U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________to_________
Commission File Number 000-50345
OLD LINE BANCSHARES, INC.
(Name of small business issuer in its charter)
MARYLAND 20-0154352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2995 Crain Highway, Waldorf, Md. 20601
(Address of principal executive offices) (Zip Code)
(301) 645-0333
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock: par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ X]
The issuer's revenues for its most recent fiscal year were $4,595,091.
The aggregate market value of the common equity held by non-affiliates was
$17,185,194 as of March 22, 2004, based on a sales price of $11.72 per share of
Common Stock, which is the sales price at which the Common Stock was last traded
on March 22, 2004 as reported by the Nasdaq SmallCap Market.
The number of shares outstanding of the issuer's Common Stock was 1,776,394.5 as
of March 22, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2004 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-KSB/A.
Transitional Small Business Disclosure Format (check one):
Yes __ No X
Explanatory Note
On March 29, 2004, Old Line Bancshares, Inc. filed its Annual Report on
Form 10-KSB for the year ended December 31, 2003 (the "10-KSB") and related
exhibits with the Securities and Exchange Commission ("SEC"). The Company
unintentionally made certain typographical errors in one of the certifications
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 (exhibit 31.2
of the 10-KSB), and in the certification required by Section 906 of the
Sarbanes-Oxley Act of 2003 (exhibit 32 of the 10-KSB). Specifically, the Section
302 certification of the principal financial officer referred to a "quarterly
report" instead of the "annual report" and the Section 906 certification of the
Chief Executive Officer and the Chief Financial Officer referred to a "Quarterly
Report on Form 10-QSB" instead of an "Annual Report on Form 10-KSB." Old Line
Bancshares, Inc. hereby files this first amendment to the 10-KSB (the
"10-KSB/A") to amend and restate the 10-KSB in its entirety, including all
exhibits. Except as described in this Explanatory Note, none of the information
previously disclosed in the 10-KSB is modified by this 10-KSB/A.
OLD LINE BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-KSB/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Page #
Part I
Item 1. Description of Business.......................................................... 1
Item 2. Description of Property.......................................................... 14
Item 3. Legal Proceedings................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.............................. 14
Part II
Item 5. Market for Common Equity and Related Stock Matters............................... 14
Item 6. Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................................ 17
Item 7. Financial Statements............................................................. 41
Independent Auditor's Report
Consolidated Balance Sheets December 31, 2003, 2002 and 2001
Consolidated Statements of Income for the years ended December
31, 2003, 2002 and 2001 Consolidated Statement of Changes in
Stockholders' Equity For the years ended December 31, 2001,
2002 and 2003 Consolidated Statements of Cash Flows For the
years ended December 31, 2003, 2002 and 2001 Notes to
Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure......................................................... 68
Item 8A. Controls and Procedures.......................................................... 68
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons,
Compliance with Section 16 (a) of the Exchange Act............................... 68
Item 10. Executive Compensation........................................................... 68
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters...................................................... 68
Item 12. Certain Relationships and Related Transactions................................... 69
Item 13. Exhibits and Reports on Form 8-K................................................. 69
Item 14. Principal Accountant Fees and Services........................................... 70
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PART I
Item 1. Description of Business
Business of Old Line Bancshares, Inc.
Old Line Bancshares, Inc. was formed under the laws of the State of
Maryland on April 11, 2003 to serve as the holding company of Old Line Bank, a
Maryland commercial bank.
On May 22, 2003, the stockholders of Old Line Bank approved an
Agreement and Plan of Reorganization and Articles of Share Exchange pursuant to
which (i) Old Line Bank would become a wholly-owned subsidiary of Old Line
Bancshares, Inc., and (ii) each outstanding share (or fraction thereof) of Old
Line Bank common stock would be converted into one share (or fraction thereof)
of Old Line Bancshares, Inc. common stock, and the former holders of Old Line
Bank common stock would become the holders of all the outstanding shares of Old
Line Bancshares, Inc. common stock. The reorganization became effective at 12:01
a.m. on September 15, 2003.
