real estate loans by determining either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. If it is doubtful that we will collect principal, we apply all payments to principal. | ||
| We collectively evaluate large groups of smaller balance homogeneous loans for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment unless such loans are the subject of a restructuring agreement. | ||
| The allowance for loan losses represents an amount which, in management’s judgment, will be adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. Management bases its judgment in determining the adequacy of the allowance on evaluations of the collectibility of loans. Management takes into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrowers’ ability to pay, overall portfolio quality, and review of specific problem areas. If the current economy or real estate market continues to suffer a severe downturn, we may need to increase the estimate for uncollectible accounts. We charge off loans which we deem uncollectible and deduct them from the allowance. We add recoveries on loans previously charged off to the allowance. |
72
| 1. | Summary of Significant Accounting Policies (Continued) | |
| Income taxes-The provision for income taxes includes taxes payable for the current year and deferred income taxes. We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. We allocate tax expense and tax benefits to Bancshares and its subsidiaries based on their proportional share of taxable income. | ||
| Earnings per share-We determine basic earnings per common share by dividing net income available to common stockholders 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 and warrants, calculated using the treasury stock method. |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Weighted average number of shares |
3,862,364 | 3,919,903 | 4,237,266 | |||||||||
Dilutive average number of shares |
7,102 | 3,320 | 6,038 | |||||||||
| Comprehensive income-Comprehensive income includes net income attributable to Bancshares and the unrealized gain (loss) on investment securities available for sale net of related income taxes. | ||
| Accounting Standards Codification-The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, ASC became FASB’s officially recognized source of authoritative United States (U.S.) generally accepted accounting principles (GAAP) applicable to all public and non-public, non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the United States Securities and Exchange Commission (SEC) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. | ||
| Reclassifications-We have made certain reclassifications to the 2008 and 2007 financial presentation to conform to the 2009 presentation. | ||
| 2. | Cash and Equivalents | |
| The Bank may carry balances with other banks that exceed the federally insured limit. In 2009, the average balance exceeded the federally insured limit by $11,263,538. The average balances in 2008 and 2007 did not exceed the federally insured limit. The Bank also sells federal funds on an unsecured basis to the same banks. The average balance sold was $458,457, $13,342,150 and $21,525,420 in 2009, 2008 and 2007, respectively. | ||
| Federal banking regulators require banks to carry non-interest bearing cash reserves at specified percentages of deposit balances. The Bank’s normal amount of cash on hand and on deposit with other banks is sufficient to satisfy the reserve requirements. |
73
| 3. | Investment Securities | |
| Investment securities are summarized as follows: |
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| December 31, 2009 | cost | gains | losses | value | ||||||||||||
Available for sale |
||||||||||||||||
U. S. government agency |
$ | 7,133,657 | $ | 171,946 | $ | (14,928 | ) | $ | 7,290,675 | |||||||
Municipal securities |
2,253,107 | 36,759 | (14,294 | ) | 2,275,572 | |||||||||||
Mortgage-backed |
18,017,019 | 429,682 | — | 18,446,701 | ||||||||||||
| $ | 27,403,783 | $ | 638,387 | $ | (29,222 | ) | $ | 28,012,948 | ||||||||
Held to maturity |
||||||||||||||||
Municipal securities |
$ | 300,779 | $ | 2,714 | $ | — | $ | 303,493 | ||||||||
Mortgage-backed |
5,505,728 | 267,544 | — | 5,773,272 | ||||||||||||
| $ | 5,806,507 | $ | 270,258 | $ | — | $ | 6,076,765 | |||||||||
December 31, 2008 |
||||||||||||||||
Available for sale |
||||||||||||||||
U. S. government agency |
$ | 10,578,928 | $ | 318,722 | $ | — | $ | 10,897,650 | ||||||||
Municipal securities |
2,425,036 | 21,547 | (3,105 | ) | 2,443,478 | |||||||||||
Mortgage-backed |
15,913,656 | 311,457 | (265 | ) | 16,224,848 | |||||||||||
| $ | 28,917,620 | $ | 651,726 | $ | (3,370 | ) | $ | 29,565,976 | ||||||||
Held to maturity |
||||||||||||||||
U. S. Treasury |
$ | 499,942 | $ | 7,089 | $ | — | $ | 507,031 | ||||||||
Municipal securities |
300,866 | 194 | (2,753 | ) | 298,307 | |||||||||||
Mortgage-backed |
7,202,583 | 227,092 | — | 7,429,675 | ||||||||||||
| $ | 8,003,391 | $ | 234,375 | $ | (2,753 | ) | $ | 8,235,013 | ||||||||
December 31, 2007 |
||||||||||||||||
Available for sale |
||||||||||||||||
U. S. Treasury |
$ | 999,398 | $ | — | $ | (1,117 | ) | $ | 998,281 | |||||||
U. S. government agency |
4,499,658 | — | (27,480 | ) | 4,472,178 | |||||||||||
Municipal securities |
2,924,037 | 2,984 | (12,902 | ) | 2,914,119 | |||||||||||
Mortgage-backed |
1,019,390 | — | (10,612 | ) | 1,008,778 | |||||||||||
| $ | 9,442,483 | $ | 2,984 | $ | (52,111 | ) | $ | 9,393,356 | ||||||||
Held to maturity |
||||||||||||||||
U. S. Treasury |
$ | 2,000,638 | $ | 4,436 | $ | (2,183 | ) | $ | 2,002,891 | |||||||
Municipal securities |
300,953 | 183 | (6,688 | ) | 294,448 | |||||||||||
| $ | 2,301,591 | $ | 4,619 | $ | (8,871 | ) | $ | 2,297,339 | ||||||||
74
| 3. | Investment Securities (Continued) | |
| The table below summarizes investment securities with unrealized losses and the length of time the securities have been in an unrealized loss position as of December 31, 2009: |
| Fair | Unrealized | |||||||
| December 31, 2009 | value | losses | ||||||
Unrealized losses less than 12 months |
||||||||
U.S. government agency |
$ | 2,554,652 | $ | 14,928 | ||||
Municipal securities |
800,059 | 14,294 | ||||||
Mortgage-backed |
— | — | ||||||
Total unrealized losses less than 12 months |
3,354,711 | 29,222 | ||||||
Unrealized losses greater than 12 months |
||||||||
U.S. government agency |
— | — | ||||||
Municipal securities |
— | — | ||||||
Mortgage-backed |
— | — | ||||||
Total unrealized losses greater than 12 months |
— | — | ||||||
Total unrealized losses |
||||||||
U.S. government agency |
2,554,652 | 14,928 | ||||||
Municipal securities |
800,059 | 14,294 | ||||||
Mortgage-backed |
— | — | ||||||
Total unrealized losses |
$ | 3,354,711 | $ | 29,222 | ||||
| We consider all unrealized losses on securities as of December 31, 2009 to be temporary losses because we will redeem each security at face value at or prior to maturity. In most cases, market interest rate fluctuations cause a temporary impairment in value. The Bank has the intent and ability to hold these securities until recovery or maturity. | ||
| During the year ended December 31, 2009, we received $4,243,654 in proceeds from the sale of investment securities and recorded gross realized gains of $158,551 from the sale of available-for-sale securities. During 2008, proceeds from sales of investment securities were $141,919 resulting in gross losses of $3,081. There were no sales of securities in 2007. |
75
| 3. | Investment Securities (Continued) | |
| Contractual maturities and pledged securities at December 31, 2009, 2008 and 2007, 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, the Bank receives payments on a monthly basis. |
| Available for Sale | Held to Maturity | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| December 31, 2009 | cost | value | cost | value | ||||||||||||
Maturing |
||||||||||||||||
Within one year |
$ | 1,644,598 | $ | 1,663,512 | $ | — | $ | — | ||||||||
Over one to five years |
4,440,360 | 4,621,900 | 99,927 | 100,210 | ||||||||||||
Over five to ten years |
8,567,790 | 8,760,477 | 2,279,892 | 2,373,515 | ||||||||||||
Over ten years |
12,751,035 | 12,967,059 | 3,426,688 | 3,603,040 | ||||||||||||
| $ | 27,403,783 | $ | 28,012,948 | $ | 5,806,507 | $ | 6,076,765 | |||||||||
Pledged securities |
$ | — | $ | — | $ | — | $ | — | ||||||||
December 31, 2008 |
||||||||||||||||
Maturing |
||||||||||||||||
Within one year |
$ | 1,150,265 | $ | 1,171,205 | $ | 499,942 | $ | 507,031 | ||||||||
Over one to five years |
11,635,121 | 11,957,725 | 99,881 | 100,075 | ||||||||||||
Over five to ten years |
8,995,942 | 9,249,654 | 2,051,611 | 2,091,071 | ||||||||||||
Over ten years |
7,136,292 | 7,187,392 | 5,351,957 | 5,536,836 | ||||||||||||
| $ | 28,917,620 | $ | 29,565,976 | $ | 8,003,391 | $ | 8,235,013 | |||||||||
Pledged securities |
$ | — | $ | — | $ | — | $ | — | ||||||||
December 31, 2007 |
||||||||||||||||
Maturing |
||||||||||||||||
Within one year |
$ | 3,994,083 | $ | 3,977,436 | $ | 1,500,855 | $ | 1,498,672 | ||||||||
Over one to five years |
3,530,043 | 3,512,777 | 599,618 | 604,237 | ||||||||||||
Over five to ten years |
1,707,775 | 1,693,237 | 201,118 | 194,430 | ||||||||||||
Over ten years |
210,582 | 209,906 | — | — | ||||||||||||
| $ | 9,442,483 | $ | 9,393,356 | $ | 2,301,591 | $ | 2,297,339 | |||||||||
Pledged securities |
$ | 5,921,558 | $ | 5,890,011 | $ | 2,000,638 | $ | 2,002,891 | ||||||||
| In 2007, we pledged securities to secure a line of credit from the Federal Home Loan Bank. |
76
| 4. | Credit Commitments | |
| The Bank is party to financial instruments with off balance sheet risk in the normal course of business in order to meet the financing needs of customers. These financial instruments include commitments to extend credit, available credit lines and standby letters of credit. |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Commitments to extend credit and available credit lines: |
||||||||||||
Commercial |
$ | 21,153,839 | $ | 23,073,938 | $ | 15,506,189 | ||||||
Real estate undisbursed development and construction |
14,573,064 | 21,980,974 | 35,966,127 | |||||||||
Consumer |
9,014,671 | 6,378,630 | 6,142,229 | |||||||||
| $ | 44,741,574 | $ | 51,433,542 | $ | 57,614,545 | |||||||
Standby letters of credit |
$ | 3,882,806 | $ | 1,582,717 | $ | 1,634,022 | ||||||
| Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have variable interest rates, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. | ||
| The Bank’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss it would incur by funding its outstanding commitments. | ||
| 5. | Loans | |
| Major classifications of loans are as follows: |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Real estate |
||||||||||||
Commercial |
$ | 124,002,072 | $ | 110,826,321 | $ | 96,017,558 | ||||||
Construction |
30,872,499 | 23,422,258 | 21,905,237 | |||||||||
Residential |
23,350,018 | 12,819,445 | 11,227,505 | |||||||||
Commercial |
74,174,400 | 69,961,313 | 55,513,122 | |||||||||
Consumer |
14,622,153 | 15,638,011 | 18,527,588 | |||||||||
| 267,021,142 | 232,667,348 | 203,191,010 | ||||||||||
Allowance for loan losses |
(2,481,716 | ) | (1,983,751 | ) | (1,586,737 | ) | ||||||
Deferred loan costs, net |
469,243 | 370,021 | 337,394 | |||||||||
| $ | 265,008,669 | $ | 231,053,618 | $ | 201,941,667 | |||||||
77
5. Loans (Continued)
The following table outlines the maturity and rate repricing distribution of the loan
portfolio. For purposes of this disclosure, we have classified non-accrual loans as
immediately repricing or maturing.
| December 31, | 2009 | 2008 | 2007 | |||||||||
Within one year |
$ | 101,809,560 | $ | 91,649,352 | $ | 84,698,659 | ||||||
Over one to five years |
131,119,339 | 118,762,804 | 90,379,861 | |||||||||
Over five years |
34,092,243 | 22,255,192 | 28,112,490 | |||||||||
| $ | 267,021,142 | $ | 232,667,348 | $ | 203,191,010 | |||||||
Transactions in the allowance for loan losses were as follows:
| December 31, | 2009 | 2008 | 2007 | |||||||||
Beginning balance |
$ | 1,983,751 | $ | 1,586,737 | $ | 1,280,396 | ||||||
Provision charged to operations |
900,000 | 415,000 | 318,000 | |||||||||
Recoveries |
— | 454 | 490 | |||||||||
| 2,883,751 | 2,002,191 | 1,598,886 | ||||||||||
Loans charged off |
402,035 | 18,440 | 12,149 | |||||||||
Ending balance |
$ | 2,481,716 | $ | 1,983,751 | $ | 1,586,737 | ||||||
At December 31, 2009, we had three loans totaling $1,586,499 past due and classified as
non-accrual. The first loan is the same loan that we reported in our December 31, 2008
financial statements and described below. During 2009, we received $40,384 in payments on
this loan and the current balance is $810,291. In October 2009, the Borrower re-entered
bankruptcy under Chapter 11 of the United States Bankruptcy Code. We have a hearing
scheduled to obtain “a lift stay” on the commercial property that secures this loan.
Assuming the court provides the “lift stay” on the property, we plan to proceed with
foreclosure on the property. The second loan is in the amount of $223,169. The value of
the collateral is sufficient to provide repayment and we do not consider this loan
impaired. We have foreclosed on the property and were awaiting ratification from the
court. Once we receive ratification, we anticipate that we will hold the real estate for
future sale. The third loan is a land development loan secured by real estate in the
amount of $553,039. The borrower on this loan has filed bankruptcy. A recent appraisal of
the property securing this loan indicates that the value of the collateral is sufficient to
provide repayment and we do not consider this loan impaired. We plan to proceed with
foreclosure on this property. We have not designated a specific allowance for any of these
non-accrual loans. The total non-accrued interest on these loans at December 31, 2009 was
$190,701.
At December 31, 2008, we had one loan past due and classified as non-accrual in the amount
of $850,675. 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%. We anticipate that we will receive repayment for all of the balance due
on this loan. As of December 31, 2008, the interest not accrued on this loan was $85,706. During the year
ended December 31, 2008, we applied $80,099 in interest payments to the principal balance
on the loan. We have not designated a specific allowance for this non-accrual loan.
At December 31, 2007, we had two loans totaling $1,061,144 that were 90 days past due and
were classified as non-accrual. We received payment in full on one of these loans in June
2008.
There were no accruing loans 90 days or more past due or considered impaired at December
31, 2009, 2008 and 2007.
78
5. Loans (Continued)
The company has pledged loans totaling $114,160,379 to support Federal Home Loan Bank
borrowings.
The Bank makes loans to customers located in the Maryland suburbs of Washington D.C.
Residential and commercial real estate secure substantial portions of the Bank’s loans.
Although the loan portfolio is diversified, the regional real estate market and economy
will influence its performance.
6. Restricted Equity Securities
We own the following restricted equity securities:
| December 31, | 2009 | 2008 | 2007 | |||||||||
Federal Reserve Bank stock |
$ | 1,037,050 | $ | 827,050 | $ | 827,050 | ||||||
Atlantic Central Bankers
Bank stock |
12,000 | 12,000 | 12,000 | |||||||||
Federal Home Loan Bank stock |
1,733,600 | 1,112,500 | 1,066,200 | |||||||||
Maryland Financial Bank stock |
175,000 | 175,000 | 175,000 | |||||||||
Total |
$ | 2,957,650 | $ | 2,126,550 | $ | 2,080,250 | ||||||
We have recorded these securities at cost and have not evaluated them for impairment.
7. 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 consolidated their results of
operations from the date of the acquisition. Prior to the acquisition date of a majority
interest, we accounted for our investment in Pointer Ridge using the equity method. The
following table summarizes the condensed Balance Sheets and Statements of Income
information for Pointer Ridge.
| Pointer Ridge Office Investment, LLC | ||||||||||||
| December 31, | 2009 | 2008 | 2007 | |||||||||
Balance Sheets |
||||||||||||
Current assets |
$ | 891,233 | $ | 540,105 | $ | 440,256 | ||||||
Non-current assets |
7,432,268 | 7,619,352 | 7,815,892 | |||||||||
Liabilities |
6,480,230 | 6,548,760 | 6,644,206 | |||||||||
Equity |
1,843,271 | 1,610,697 | 1,611,942 | |||||||||
Statements of Income |
||||||||||||
Revenue |
$ | 1,239,137 | $ | 1,014,136 | $ | 941,520 | ||||||
Expenses |
1,006,563 | 1,019,577 | 893,320 | |||||||||
Net income (loss) |
$ | 232,574 | $ | (5,441 | ) | $ | 48,200 | |||||
We purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest at the book value
which was equivalent to the fair value. Accordingly, we did not record any goodwill with
this purchase.