Other than owning all of the capital stock of Old Line Bank, Old Line
Bancshares, Inc. does not currently engage in any other business activity.
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 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 its deposits.
In June 2003, Old Line Bank completed a public offering of 299,000
shares of common stock at an offering price of $25 per share. We anticipate that
the $6.9 million in net offering proceeds will provide Old Line Bank the capital
to retain higher percentages of loans that it previously participated to other
financial institutions and to support present and future growth in assets and
maintain Old Line Bank's well capitalized status with the bank regulatory
authorities. We may also use these funds for future expansion efforts including,
potentially, opening or acquiring new branch locations.
We are headquartered in Waldorf, Maryland, approximately 10 miles south
of Andrews Air Force Base and 25 miles southeast 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 and Charles. We also target customers
throughout the greater Washington, D.C. metropolitan area.
Our primary 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.
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Conversion from Federal Charter
At Old Line Bank's 2002 annual meeting of stockholders, the
stockholders of Old Line Bank approved a Plan of Conversion pursuant to which
the bank, which was then known as Old Line National Bank, converted to a
Maryland-chartered trust company exercising the powers of a commercial bank
named Old Line Bank.
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 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.
As part of the conversion, and to comply with certain provisions of
Maryland banking law, on the effective date of the conversion each two shares of
Old Line National Bank common stock issued and outstanding were converted into
one share of Old Line Bank common 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 and Charles.
Our headquarters and one of our branch offices is 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.
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. All of the regions national and international airports are less than
an hour away, as is Baltimore. We currently have two branch locations in Prince
George's County including our newest branch, which opened in 2002.
The economy in our current primary market area has focused on real
estate development, high technology, retail and the government sector. Although
the national and local economies have contracted somewhat over the past several
years, we do not believe that we have experienced any significant credit losses
or have had any non-performing assets as a result of the volatility or
contraction in the economy. We believe this is due to our credit culture that
reinforces strict underwriting as well as close monitoring.
We believe a natural evolution of a community-focused bank like Old
Line Bank is to expand the delivery channels via the branch network. We
anticipate expanding in Prince George's and Charles counties and in contiguous
northern and western counties, such as Montgomery County, Maryland and Anne
Arundel County, Maryland. We plan to take advantage of strategic opportunities
presented to us via mergers occurring in our marketplace. We may purchase
branches that other banks close or lease branch space from other banks.
Additionally, we will pursue key market locations for new branch facilities. We
currently have no specific plans regarding new branch offices or acquisitions of
existing financial institutions or branches thereof.
We intend to use the Internet and technology to augment our growth
plans. Currently, we offer our customers image technology as well as telephone
banking. During the first quarter of 2004, we introduced Internet banking to our
customers that includes online account access. We will continue to evaluate cost
effective ways that technology can enhance our management, products and
services.
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.
2
As a niche-lending product, we provide luxury boat financing to individuals.
These boats are generally Coast Guard documented and have a homeport of record
in the Chesapeake Bay or its tributaries.
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 conditions of its
borrowers and the concentration 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, indemnity 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 80%. 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 ranging 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.
3
Real Estate Construction Lending. This segment of our loan portfolio is
predominately residential in nature and is comprised of loans of short duration,
meaning maturities typically of nine months or less. Residential houses 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 home under construction, which is estimated prior to the completion of
the home. 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 individuals who have
demonstrated the ability to obtain a permanent loan "take-out." We also perform
a complete analysis of the borrower and the home 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 constructions 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.
Consumer Installment Lending. We offer various types of secured and
unsecured consumer loans. A primary aspect of our consumer lending is our
financing for luxury boat purchases ($19 million or 96% of the consumer loans,
excluding consumer real estate, and 32.33% of all loans at December 31, 2003).