79
8. Premises and Equipment
A summary of our premises and equipment and the related depreciation follows:
| December 31, | Useful lives | 2009 | 2008 | 2007 | ||||||||||||
Land |
$ | 5,061,583 | $ | 2,959,864 | $ | 487,673 | ||||||||||
Building |
5-50 years | 10,188,380 | 7,351,089 | 1,600,297 | ||||||||||||
Leasehold improvements |
3-30 years | 2,171,310 | 1,890,119 | 1,380,032 | ||||||||||||
Furniture and equipment |
3-23 years | 2,384,207 | 2,005,424 | 1,743,823 | ||||||||||||
| 19,805,480 | 14,206,496 | 5,211,825 | ||||||||||||||
Accumulated depreciation |
2,479,381 | 1,818,450 | 1,004,430 | |||||||||||||
Net premises and equipment |
$ | 17,326,099 | $ | 12,388,046 | $ | 4,207,395 | ||||||||||
Depreciation expense |
$ | 676,127 | $ | 420,595 | $ | 336,844 | ||||||||||
Computer software included in other assets, and related amortization, are as follows:
Cost |
3 years | $ | 224,028 | $ | 214,670 | $ | 205,564 | |||||||||
Accumulated amortization |
204,280 | 181,063 | 154,654 | |||||||||||||
Net computer software |
$ | 19,748 | $ | 33,607 | $ | 50,910 | ||||||||||
Amortization expense |
$ | 23,218 | $ | 26,934 | $ | 22,876 | ||||||||||
9. Deposits
Major classifications of interest bearing deposits are as follows:
| December 31, | 2009 | 2008 | 2007 | |||||||||
Money market and NOW |
$ | 43,424,979 | $ | 31,852,127 | $ | 33,935,011 | ||||||
Savings |
7,578,780 | 5,504,261 | 6,584,834 | |||||||||
Other time deposits-$100,000 and over |
58,681,241 | 44,319,687 | 41,150,781 | |||||||||
Other time deposits |
135,779,373 | 109,874,446 | 61,000,318 | |||||||||
| $ | 245,464,373 | $ | 191,550,521 | $ | 142,670,944 | |||||||
Time deposits mature as follows:
| December 31, | 2009 | 2008 | 2007 | |||||||||
Within three months |
$ | 63,785,047 | $ | 44,327,104 | $ | 33,624,666 | ||||||
Over three to twelve months |
82,433,333 | 55,066,817 | 55,367,386 | |||||||||
Over one to three years |
42,526,579 | 46,923,119 | 12,392,117 | |||||||||
Over three to five years |
5,715,655 | 7,877,093 | 766,930 | |||||||||
| $ | 194,460,614 | $ | 154,194,133 | $ | 102,151,099 | |||||||
80
9. Deposits (Continued)
Interest on deposits for the years ended December 31, 2009, 2008, and 2007, consisted of
the following:
| December 31, | 2009 | 2008 | 2007 | |||||||||
Money market and NOW |
$ | 171,476 | $ | 321,164 | $ | 588,824 | ||||||
Savings |
25,602 | 39,492 | 55,660 | |||||||||
Other time deposits — $100,000 and over |
1,608,367 | 1,490,587 | 1,503,715 | |||||||||
Other time deposits |
2,747,654 | 3,250,365 | 3,541,355 | |||||||||
| $ | 4,553,099 | $ | 5,101,608 | $ | 5,689,554 | |||||||
10. Short Term Borrowings
The Bank has available lines of credit including overnight federal funds and reverse
repurchase agreements from its correspondent banks totaling $32.0 million as of December
31, 2009. The Bank has an additional secured line of credit from the Federal Home Loan
Bank of Atlanta (FHLB) of $103.7 million. Prior to allowing the Bank to borrow under the
line of credit, the FHLB requires that the Bank provide collateral to support borrowings.
At December 31, 2009, we had provided $39.3 million in collateral value and as outlined
below have borrowed $15.0 million. We have additional available borrowing capacity of
$24.3 million. We may increase this availability by pledging additional collateral. As a
condition of obtaining the line of credit from the FHLB, the FHLB also requires that the
Bank purchase shares of capital stock in the FHLB.
Short term borrowings consist of promissory notes sold to the Bank’s customers, federal
funds purchased and advances from the FHLB. The 3.66% FHLB borrowing matures November 23,
2010. Interest is payable on the 23rd day of each February, May, August, and
November. 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 (3) month LIBOR based variable rate.
The Bank sells short term promissory notes to its customers. These notes reprice daily and
have maturities of 270 days or less. Federal funds purchased are unsecured, overnight
borrowings from other financial institutions.
Information relating to short term borrowings is as follows:
| December 31, | 2009 | 2008 | 2007 | |||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||
Amount outstanding at year
end |
||||||||||||||||||||||||||
Short term promissory notes |
$ | 11,149,939 | 0.50 | % | $ | 17,773,934 | 0.50 | % | $ | 16,347,096 | 2.53 | % | ||||||||||||||
FHLB advance due Nov. 2010 |
5,000,000 | 3.66 | % | — | — | |||||||||||||||||||||
Total |
$ | 16,149,939 | $ | 17,773,934 | $ | 16,347,096 | ||||||||||||||||||||
Average for the year |
||||||||||||||||||||||||||
Short term promissory notes |
$ | 14,928,391 | 0.62 | % | $ | 18,954,799 | 1.36 | % | $ | 13,674,099 | 3.23 | % | ||||||||||||||
FHLB advance due Jan. 2007 |
— | — | 169,862 | 5.65 | % | |||||||||||||||||||||
FHLB advance due Nov. 2010 |
1,837,268 | 3.66 | % | — | — | |||||||||||||||||||||
Federal funds purchased |
603 | 0.66 | % | 253,338 | 0.66 | % | 55,069 | 5.99 | % | |||||||||||||||||
Total |
$ | 16,766,262 | $ | 19,208,137 | $ | 13,899,030 | ||||||||||||||||||||
81
| 11. | Long Term Borrowings | |
| At December 31, 2009, the Bank had two advances, in the amount of $5,000,000 each, from the Federal Home Loan Bank (FHLB) totaling $10,000,000. The 3.3575% FHLB borrowing matures 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 (3) month LIBOR based variable rate. | ||
| The 3.119% 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 (1) 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. |
| December 31, | 2009 | 2008 | 2007 | |||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
Amount outstanding at year end |
||||||||||||||||||||||||
FHLB advance due Nov. 2010 |
$ | — | % | $ | 5,000,000 | 3.660 | % | $ | 5,000,000 | 3.660 | % | |||||||||||||
FHLB advance due Dec. 2012 |
5,000,000 | 3.358 | 5,000,000 | 3.358 | 5,000,000 | 3.358 | ||||||||||||||||||
FHLB advance due Dec. 2012 |
5,000,000 | 3.119 | 5,000,000 | 3.119 | 5,000,000 | 3.119 | ||||||||||||||||||
Senior note |
6,454,067 | 6.280 | 6,531,133 | 6.280 | — | |||||||||||||||||||
Total |
$ | 16,454,067 | $ | 21,531,133 | $ | 15,000,000 | ||||||||||||||||||
Average for the year |
||||||||||||||||||||||||
FHLB advance due Nov. 2010 |
$ | 4,561,644 | 3.660 | % | $ | 5,000,000 | 3.660 | % | $ | 520,548 | 3.660 | % | ||||||||||||
FHLB advance due Dec. 2012 |
5,000,000 | 3.358 | 5,000,000 | 3.358 | 260,274 | 3.358 | ||||||||||||||||||
FHLB advance due Dec. 2012 |
5,000,000 | 3.119 | 5,000,000 | 3.119 | 164,384 | 3.119 | ||||||||||||||||||
FHLB advance due July 2009 |
— | — | 1,652,055 | 5.328 | ||||||||||||||||||||
Senior note, fixed at 6.28% |
6,489,559 | 6.280 | 546,018 | 6.280 | — | |||||||||||||||||||
Total |
$ | 21,051,203 | $ | 15,546,018 | $ | 2,597,261 | ||||||||||||||||||
Principal payments on long term debt obligations are due as follows:
| Year | Amount | |||
2010 |
$ | 83,297 | ||
2011 |
88,743 | |||
2012 |
10,094,545 | |||
2013 |
100,727 | |||
2014 |
107,312 | |||
Remaining |
5,979,443 | |||
| $ | 16,454,067 | |||
82
| 12. | Related Party Transactions | |
| The Bank has entered into various transactions with firms in which owners are also members of the Board of Directors. Fees charged for these services are at similar rates charged by unrelated parties for similar work. Amounts paid to these related parties totaled $21,566, $15,481, and $110, during the years ended December 31, 2009, 2008, and 2007, respectively. | ||
| Effective November 1, 2008, we purchased Chesapeake Custom Homes, L.L.C.’s 12.5% membership interest in Pointer Ridge for the book value of $205,000. This purchase increased Bancshares’ membership interest from 50.0% to 62.5%. Frank Lucente, a director of Bancshares and the Bank, is the President and 52.0% stockholder of Lucente Enterprises, Inc. Lucente Enterprises, Inc. is the manager and majority member of Chesapeake Custom Homes, L.L.C. Lucente Enterprises has retained its 12.5% membership interest in Pointer Ridge. In 2009 and 2008, the Bank paid Pointer Ridge $526,494 and $513,939 in lease payments, respectively. In 2007, the Bank paid Pointer Ridge $496,272 in lease payments and $24,005 for leasehold improvements. | ||
| The directors, executive officers and their affiliated companies maintained deposits with the Bank of $8,798,695, $11,026,340, and $9,117,683, at December 31, 2009, 2008, and 2007, respectively. | ||
| The schedule below summarizes changes in amounts of loans outstanding to directors and executive officers or their affiliated companies: |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Balance at beginning of year |
$ | 889,630 | $ | 4,260,564 | $ | 4,756,505 | ||||||
Additions |
967,630 | 454,252 | 877,550 | |||||||||
Repayments |
(393,145 | ) | (3,825,186 | ) | (1,373,491 | ) | ||||||
Balance at end of year |
$ | 1,464,115 | $ | 889,630 | $ | 4,260,564 | ||||||
| In addition to the outstanding balances, the directors and executive officers or affiliated companies have $941,050 in unused commitments as of December 31, 2009. In the opinion of management, these transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. | ||
| 13. | Income Taxes | |
| The components of income tax expense are as follows: |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Current |
||||||||||||
Federal |
$ | 1,024,750 | $ | 786,677 | $ | 715,134 | ||||||
State |
259,538 | 200,237 | 97,780 | |||||||||
| 1,284,288 | 986,914 | 812,914 | ||||||||||
Deferred |
(228,766 | ) | (47,531 | ) | (23,861 | ) | ||||||
| $ | 1,055,522 | $ | 939,383 | $ | 789,053 | |||||||
83
| 13. | Income Taxes (Continued) | |
| The components of deferred income taxes are as follows: |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Provision for loan losses |
$ | (171,316 | ) | $ | (163,697 | ) | $ | (135,333 | ) | |||
Nonaccrual interest |
6,110 | (22,633 | ) | (11,174 | ) | |||||||
Organization costs |
— | 5,132 | 5,190 | |||||||||
Director stock option expense |
(8,298 | ) | — | (12,141 | ) | |||||||
Supplemental executive retirement plan |
(52,760 | ) | (47,036 | ) | (42,586 | ) | ||||||
Deferred loan origination costs, net |
(114,426 | ) | 57,172 | 94,909 | ||||||||
Depreciation |
111,924 | 123,531 | 77,274 | |||||||||
| $ | (228,766 | ) | $ | (47,531 | ) | $ | (23,861 | ) | ||||
| The components of net deferred tax assets and liabilities are as follows: |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Deferred tax assets |
||||||||||||
Allowance for loan losses |
$ | 933,688 | $ | 762,372 | $ | 598,675 | ||||||
Nonaccrual interest |
27,697 | 33,807 | 11,174 | |||||||||
Organization costs |
— | — | 5,132 | |||||||||
Director stock option expense |
20,439 | 12,141 | 12,141 | |||||||||
Supplemental executive retirement plan |
178,652 | 125,892 | 78,856 | |||||||||
Net unrealized loss on securities available for sale |
— | — | 19,378 | |||||||||
| 1,160,476 | 934,212 | 725,356 | ||||||||||
Deferred tax liabilities |
||||||||||||
Deferred loan origination costs |
292,879 | 407,305 | 350,133 | |||||||||
Depreciation |
448,738 | 336,814 | 213,283 | |||||||||
Net unrealized gain on securities available for sale |
240,285 | 255,744 | — | |||||||||
| 981,902 | 999,863 | 563,416 | ||||||||||
Net deferred tax asset (liability) |
$ | 178,574 | $ | (65,651 | ) | $ | 161,940 | |||||
84
| 13. | Income Taxes (Continued) | |
| The differences between the federal income tax rate of 34 percent and our effective tax rate are reconciled as follows: |
| December 31, | 2009 | 2008 | 2007 | |||||||||
Statutory federal income tax rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
Increase (decrease) resulting from |
||||||||||||
State income taxes, net of federal income tax benefit |
4.0 | 4.3 | 2.3 | |||||||||
Tax exempt income |
(1.8 | ) | (0.9 | ) | (1.2 | ) | ||||||
Stock based compensation awards |
1.1 | 1.3 | 2.1 | |||||||||
Other nondeductible expenses |
0.3 | 0.3 | 0.6 | |||||||||
Bank owned life insurance |
(3.5 | ) | (4.1 | ) | (4.5 | ) | ||||||
Net income attributable to the non-controlling interest |
(0.9 | ) | — | — | ||||||||
Effective tax rate |
33.2 | % | 34.9 | % | 33.3 | % | ||||||
| 14. | Retirement Plan | |
| 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 the Bank makes matching contributions of up to 4% of eligible employee compensation. Our contributions to the plan, included in employee benefit expenses, were $132,284, $128,189, and $122,901 for 2009, 2008, and 2007, respectively. | ||
| The 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’ expected retirement dates. The Bank’s expenses for the SERPs were $133,758, $119,245, and $105,997 in 2009, 2008, and 2007, respectively. |
85
| 15. | Capital Standards | |
| The Federal Deposit Insurance Corporation and the Federal Reserve Board have adopted risk-based capital standards for banking organizations. These standards require ratios of capital to assets for minimum capital adequacy and to be classified as well capitalized under prompt corrective action provisions. As of December 31, 2009, 2008, and 2007, the capital ratios and minimum capital requirements are as follows: |
| Minimum capital | To be well | |||||||||||||||||||||||
| (in thousands) | Actual | adequacy | capitalized | |||||||||||||||||||||
| December 31, 2009 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 38,088 | 13.7 | % | $ | 22,239 | 8.0 | % | $ | 27,799 | 10.0 | % | ||||||||||||
Old Line Bank |
$ | 36,444 | 12.8 | % | $ | 22,700 | 8.0 | % | $ | 28,385 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 35,571 | 12.8 | % | $ | 11,120 | 4.0 | % | $ | 16,679 | 6.0 | % | ||||||||||||
Old Line Bank |
$ | 36,444 | 12.0 | % | $ | 11,354 | 4.0 | % | $ | 17,031 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 35,571 | 10.0 | % | $ | 14,228 | 4.0 | % | $ | 17,785 | 5.0 | % | ||||||||||||
Old Line Bank |
$ | 36,444 | 9.6 | % | $ | 14,181 | 4.0 | % | $ | 17,727 | 5.0 | % | ||||||||||||
| December 31, 2008 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 43,278 | 17.4 | % | $ | 19,884 | 8.0 | % | $ | 24,856 | 10.0 | % | ||||||||||||
Old Line Bank |
$ | 41,596 | 16.8 | % | $ | 19,766 | 8.0 | % | $ | 24,707 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 41,294 | 16.6 | % | $ | 9,942 | 4.0 | % | $ | 14,913 | 6.0 | % | ||||||||||||
Old Line Bank |
$ | 39,612 | 16.0 | % | $ | 9,883 | 4.0 | % | $ | 14,824 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 41,294 | 14.0 | % | $ | 11,767 | 4.0 | % | $ | 14,708 | 5.0 | % | ||||||||||||
Old Line Bank |
$ | 39,612 | 13.5 | % | $ | 11,707 | 4.0 | % | $ | 14,634 | 5.0 | % | ||||||||||||
| December 31, 2007 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 36,248 | 16.3 | % | $ | 17,763 | 8.0 | % | $ | 22,203 | 10.0 | % | ||||||||||||
Old Line Bank |
$ | 32,913 | 15.0 | % | $ | 17,583 | 8.0 | % | $ | 21,979 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 34,661 | 15.6 | % | $ | 8,881 | 4.0 | % | $ | 13,322 | 6.0 | % | ||||||||||||
Old Line Bank |
$ | 31,326 | 14.3 | % | $ | 8,791 | 4.0 | % | $ | 13,187 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 34,661 | 14.6 | % | $ | 9,480 | 4.0 | % | $ | 11,850 | 5.0 | % | ||||||||||||
Old Line Bank |
$ | 31,326 | 13.3 | % | $ | 9,390 | 4.0 | % | $ | 11,738 | 5.0 | % | ||||||||||||
| Tier 1 capital consists of common and preferred stock, additional paid-in capital and retained earnings. Total capital includes a limited amount of the allowance for loan losses. In calculating risk-weighted assets, specified risk percentages are applied to each category of asset and off-balance sheet items. | ||
| Failure to meet the capital requirement could affect our ability to pay dividends and accept deposits and may significantly affect our operations. | ||
| In the most recent regulatory report, we were categorized as well capitalized under the prompt corrective action regulations. Management knows of no events or conditions that should change this classification. |
86
| 16. | Commitments and Contingencies | |
| We lease seven branch locations and one loan production office from non-related parties under lease agreements expiring through 2040. We lease our corporate headquarters and one branch location from Pointer Ridge. Each of the leases provides extension options. | ||
| The approximate future minimum lease commitments under the operating leases as of December 31, 2009, are presented below. We have eliminated 62.5% of lease commitments to Pointer Ridge in consolidation. |
| Year | Amount | |||
2010 |
$ | 650,104 | ||
2011 |
664,590 | |||
2012 |
662,468 | |||
2013 |
608,461 | |||
2014 |
548,274 | |||
Remaining |
9,244,843 | |||
| $ | 12,378,740 | |||
| Rent expense was $475,113, $796,429, and $671,110, for the years ended December 31, 2009, 2008, and 2007, respectively. | ||