Our average loan in the luxury boat loan category is approximately $150,000,
with an 18 year term and a fixed interest rate. Our internal analysis and
industry statistics indicate that the average life of these loans is
approximately 42 months as the purchaser either trades or sells the vessel.
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 two accounts have experienced 30-day delinquency
with total losses in the portfolio of $20,000 from one account.
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 are secured by
rapidly depreciating assets. Repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance because of the greater
4
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, 2003, our legal lending limit for
loans to one borrower was approximately $1,950,000. 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.
Investments and Funding
We balance our liquidity needs based on loan and deposit growth via the
investment portfolio and purchased funds. 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 use a combination of investment sales,
federal funds and other purchased funds to augment our funding position.
We actively monitor our investment portfolio and the majority of the
portfolio is generally classified as "available for sale." Under such a
classification, we may sell investment instruments as management deems
appropriate. On a monthly basis, we "mark to market" the investment portfolio
via equity as required by Statement of Financial Accounting Standards No. 115
("SFAS 115"). 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, ATM machines at three of our branch locations and credit cards
through a third party processor. Additionally, during the first quarter of 2004,
we introduced Internet banking capabilities to our customers. With our Internet
banking service, our customers may view their accounts on-line and
electronically remit bill payments.
Deposit Activities
Deposits are the major source of our funding. We offer a broad array of
deposit products that include demand, NOW, super 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. To date, we have not used
brokered deposits.
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
5
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 15, 2004, Old Line Bank had 30 full time and 6 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.
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 bank holding company under the Bank
Holding Company Act of 1956, as amended. As such, Old Line Bancshares, Inc. is
subject to regulation and examination by the Federal Reserve Board, and is
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 proposed bank holding company of control of more than five
percent (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. Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), the restrictions on interstate
acquisitions of banks by bank holding companies were repealed as of September
29, 1995. The effect of the repeal of these restrictions is that, subject to
certain time and deposit base requirements, Old Line Bancshares, Inc. is able to
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.
Statutes impose certain restrictions on subsidiary banks of a bank
holding company 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, these statutes prohibit a bank holding company and any subsidiary bank
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
6
insure their capital adequacy. Because Old Line Bancshares, Inc. is a bank
holding company with less than $150,000,000 in assets, Old Line Bancshares, Inc.
is exempt from most of these risk-based capital measures. However, the Federal
Reserve Board will still require that Old Line Bancshares, Inc. remain
adequately capitalized and have the ability to retire any debt within 25 years
from the date it incurs the debt.
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.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act ("GLBA"). Effective March 11, 2000, pursuant to authority
granted under the GLBA, a bank holding company may elect to become a financial
holding company and thereby engage in a broader range of financial and other
activities than are permissible for traditional bank holding companies. In order
to qualify for the election, all of the depository institution subsidiaries of
the bank holding company must be well capitalized and well managed, as defined
by regulation, and all of its depository institution subsidiaries must have
achieved a rating of satisfactory or better with respect to meeting community
credit needs.
Pursuant to the GLBA, financial holding companies are permitted to
engage in activities that are "financial in nature" or incidental or
complementary thereto and not a substantial risk to the safety and soundness of
the depository institution or the financial system in general, as determined by
the Federal Reserve Board. The GLBA identifies several activities as "financial
in nature," including, among others, insurance underwriting and agency,
investment advisory services, merchant banking and underwriting, and dealing or
making a market in securities. Being designated a financial holding company will
allow insurance companies, securities brokers and other types of financial
companies to affiliate with and/or acquire depository institutions.
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 and a Maryland-chartered bank holding
company does not exempt it from certain federal and state laws and regulations
applicable to 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 Bank Insurance Fund of the FDIC 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
7
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.
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 adopting a
law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
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 (the "GLBA") altered substantially 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.
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 core capital.
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" in accordance with FAS 115. 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
8
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 shall, 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 shall achieve its minimum Leverage Capital Ratio requirement.
A bank which fails to file such 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.
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%.
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 shall 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.
9
A "critically undercapitalized institution" is to 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.
Immediately upon becoming undercapitalized, an institution will become
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 the 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.
Additionally, under Section 11I(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 under the prompt
corrective actions regulations.
Regulatory Enforcement Authority
Federal banking law grants substantial enforcement powers to federal
banking regulators. 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.
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
10
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
of the Federal Reserve Act, which limits 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. Section 23A limits the aggregate amount of
transactions with any individual affiliate to ten percent (10%) of the capital
and surplus of Old Line Bank and also limits the aggregate amount of
transactions with all affiliates to twenty percent (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 Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Old Line Bank also is subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibits an institution from
engaging in certain transactions with certain affiliates 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 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.
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
surplus.
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, 2003,
amounts in transaction accounts above $6,600,000 and up to $45,400,000 must have
reserves held against them in the ratio of three percent of the amount. Amounts
above $45,400,000 require reserves of $1,164,000 plus 10 percent of the amount
in excess of $45,400,000. 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 evaluating mergers, acquisitions and
applications to open
11
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
On October 26, 2001, President Bush signed into law comprehensive
anti-terrorism legislation known as the USA PATRIOT Act of 2001 (the "USA
Patriot Act"). Title III of 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 U.S.
Treasury Department ("Treasury") has issued a number of implementing regulations
that apply various requirements of the USA Patriot Act to financial institutions
such as Old Line Bank. Those regulations impose new obligations on financial
institutions to maintain appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist financing. Treasury is
expected to issue a number of additional regulations that will further clarify
the USA Patriot Act's requirements.
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.
Factors Affecting Future Results
Some of the matters discussed in this annual report including under the
captions "Business of Old Line Bancshares, Inc.," "Business of Old Line Bank,"
and "Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" include forward-looking statements. These forward-looking statements
include statements regarding profitability, liquidity, allowance for loan
losses, interest rate sensitivity, market risk and 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.
We depend on the services of key personnel, including James W.
Cornelsen, Joseph E. Burnett and Christine M. Rush. The loss of any of these
personnel could disrupt our operations and result in reduced earnings. Mr.
Cornelsen is the President and Chief Executive Officer of Old Line Bank, Mr.
Burnett is a Senior Vice President and the Chief Lending Officer. Ms. Rush is a
Senior Vice President, the Chief Financial Officer and the Chief Credit Officer.
They provide valuable services to us and would be difficult to replace. Also,
the relationships maintained by our banking executives with our customers have
in a large part driven our growth and success. The unexpected loss of services
of one or more of these executives could have a material adverse effect on our
operations and could result in reduced revenues and earnings.
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, which includes luxury boat financing. Many of our loans are secured by
real estate (both residential and commercial) in the Maryland suburbs of
Washington, D.C. We believe our credit underwriting adequately considers the
underlying collateral in the evaluation process, however a major change in the
real estate market could have an adverse effect on our customers, which in turn
could adversely impact us.
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
12
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, we cannot predict such losses or that our allowance 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.
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. Fluctuations in interest rates
are not predictable or controllable and, therefore, we might not be able to
maintain a consistent positive spread between the interest that we receive and
the interest that we pay, which may significantly reduce our earnings.
The market value of our investments could negatively impact
stockholders' equity. Approximately 90.6% of our securities investment portfolio
at December 31, 2003 has been designated as available for sale pursuant to
Statement of Financial Accounting Standards (SFAS) No. 115 relating to
accounting for investments. SFAS 115 requires that unrealized gains and losses
in the estimated value of the available for sale portfolio be "marked to market"
and reflected as a separate item in stockholders' equity, net of tax. Also, at
December 31, 2003, we maintained approximately 19.4% of total assets in
securities available for sale. If the market value of the investment portfolio
declines, this could cause a corresponding decline in stockholders' equity.