| On August 25, 2006, Pointer Ridge entered into a loan agreement with an unrelated bank, in an original principal amount of $6.6 million to finance the commercial office building located at 1525 Pointer Ridge Place, Bowie, Maryland. We lease approximately half of this building for our main office and operate a branch from this address. Pursuant to the terms of a guaranty between the bank and Bancshares dated August 25, 2006, Bancshares has guaranteed up to 62.5% of the loan amount plus costs incurred by the lender resulting from any acts, omissions or alleged acts or omissions. | ||
| In the normal course of business the Bank is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Bank’s financial statements. |
87
| 17. | Fair Value of Financial Instruments | |
| On January 1, 2008, we adopted FASB ASC Topic 820 Fair Value Measurements and Disclosures which defines fair value as the price that would be received to sell an asset or paid 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. The Bank values 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 December 31, 2009, we established values for available for sale investment securities as follows (000’s); |
| Total Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2009 | Inputs | Inputs | Inputs | |||||||||||||
Investment securities available for sale |
$ | 28,013 | $ | 4,708 | $ | 23,305 | $ | — | ||||||||
| 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. |
88
| 17. | Fair Value of Financial Instruments (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-The fair values of investment securities are based upon quoted market prices or dealer quotes. | ||
| Loans-The fair value of loans is an estimate determined by discounting future cash flows using current rates for which the Bank would make similar loans to borrowers with similar credit histories. | ||
| Interest bearing deposits-The fair value of demand deposits and savings accounts is the amount payable on demand. The fair value of fixed maturity certificates of deposit is an estimate 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 is not included in the following table. |
| Carrying | Fair | |||||||
| amount | value | |||||||
December 31, 2009 |
||||||||
Financial assets |
||||||||
Time deposits |
$ | 15,031,102 | $ | 15,491,899 | ||||
Investment securities |
33,819,455 | 34,089,713 | ||||||
Loans |
265,008,669 | 269,907,318 | ||||||
Financial liabilities |
||||||||
Interest bearing deposits |
$ | 245,464,373 | $ | 247,456,675 | ||||
Short term borrowings |
16,149,939 | 16,297,360 | ||||||
Long term borrowings |
16,454,067 | 17,261,757 | ||||||
December 31, 2008 |
||||||||
Financial assets |
||||||||
Time deposits |
$ | 13,267,000 | $ | 13,276,560 | ||||
Investment securities |
37,569,367 | 37,800,989 | ||||||
Loans |
231,053,618 | 233,640,929 | ||||||
Financial liabilities |
||||||||
Interest bearing deposits |
$ | 191,550,521 | $ | 194,267,851 | ||||
Long term borrowings |
21,531,133 | 22,314,640 | ||||||
December 31, 2007 |
||||||||
Financial assets |
||||||||
Time deposits |
$ | 2,000,000 | $ | 2,003,325 | ||||
Investment securities |
11,694,947 | 11,690,695 | ||||||
Loans |
201,941,667 | 200,202,101 | ||||||
Financial liabilities |
||||||||
Interest bearing deposits |
$ | 142,670,944 | $ | 143,517,303 | ||||
Long term borrowings |
15,000,000 | 14,980,071 | ||||||
89
| 18. | Other Operating Expenses | |
| Other operating expenses that are significant are as follows: |
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Advertising |
$ | 41,787 | $ | 30,102 | $ | 46,797 | ||||||
Audit & exam fees |
60,500 | 67,000 | 54,000 | |||||||||
Branch security costs |
44,020 | 45,417 | 50,422 | |||||||||
Broker referrals |
— | — | 27,565 | |||||||||
Business development |
116,819 | 96,418 | 78,935 | |||||||||
Courier fees |
15,680 | 30,435 | 81,067 | |||||||||
Director fees |
137,698 | 124,450 | 120,400 | |||||||||
Organizational & legal expenses |
68,491 | 43,944 | 36,734 | |||||||||
Stationery & supplies |
64,037 | 75,107 | 75,180 | |||||||||
Other |
1,315,789 | 761,268 | 712,633 | |||||||||
Total |
$ | 1,864,821 | $ | 1,274,141 | $ | 1,283,733 | ||||||
90
19. Parent Company Financial Information
| The balance sheets, statements of income, and statements of cash flows for Bancshares (Parent Company) follow: |
| Old Line Bancshares, Inc. | ||||||||||||
| Balance Sheets | ||||||||||||
| December 31, | 2009 | 2008 | 2007 | |||||||||
| Assets | ||||||||||||
Cash and due from banks |
$ | 95,232 | $ | 164,263 | $ | 985,479 | ||||||
Loans |
275,920 | 551,752 | 1,424,317 | |||||||||
Investment in real estate LLC |
1,152,044 | 1,006,686 | 805,971 | |||||||||
Investment in Old Line Bank |
34,331,418 | 40,004,678 | 31,296,637 | |||||||||
Deferred income taxes |
— | — | 5,132 | |||||||||
Other assets |
120,918 | 9,321 | 189,065 | |||||||||
| $ | 35,975,532 | $ | 41,736,700 | $ | 34,706,601 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||||||
Accounts payable |
$ | 34,628 | $ | 49,858 | $ | 75,347 | ||||||
Stockholders’ equity |
||||||||||||
Preferred stock |
— | 6,703,591 | — | |||||||||
Common stock |
38,624 | 38,624 | 40,758 | |||||||||
Additional paid-in capital |
29,034,954 | 28,838,810 | 30,465,013 | |||||||||
Warrants to purchase common stock |
— | 301,434 | — | |||||||||
Retained earnings |
6,498,446 | 5,411,772 | 4,155,232 | |||||||||
| 35,572,024 | 41,294,231 | 34,661,003 | ||||||||||
Accumulated other comprehensive
income |
368,880 | 392,611 | (29,749 | ) | ||||||||
| 35,940,904 | 41,686,842 | 34,631,254 | ||||||||||
| $ | 35,975,532 | $ | 41,736,700 | $ | 34,706,601 | |||||||
91
| 19. | Parent Company Financial Information (Continued) |
| Old Line Bancshares, Inc. | ||||||||||||
| Statements of Income | ||||||||||||
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Interest and dividend revenue |
||||||||||||
Dividend from Old Line Bank |
$ | 653,067 | $ | 445,943 | $ | 505,189 | ||||||
Interest on money market and certificates of
deposit |
612 | 5,921 | 128,775 | |||||||||
Interest on loans |
37,019 | 76,783 | 54,170 | |||||||||
Total interest and dividend revenue |
690,698 | 528,647 | 688,134 | |||||||||
Non-interest revenue |
||||||||||||
Income (loss) on investment in real estate LLC |
145,359 | (4,335 | ) | 24,100 | ||||||||
Other fees |
— | — | 5,000 | |||||||||
Total non-interest revenue |
145,359 | (4,335 | ) | 29,100 | ||||||||
Non-interest expense |
129,134 | 117,381 | 105,057 | |||||||||
Income before income taxes |
706,923 | 406,931 | 612,177 | |||||||||
Income tax expense (benefit) |
21,243 | (14,775 | ) | 41,319 | ||||||||
| 685,680 | 421,706 | 570,858 | ||||||||||
Undistributed net income of Old Line Bank |
1,350,470 | 1,334,412 | 1,012,251 | |||||||||
Net income |
$ | 2,036,150 | $ | 1,756,118 | $ | 1,583,109 | ||||||
92
| 19. | Parent Company Financial Information (Continued) |
| Old Line Bancshares, Inc. | ||||||||||||
| Statements of Cash Flows | ||||||||||||
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities |
||||||||||||
Interest and dividends received |
$ | 692,352 | $ | 530,833 | $ | 683,087 | ||||||
Income taxes (refund received) |
(8,613 | ) | (35,894 | ) | 35,894 | |||||||
Reimbursement received (cash paid)
for operating expenses |
(126,231 | ) | 219,457 | (30,349 | ) | |||||||
| 557,508 | 714,396 | 688,632 | ||||||||||
Cash flows from investing activities |
||||||||||||
Loans made, net of principal collected |
275,832 | 872,565 | (1,424,317 | ) | ||||||||
Investment in Old Line Bank |
7,000,000 | (7,000,000 | ) | — | ||||||||
Return of principal from (investment in) real estate LLC |
— | (205,050 | ) | 11,843 | ||||||||
| 7,275,832 | (6,332,485 | ) | (1,412,474 | ) | ||||||||
Cash flows from financing activities |
||||||||||||
Proceeds from stock options exercised |
— | 16,000 | 32,706 | |||||||||
Tax benefit from stock options exercised |
— | 2,777 | 11,887 | |||||||||
Proceeds from issuance of preferred stock |
— | 7,000,000 | — | |||||||||
Repurchase of preferred stock & warrants |
(7,225,000 | ) | — | — | ||||||||
Repurchase of common stock |
— | (1,751,655 | ) | (1,623,098 | ) | |||||||
Cash dividends paid-preferred stock |
(213,888 | ) | — | — | ||||||||
Cash dividends paid-common stock |
(463,483 | ) | (470,249 | ) | (505,190 | ) | ||||||
| (7,902,371 | ) | 4,796,873 | (2,083,695 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
(69,031 | ) | (821,216 | ) | (2,807,537 | ) | ||||||
Cash and cash equivalents at beginning of year |
164,263 | 985,479 | 3,793,016 | |||||||||