Because Old Line Bank serves a limited market area in Maryland, we
could be more adversely affected by an economic downturn in our market area than
our larger competitors which are more geographically diverse. Our current
primary market area consists of the suburban Maryland (Washington, D.C. suburbs)
counties of Prince George's and Charles. We anticipate expanding in these
counties and in contiguous northern and western counties, such as Montgomery
County, Maryland and Anne Arundel County, Maryland. However, broad geographic
diversification is not currently part of our community bank focus. As a result,
if our market area suffers an economic downturn, our business and financial
condition may be more severely affected by such circumstances. Our larger bank
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.
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.
Our expansion strategy may not be successful. As part of our strategic
plan, we intend to expand our asset base and add branches to our banking
network, either through internal growth or through acquisitions of existing
financial institutions or branches thereof. Our ability to continue to grow
depends upon our ability to open new branches, attract new deposits, identify
loan and investment opportunities and maintain adequate capital levels. There
are no guarantees that our expansion strategies will be successful.
With respect to the branch expansion strategy, we may not be able to
correctly identify profitable or growing markets for new branches or to
integrate existing financial institutions or branches thereof into our
operations. Also, the costs to start up new branch facilities or to acquire
existing financial institutions or branches, and the additional costs to operate
these facilities, may increase our non-interest expense and decrease our
earnings. It may also be difficult to adequately and profitably manage the
anticipated growth from the new branches. We can provide no assurance that any
new branch sites will successfully attract a sufficient level of deposits and
other banking business to offset their operating expenses. Any new or acquired
branches will be subject to regulatory approval, and there can be no assurance
that we will succeed in securing such approvals.
Our lending limit may limit our growth. 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. Based upon our current capital levels, the amount we may lend is
significantly less than that of many of our competitors and may discourage
potential borrowers who have credit needs in excess of our
13
lending limit from doing business with us. We accommodate larger loans by
selling participations in those loans to other financial institutions, but this
strategy is not always available.
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 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.
Item 2. Description of Property
We acquired our headquarters, which is a full service banking branch
and office facility located at 2995 Crain Highway in Waldorf, Maryland, in 1998
for $750,000, renovated the space at a cost of approximately $716,000, and moved
our main office into it from our branch office located at 12080 Old Line Centre
in Waldorf, Maryland. As an accommodation to the seller, we purchased this
facility subject to a 99-year lease that we have paid in full, and we have the
option to purchase the facility for $1.00 plus any applicable closing costs. We
planned to exercise the purchase option during 2003. However, we were unable to
complete this transaction during the year. We expect to exercise the option
during 2004. For financial reporting purposes, we consider the facility owned by
Old Line Bank.
We continue to maintain a branch operation at the Old Line Centre
location, and have done so since 1989. The lease, which commenced in August
1999, is a ten-year lease with two, five-year options. Payment terms on the
lease are "triple net," at $4,565 monthly with 1.5% annual increases.
In 1995, we opened a branch at 15808 Livingston Road in Accokeek,
Maryland in Prince George's County in leased facilities. In March 2003, we
purchased the Accokeek location for $155,877.
Our Clinton, Maryland, Prince George's County branch, located at 7801
Old Branch Avenue, was opened in September 2002 in leased space. Exclusive of
the $825 in monthly rent, we pay no utilities or other expenses associated with
this facility. The lease incorporates increases in monthly rent beginning in
October 2006 to $2,301, in October 2008 to $2,685 and 1.5% every year
thereafter. The lease term is for a period of ten years, with three, five-year
options.
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, 2003, we had no pending legal matters or litigation
for Old Line Bank or Old Line Bancshares, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2003.
PART II
Item 5. Market for Common Equity and Related Stock Matters
Common Stock Prices
On November 13, 2003, Nasdaq approved Old Line Bancshares, Inc.'s
application to list its securities on the Nasdaq SmallCap Market under the
symbol "OLBK" with listing to occur on December 1, 2003. Prior to the
14
establishment of the holding company, our common stock was quoted for trading on
the OTC Bulletin Board operated by the National Association of Securities
Dealers under the symbol "OLBK". From September 15, 2003 until November 30,
2003, our common stock was quoted for trading on the OTC Bulletin Board under
the symbol "OLBC." Prior to listing on the Nasdaq SmallCap Market our common
stock traded only sporadically.
The following table reflects the high and low sales information as
reported on the OTC Bulletin Board through December 1, 2003. Subsequent to
December 1, 2003, the table shows the high and low sales information as reported
on the Nasdaq SmallCap Market. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission, and may not represent actual
transactions. The prices quoted were adjusted to reflect our one for two stock
exchange in June 2002 and our 200% stock dividend paid October 10, 2003.
Sale Price Range
High Low
---- ---
2002
----
First Quarter $ 7.00 $5.27
Second Quarter 6.67 5.53
Third Quarter 6.67 6.33
Fourth Quarter 6.33 5.80
2003
First Quarter $ 6.50 $5.80
Second Quarter 9.08 5.95
Third Quarter 10.17 9.15
Fourth Quarter 11.60 9.70
As of December 31, 2003, there were 1,756,894.5 shares of common stock
issued and outstanding, which were held by approximately 328 stockholders of
record. There were 89,250 shares of common stock issuable on the exercise of
outstanding stock options, all of which were exercisable.
Dividends
Old Line Bank has paid three cash dividends since its inception. In
March 2001, Old Line Bank paid a dividend of $0.07 per share, in March 2002 Old
Line Bank paid a dividend of $0.08 per share and in February 2003 Old Line Bank
paid a dividend of $0.09 per share. These dividend amounts have been adjusted to
reflect our one for two stock exchange in June 2002 and the 200% stock dividend
paid by Old Line Bancshares, Inc. on October 10, 2003. The 200% stock dividend
was paid to meet the listing requirements of the Nasdaq SmallCap Market. On
February 9, 2004, Old Line Bancshares, Inc. declared a $0.03 per share quarterly
dividend payable March 15, 2004 to all shareholders of record as of March 1,
2004.
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, general business conditions and other factors
before deciding to pay additional dividends in the future. There can be no
assurance that we will continue to pay dividends to our stockholders.
15
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. This
information should be read 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 Registration Statement. Results
for past periods are not necessarily indicative of results that may be expected
for any future period.
------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Income Statement Data:
Interest income $3,994 $3,756 $3,457
Interest expense 1,259 1,497 1,569
Net interest income 2,735 2,259 1,888
Provision for loan losses 162 144 78
Non-interest income 601 472 321
Non-interest expense 2,479 2,084 1,660
Income taxes 225 165 156
Net income $470 $338 $315
Per Share and Shares Outstanding Data: (1)
Basic net income $.34 $.39 $.37
Fully diluted net income .34 .39 .36
Cash dividends declared .09 .08 .07
Book value at period end $7.30 $6.61 $6.24
Shares outstanding, period end 1,756,894.5 859,894.5 859,894.5
Average shares outstanding, basic 1,363,689.0 859,894.5 859,894.5
Average shares outstanding, diluted 1,395,300.0 874,069.5 864,670.5
Balance Sheet Data:
Total assets $89,536 $72,245 $60,469
Total loans 59,518 43,059 33,733
Total investment securities 19,185 18,739 15,757
Total deposits 69,325 62,256 50,837
Stockholders' equity 12,828 5,687 5,362
Performance Ratios:
Return on average assets .58% .53% .59%
Return on average equity 5.12% 6.40% 6.02%
Net interest margin 3.67% 3.78% 3.91%
Asset Quality Ratios:
Allowance to period-end loans .91% .90% .79%
Non-performing assets to total assets .00% .00% .00%
Non-performing assets to provision for loan losses .00% .00% .00%
Capital Ratios:
Tier I risk-based capital 19.4% 10.9% 13.1%
Total risk-based capital 20.2% 11.7% 13.7%
Leverage capital ratio 14.7% 7.9% 9.2%
Total equity to total assets 14.4% 7.7% 8.8%
Dividend payout ratio for period 17.07% 20.36% 18.19%
(1) Restated for the effect of the one for two stock exchange in June 2002
and the 200% stock dividend in October 2003. See "Business of Old Line
Bank - Conversion from Federal Charter" and "Market for Common Equity
and Related Stock Matters."