Cash and cash equivalents at end of year |
$ | 95,232 | $ | 164,263 | $ | 985,479 | ||||||
Reconciliation of net income to net cash
provided by operating activities |
||||||||||||
Net income |
$ | 2,036,150 | $ | 1,756,118 | $ | 1,583,109 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities |
||||||||||||
Undistributed net income of Old Line Bank |
(1,350,470 | ) | (1,334,412 | ) | (1,012,251 | ) | ||||||
Stock based compensation awards |
119,711 | 104,541 | 173,714 | |||||||||
Decrease in deferred income taxes |
— | 5,132 | 5,190 | |||||||||
(Income) Loss from investment in real estate LLC |
(145,359 | ) | 4,335 | (24,100 | ) | |||||||
Increase (Decrease) in other liabilities |
9,073 | (1,063 | ) | 41,086 | ||||||||
(Increase) decrease in other assets |
(111,597 | ) | 179,745 | (78,116 | ) | |||||||
| $ | 557,508 | $ | 714,396 | $ | 688,632 | |||||||
93
| 20. | Stockholders’ Equity |
| Stock Options | ||
| We have two stock option plans under which we may issue options, the 2001 Incentive Stock Option Plan, as amended, and the 2004 Equity Incentive Plan. Our Compensation Committee administers the stock option plans. As the plans outline, the Compensation Committee approves stock option grants to directors and employees, determines the number of shares, the type of option, the option price, the term (not to exceed 10 years from the date of issuance) and the vesting period of options issued. The Compensation Committee has approved and we have granted options vesting immediately as well as over periods of two, three and five years. We recognize the compensation expense associated with these grants over their respective vesting period. As of December 31, 2009, there were 71,530 shares remaining available for future issuance under the stock option plans. | ||
| The intrinsic value of the options that directors and officers exercised for the years ended December 31, 2009, 2008, and 2007 was $0, $7,040, and $26,432, respectively. | ||
| A summary of the status of the outstanding options follows: |
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Number | average | Number | average | Number | average | |||||||||||||||||||
| of shares | exercise price | of shares | exercise price | of shares | exercise price | |||||||||||||||||||
Outstanding, beginning of year |
236,620 | $ | 9.09 | 216,920 | $ | 9.37 | 182,820 | $ | 8.91 | |||||||||||||||
Options granted |
62,650 | 6.30 | 37,300 | 7.75 | 47,200 | 10.57 | ||||||||||||||||||
Options exercised |
— | — | (3,600 | ) | 4.44 | (8,100 | ) | 4.72 | ||||||||||||||||
Options expired |
— | — | (14,000 | ) | 11.09 | (5,000 | ) | 11.31 | ||||||||||||||||
Outstanding, end of year |
299,270 | $ | 8.50 | 236,620 | $ | 9.09 | 216,920 | $ | 9.37 | |||||||||||||||
| Outstanding options | Exercisable options | |||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||
| Number | average | average | Number | average | ||||||||||||||||
| Exercise | of shares at | remaining | exercise | of shares at | exercise | |||||||||||||||
| price | December 31, 2009 | term in years | price | December 31, 2009 | price | |||||||||||||||
$3.33-$4.17 |
11,700 | 1.00 | $ | 3.44 | 11,700 | $ | 3.44 | |||||||||||||
$4.18-$5.00 |
18,000 | 2.55 | 4.69 | 18,000 | 4.69 | |||||||||||||||
$5.01-$7.64 |
62,650 | 9.07 | 6.30 | 28,884 | 6.30 | |||||||||||||||
$7.65-$8.65 |
37,300 | 8.09 | 7.75 | 24,866 | 7.75 | |||||||||||||||
$8.66-$10.00 |
46,620 | 4.64 | 9.74 | 46,620 | 9.74 | |||||||||||||||
$10.01-11.31 |
123,000 | 6.31 | 10.43 | 117,000 | 10.41 | |||||||||||||||
| 299,270 | 6.41 | $ | 8.50 | 247,070 | $ | 8.79 | ||||||||||||||
Intrinsic value of vested exercisable
options where the market value
exceeds the exercise price |
$ | 79,400 | ||||||||||||||||||
Intrinsic value of outstanding
options where the market value exceeds
the exercise price |
$ | 89,192 | ||||||||||||||||||
94
| 20. | Stockholders’ Equity (Continued) |
| At December 31, 2009, there was $37,862 of total unrecognized compensation cost related to non-vested stock options that we expect to realize over the next 3.5 years. The following table summarizes the fair values of the options granted and weighted-average assumptions used to calculate the fair values. We used the Black-Scholes option pricing model. |
| Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Expected dividends |
2 | % | 2 | % | 1 | % | ||||||
Risk free interest rate |
2.15 | % | 3.31 | % | 4.64 | % | ||||||
Expected volatility |
25.40 | % | 20.80 | % | 20.2-20.4 | % | ||||||
Weighted average volatility |
25.39 | % | 20.79 | % | 20.31 | % | ||||||
Expected life in years |
6.8-10.0 | 7.80 | 6.0-7.0 | |||||||||
Weighted average fair value of options granted |
$ | 1.57 | $ | 1.94 | $ | 2.92 | ||||||
| Preferred stock | ||
| On December 5, 2008, Bancshares issued 7,000 shares of Fixed Rate Cumulative Preferred Stock, Series A, $1 par value (“Series A Preferred Stock”) with a liquidation preference per share equal to $1,000 and a ten year warrant to purchase up to 141,892 shares of Bancshares’ common stock, $0.01 par value per share, at an exercise price of $7.40 per share, for a total purchase price of $7 million in cash as part of the Troubled Asset Relief Program-Capital Purchase Program of the U.S. Treasury (“Treasury”). Bancshares allocated the cash proceeds between the Series A Preferred Stock and the warrant to purchase common stock based on the relative estimated fair values at the date of issuance. | ||
| In July of 2009, we repurchased from the Treasury the 7,000 shares of preferred stock that we issued to them. We paid Treasury $7,058,333 to repurchase the preferred stock which reflects the liquidation value of the preferred stock and $58,333 of accrued but unpaid dividends. In August, we also repurchased at a fair market value of $225,000 the warrant to purchase 141,892 shares of our common stock. |
95
| 21. | Quarterly Results of Operations (Unaudited) |
| The following is a summary of the unaudited quarterly results of operations |
Three months ended
(Dollars in thousands except per share data)
(Dollars in thousands except per share data)
| 2009 | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Interest revenue |
$ | 4,374 | $ | 4,392 | $ | 4,227 | $ | 4,102 | ||||||||
Interest expense |
1,308 | 1,406 | 1,416 | 1,450 | ||||||||||||
Net interest income |
3,066 | 2,986 | 2,811 | 2,652 | ||||||||||||
Provision for loan losses |
140 | 210 | 250 | 300 | ||||||||||||
Net income available to
common stockholders |
466 | 227 | 447 | 410 | ||||||||||||
Earnings per share-basic |
0.12 | 0.06 | 0.12 | 0.11 | ||||||||||||
Earnings per share-diluted |
0.12 | 0.06 | 0.12 | 0.11 | ||||||||||||
| 2008 | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Interest revenue |
$ | 3,991 | $ | 3,937 | $ | 3,726 | $ | 3,770 | ||||||||
Interest expense |
1,543 | 1,460 | 1,366 | 1,541 | ||||||||||||
Net interest income |
2,448 | 2,477 | 2,360 | 2,229 | ||||||||||||
Provision for loan losses |
70 | 180 | 127 | 38 | ||||||||||||
Net income available to
common stockholders |
352 | 433 | 497 | 445 | ||||||||||||
Earnings per share-basic |
0.09 | 0.11 | 0.13 | 0.11 | ||||||||||||
Earnings per share-diluted |
0.09 | 0.11 | 0.13 | 0.11 | ||||||||||||
| 2007 | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Interest revenue |
$ | 3,817 | $ | 3,786 | $ | 3,523 | $ | 3,428 | ||||||||
Interest expense |
1,594 | 1,666 | 1,536 | 1,467 | ||||||||||||
Net interest income |
2,223 | 2,120 | 1,987 | 1,961 | ||||||||||||
Provision for loan losses |
112 | 120 | 30 | 56 | ||||||||||||
Net income available to
common stockholders |
519 | 328 | 408 | 328 | ||||||||||||
Earnings per share-basic |
0.13 | 0.08 | 0.10 | 0.08 | ||||||||||||
Earnings per share-diluted |
0.13 | 0.08 | 0.10 | 0.08 | ||||||||||||
96
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |
There were no disagreements with accountants on accounting matters and financial disclosures
for the reporting periods presented.
| Item 9A. | Controls and Procedures |
As of the end of the period covered by this annual report on Form 10-K, Old Line Bancshares’s
Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of Old Line
Bancshares, Inc.’s disclosure controls and procedures. Based upon that evaluation, Old Line
Bancshares, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that Old Line
Bancshares, Inc.’s disclosure controls and procedures are effective as of December 31, 2009.
Disclosure controls and procedures are controls and other procedures that are designed to ensure
that information required to be disclosed by Old Line Bancshares, Inc. in the reports that it files
or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms.
In addition, there were no changes in Old Line Bancshares, Inc.’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended) during the quarter ended December 31, 2009, that have materially affected, or are
reasonably likely to materially affect, Old Line Bancshares, Inc.’s internal control over financial
reporting.
Management’s Report On Internal Control Over Financial Reporting
The management of Old Line Bancshares, Inc. (“the Company”) is responsible for establishing
and maintaining adequate internal control over financial reporting. The internal control over
financial reporting has been designed under our supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Company’s consolidated
financial statements for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
Management has conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009, utilizing the framework established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has determined that the Company’s internal control
over financial reporting as of December 31, 2009 is effective.
This annual report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
| Item 9B. | Other Information |
None
97
PART III.
| Item 10. | Directors, Executive Officers and Corporate Governance |
Code of Ethics
Old Line Bancshares, Inc.’s Board of Directors has adopted a code of ethics that applies to
its principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. That Code of Ethics for Senior Financial
Officers is posted on Old Line Bancshares, Inc.’s internet website at www.oldlinebank.com. A copy
of the Code of Conduct that applies to all of Old Line Bancshares’ and Old Line Bank’s officers,
directors and employees is also available on Old Line Bancshares, Inc.’s internet website.
The remaining information required by this Item 10 is incorporated by reference to the
information appearing under the captions “Election of Directors,” “Board Meetings and Committees”,
“Executive Compensation” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement for the 2010 Annual Meeting of Stockholders of Old Line Bancshares, Inc.
| Item 11. | Executive Compensation |
The information required by this Item 11 is incorporated by reference to the information
appearing under the captions “Director Compensation,” “Executive Compensation” and “Board Meetings
and Committees” in the Proxy Statement for the 2010 Annual Meeting of Stockholders of Old Line
Bancshares, Inc.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2009, with respect to
compensation plans under which equity securities of Old Line Bancshares are authorized for
issuance.
Equity Compensation Plan Information
December 31, 2009
December 31, 2009
| Number of | ||||||||||||
| securities to be | ||||||||||||
| issued upon | Weighted average | |||||||||||
| exercise of | exercise price of | Number of | ||||||||||
| outstanding | outstanding | securities | ||||||||||
| options, | options, warrants | remaining available | ||||||||||
| Plan Category | warrants and rights | and rights | for future issuance | |||||||||
Equity compensation
plans approved by
security
holders(1) |
299,270 | $ | 8.50 | 71,530 | ||||||||
| (1) | Includes the 1990 Stock Option Plan, as amended, the 2001 Incentive Stock Option Plan, as amended, and the 2004 Equity Incentive Plan. The 1990 Stock Option Plan, as amended, and the 2001 Incentive Stock Option Plan, as amended, were approved by security holders of Old Line Bank and its predecessor, Old Line National Bank. Effective September 15, 2003, all of the then stockholders of Old Line Bank became stockholders of Old Line Bancshares, Inc. The 2004 Equity Incentive Plan was approved by security holders of Old Line Bancshares, Inc. |
The remaining information required by this Item 12 is incorporated by reference to the
information appearing under the caption “Security Ownership of Management and Certain Security
Holders” in the Proxy Statement for the 2010 Annual Meeting of Stockholders of Old Line Bancshares,
Inc.
98
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item 13 is incorporated by reference to the information
appearing under the captions “Certain Relationships and Related Transactions” and “Election of
Directors” in the Proxy Statement for the 2010 Annual Meeting of Stockholders of Old Line
Bancshares, Inc.
| Item 14. | Principal Accounting Fees and Services. |
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by Rowles &
Company, LLP for the audit of Old Line Bancshares, Inc.’s annual consolidated financial statements
for the years ended December 31, 2009 and 2008 and fees billed for other services rendered by
Rowles & Company, LLP during those periods.
| Years Ended | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
Audit Fees (1) |
$ | 45,500 | $ | 43,350 | ||||
Tax Fees (2) |
7,567 | 6,417 | ||||||
All Other Fees (3) |
— | 920 | ||||||
Total |
$ | 53,067 | $ | 50,687 | ||||
| (1) | Audit Fees consist of fees billed for professional services rendered for the audit of the Old Line Bancshares, Inc.’s consolidated (or Old Line Bank’s) annual financial statements and review of the interim consolidated financial statements included in quarterly reports, and services that Rowles & Company, LLP normally provides in connection with statutory and regulatory filings or engagements. | |
| (2) | Tax Fees consist of fees billed for professional services rendered for federal and state tax compliance, tax advice and tax planning. | |
| (3) | All Other Fees in 2008 and 2009 are for discussions regarding the accounting for the preferred stock issued. |
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor
Old Line Bancshares, Inc.’s audit committee approves the engagement before Old Line
Bancshares, Inc. or Old Line Bank engages the independent auditor to render any audit or non-audit
services.
99
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| Exhibit No. | Description of Exhibits | |
3.1(A)
|
Articles of Amendment and Restatement of Old Line Bancshares, Inc. | |
3.1.1(L)
|
Articles of Amendment of Old Line Bancshares, Inc. | |
3.1.2(L)
|
Articles of Amendment of Old Line Bancshares, Inc. | |
3.1.3(T)
|
Old Line Bancshares, Inc. Articles Supplementary Fixed Rate Cumulative Preferred Stock, Series A. | |
3.2(A)
|
Amended and Restated Bylaws of Old Line Bancshares, Inc. | |
4(A)
|
Specimen Stock Certificate for Old Line Bancshares, Inc. | |
10.1(A)
|
Executive Employment Agreement dated March 31, 2003 between Old Line Bank and James W. Cornelsen | |
10.2(G)
|
First Amendment to Executive Employment Agreement dated December 31, 2004 between Old Line Bank and James W. Cornelsen | |
10.3(Q)
|
Sixth Amendment to Executive Employment Agreement dated January 1, 2009 between Old Line Bank and James W. Cornelsen | |
10.4(K)
|
Salary Continuation Agreement dated January 3, 2006 between Old Line Bank and James W. Cornelsen | |
10.4.1(O)
|
First Amendment dated December 31, 2007 to the Salary Continuation Agreement between Old Line Bank and James W. Cornelsen | |
10.5(K)
|
Supplemental Life Insurance Agreement dated January 3, 2006 between Old Line Bank and James W. Cornelsen | |
10.5.1(O)
|
First Amendment dated December 31, 2007 to the Supplemental Life Insurance Agreement between Old Line Bank and James W. Cornelsen | |
10.6(A)
|
Executive Employment Agreement dated March 31, 2003 between Old Line Bank and Joseph E. Burnett | |
10.7(G)
|
First Amendment to Executive Employment Agreement dated December 31, 2004 between Old Line Bank and Joseph W. Burnett | |
10.8(Q)
|
Sixth Amendment to Executive Employment Agreement dated January 1, 2009 between Old Line Bank and Joseph Burnett | |
10.9(K)
|
Salary Continuation Agreement dated January 3, 2006 between Old Line Bank and Joseph E. Burnett | |
10.9.1(O)
|
First Amendment dated December 31, 2007 to the Salary Continuation Agreement between Old Line Bank and Joseph Burnett | |
10.10(K)
|
Supplemental Life Insurance Agreement dated January 3, 2006 between Old Line Bank and Joseph E. Burnett | |
10.10.1(O)
|
First Amendment dated December 31, 2007 to the Supplemental Life Insurance Agreement between Old Line Bank and Joseph Burnett | |
10.11(A)
|
Employment Agreement March 31, 2003 between Old Line Bank and Christine M. Rush | |
10.12(G)
|
First Amendment to Executive Employment Agreement dated December 31, 2004 between Old Line Bank and Christine M. Rush | |
10.13(Q)
|
Sixth Amendment to Executive Employment Agreement dated January 1, 2009 between Old Line Bank and Christine M. Rush | |
10.14(K)
|
Salary Continuation Agreement dated January 3, 2006 between Old Line Bank and Christine M. Rush | |
10.14.1(O)
|
First Amendment dated December 31, 2007 to the Salary Continuation Agreement between Old Line Bank and Christine Rush | |
10.15(K)
|
Supplemental Life Insurance Agreement dated January 3, 2006 between Old Line Bank and Christine M. Rush | |
10.15.1(O)
|
First Amendment dated December 31, 2007 to the Supplemental Life Insurance Agreement between Old Line Bank and Christine Rush | |
10.16(B)
|
2001 Stock Option Plan, as amended | |
10.17(B)
|
Form of Incentive Stock Option Agreement for 2001 Stock Option Plan | |
10.18(B)
|
Form of Non-Qualified Stock Option Agreement for 2001 Stock Option Plan |
100
| Exhibit No. | Description of Exhibits | |
10.19(C)
|
1990 Stock Option Plan, as amended | |
10.20(C)
|
Form of Incentive Stock Option Grant Letter for 1990 Stock Option Plan | |
10.21(C)
|
Form of Director Non-Qualified Stock Option Agreement for 1990 Stock Option Plan | |
10.22(E)
|
2004 Equity Incentive Plan | |
10.23(G)
|
Form of Incentive Stock Option Agreement for 2004 Equity Incentive Plan | |
10.23.1(T)
|
Form of Nonqualified Stock Option Agreement for 2004 Equity Incentive Plan | |
10.23.2(U)
|
Form of Restricted Stock Agreement for the 2004 Equity Incentive Plan | |
10.24(G)
|
Old Line Bancshares, Inc. and Old Line Bank Director Compensation Policy | |
10.25(D)
|
Lease Agreement dated April 29, 1999 between Live Oak Limited Partnership and Old Line National Bank | |
10.26(D)
|
Commercial Lease Agreement dated February 14, 2002 between Adams and Company Commercial Brokers, Inc. and Old Line National Bank | |
10.27(F)
|
Commercial Lease Agreement dated July 7, 2004 by and between Ridgely I, LLC and Old Line Bank | |
10.28(F)
|
Operating Agreement for Pointer Ridge Office Investment, LLC among J. Webb Group, Inc., Michael M. Webb, Lucente Enterprises, Inc., Chesapeake Custom Homes, L.L.C. and Old Line Bancshares, Inc., all as Members and Chesapeake Pointer Ridge Manager, LLC | |
10.29(H)
|
AIA Construction Agreement dated April 14, 2005 between Pointer Ridge Office Investment, LLC and Waverly Construction & Management Company Inc. | |
10.30(H)
|
Incentive Plan Model and Stock Option Model | |
10.31(I)
|
Deed of Lease dated as of July 28, 2005 between Baltimore Boulevard Associates Limited Partnership and Old Line Bank | |
10.32(M)
|
First Amendment to Deed of Lease dated as of February 7, 2008 by and between Baltimore Boulevard Associated Limited Partnership and Old Line Bank | |
10.33(N)
|
Deed of Trust note dated November 3, 2005 between Pointer Ridge Office Investment, LLC and Manufacturers and Traders Trust Company. | |
10.34(N)
|
Completion Guaranty Agreement dated November 3, 2005 between Pointer Ridge Office Investment, LLC and Manufacturers and Traders Trust Company. | |
10.35(J)
|
Amendment of Lease Agreement dated June 5, 2006 between Ridgley I, LLC and Old Line Bank to the lease entered into July 7, 2004. | |
10.36(L)
|
Lease Agreement dated June 6, 2006 by and between Pointer Ridge Office Investment, LLC and Old Line Bank (1st Floor 1525 Pointer Ridge Place, Bowie, Md.). | |
10.37(L)
|
Lease Agreement dated June 6, 2006 by and between Pointer Ridge Office Investment, LLC and Old Line Bank (3rd Floor 1525 Pointer Ridge Place, Bowie, Md.). | |
10.38(L)
|
Lease Agreement dated June 6, 2006 by and between Pointer Ridge Office Investment, LLC and Old Line Bank (4th Floor 1525 Pointer Ridge Place, Bowie, Md.). | |
10.39(L)
|
Indemnity Agreement between Old Line Bancshares, Inc. and Prudential Mortgage Capital Company, LLC dated August 25, 2006. | |
10.40(P)
|
Lease Agreement dated December 29, 2006 between Old Line Bank and Eleventh Springhill Lake Associates, LLC | |
10.41(R)
|
Lease Agreement by and between Old Line Bank and AF Limited Partnership dated May 31, 2008 | |
10.42(S)
|
Agreement Of Purchase And Sale Of Membership Interests by and between Chesapeake Custom Homes, L.L.C. and Old Line Bancshares, Inc. dated as of November 1, 2008 | |
10.43(S)
|
Third Amendment To Operating Agreement For Pointer Ridge Office Investment, LLC by and between Old Line Bancshares, Inc. J. Webb, Inc., Michael M. Webb Revocable Trust, and Lucente Enterprises, Inc. dated as of November 1, 2008 | |
10.44(S)
|
Assignment of Membership Interest by and between Chesapeake Custom Homes, L.L.C. and Old Line Bancshares, Inc. dated as of November 1, 2008 | |
21(A)
|
Subsidiaries of Registrant | |
23.1
|
Consent of Rowles & Company, LLP | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
101
| Exhibit No. | Description of Exhibits | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.1(A)
|
Agreement and Plan of Reorganization between Old Line Bank and Old Line Bancshares, Inc., including form of Articles of Share Exchange attached as Exhibit A thereto | |
99.1
|
Certification of Principal Executive Officer under Treasury’s Capital Purchase Program under the Troubled Asset Relief Program Pursuant to 31 C.F.R. § 30.15 | |
99.2
|
Certification of Principal Financial Officer under Treasury’s Capital Purchase Program under the Troubled Asset Relief Program Pursuant to 31 C.F.R. § 30.15 |
(A) Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference
from, Old Line Bancshares, Inc.’s Registration Statement on Form 10-SB, as amended, under the
Securities Exchange Act of 1934, as amended (File Number 000-50345).
(B) Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from,
Old Line Bancshares, Inc.’s Registration Statement on Form S-8, under the Securities Act of 1933,
as amended (Registration Number 333-111587).
(C) Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from,
Old Line Bancshares, Inc.’s Registration Statement on Form S-8, under the Securities Act of 1933,
as amended (Registration Number 333-113097).
(D) Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from,
Old Line Bancshares, Inc.’s Annual Report on Form 10-KSB/A filed on April 8, 2004.
(E) Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from,
Old Line Bancshares, Inc.’s Registration Statement on Form S-8, under the Securities Act of 1933,
as amended (Registration Number 333-116845).
(F) Previously filed by Old Line Bancshares, Inc. as a part of, and incorporated by reference from,
Old Line Bancshares, Inc.’s Quarterly Report on Form 10-QSB filed on November 8, 2004.
(G) Previously 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 5, 2005.
(H) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Quarterly Report on Form 10-QSB filed on August 10, 2005.
(I) Previously filed by Old Line Bancshares, Inc. as part of and incorporated by reference from Old
Line Bancshares, Inc.’s Registration Statement on Form SB2, under the Securities Act of 1933, as
amended (Registration Number 333-127792) filed on August 23, 2005.
(J) Previously filed by Old Line Bancshares, Inc. as part of and incorporated by reference from Old
Line Bancshares, Inc.’s Quarterly Report on Form 10-QSB filed on August 10, 2006.
(K) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 6, 2006.
(L) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Quarterly Report on Form 10-QSB filed on November 9, 2006.
(M) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on February 12, 2008.
(N) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Annual Report on Form 10-KSB filed on March 28, 2006.
102
(O) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 7, 2008.
(P) Previously filed by Old Line Bancshares, Inc. as part of and incorporated by reference from Old
Line Bancshares, Inc.’s Quarterly Report on Form 10-Q filed on May 10, 2007.
(Q) Previously 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 February 2, 2010.
(R) Previously filed by Old Line Bancshares, Inc. as part of and incorporated by reference from Old
Line Bancshares, Inc.’s Quarterly Report on Form 10-Q filed on August 12, 2008.
(S) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on November 19, 2008.
(T) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008, filed
on March 27, 2009.
(U) Previously filed by Old Line Bancshares, Inc. as part of, and incorporated by reference from
Old Line Bancshares, Inc.’s Current Report on Form 8-K filed on January 28, 2010.
Note: Exhibits 10.1 through 10.24 and 10.30 relate to management contracts or compensatory plans or
arrangements.
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 2010 | By: | /s/ James W. Cornelsen | ||
| James W. Cornelsen, President | ||||
| (Principal Executive Officer) | ||||
104
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Name | Title | Date | ||
/s/ James W. Cornelsen
|
Director, President and Chief Executive Officer (Principal Executive Officer) | March 25, 2010 | ||
/s/ Christine M. Rush
|
Chief Financial Officer (Principal Accounting and Financial Officer) | March 25, 2010 | ||
/s/ Charles A. Bongar, Jr.
|
Director | March 25, 2010 | ||
/s/ Craig E. Clark
|
Director and Chairman of the Board | March 25, 2010 | ||
/s/John P. Davey
|
Director | March 25, 2010 | ||
/s/ Daniel W. Deming
|
Director | March 25, 2010 | ||
/s/ James F. Dent
|
Director | March 25, 2010 | ||
/s/ Nancy L. Gasparovic
|
Director | March 25, 2010 | ||
/s/ Frank Lucente, Jr.
|
Director | March 25, 2010 | ||
/s/ Gail D. Manuel
|
Director | March 25, 2010 | ||
/s/ John D. Mitchell
|
Director | March 25, 2010 | ||
/s/ Gregory S. Proctor, Sr.
|
Director | March 25, 2010 | ||
/s/ Suhas R. Shah
|
Director | March 25, 2010 | ||
/s/ John M. Suit, II
|
Director | March 25, 2010 |
105