16
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The year ended December 31, 2003 was an exciting and challenging year.
During the period we accomplished the following goals:
o In June 2003, we raised $6.9 million in net offering proceeds from a
public offering of 299,000 shares of Old Line Bank common stock at an
offering price of $25 per share.
o In September 2003, we reorganized into the holding company form of
organization and, as a result, Old Line Bank became a wholly owned
subsidiary of Old Line Bancshares, Inc. and Old Line Bank's
shareholders became shareholders of Old Line Bancshares, Inc.
o On October 10, 2003, we paid a 200% stock dividend to shareholders of
record on September 26, 2003 in order to meet the listing requirements
of the Nasdaq SmallCap Market.
o In December 2003, we obtained approval from Nasdaq to list Old Line
Bancshares, Inc.'s common stock on the Nasdaq Smallcap market.
o In December 2003, we completed testing and installation of Old Line
Bank's website and Internet on-line banking service.
o During the year, we grew net loans by 38.22% or $16.4 million to $59.5
million at December 31, 2003 from $43.1 million at December 31, 2002.
o We maintained asset quality with no loans past due more than 90 days
at December 31, 2003, a ratio of non performing assets to total asset
at December 31, 2003 of 0.00%, and a ratio of net chargeoffs to
average loans outstanding during the period of 0.007% compared to
.062% for the year ended December 31, 2002.
o We grew deposits $7.0 million or 11.35% during the year to $69.3
million at December 31, 2003 from $62.3 million at December 31, 2002.
o With gains on the sale of securities and increased fee income, we grew
noninterest revenue 27.40% during the year or $129,188, from $471,553
for 2002 to $600,741 for 2003.
o As a result of the 38.22% loan growth and the 27.40% improvement in
noninterest revenue, we increased net income 39.18% as compared to
2002, to $470,262 from $337,869.
o We ended the year with a Tier I risk-based capital ratio at 19.4%, a
total risk based capital ratio of 20.2% and a leverage capital ratio
of 14.7%, which exceeds the regulatory requirements of 4.0%, 8.0% and
4.0%, respectively.
o We increased the dividend per share over 2002 from $0.08 to $0.09
while reducing the dividend payout ratio from 20.36% to 17.07%.
We also faced many internal and external challenges during the year that
negatively impacted our performance as outlined below:
o Primarily as a result of costs associated with the formation of the
holding company, Nasdaq Smallcap listing expenses and increased branch
security costs, other operating expenses increased 21.35% or $128,692
during the year to $731,474 from $602,782 during 2002.
o As a result of the increased equity received in the offering, our
return on average equity declined to 5.12% at December 31, 2003 from
6.40% at December 31, 2002.
o Due to the $6.9 million in proceeds received in the offering and the
increased number of shares, earnings per share declined to $0.34 for
the year ended December 31, 2003 from $0.39 for the year ended
December 31, 2002.
o Primarily as a result of the .25% reduction in the Federal Funds rate
and excess funds held in lower yielding investments, the net interest
margin declined from 3.78% to 3.67% during the year as we began
deploying the offering proceeds from lower yielding investment
securities to loans.
As we look ahead to 2004 and beyond, the market area in which we operate
continues to present opportunities for a community focused bank. We anticipate
our loans and deposits will continue to grow during the year. We expect
continued improvement in earnings as we leverage the funds received from the
offering into loans. During the year we anticipate we will improve earnings by:
o Increasing interest revenue through continued loan growth.
o Reducing interest expense by growing core deposits and non-interest
bearing deposits with increased business
17
development and promotional campaigns.
o Reducing other operating expenses relative to revenues:
o with reductions in security costs garnered from the installation
of equipment during the third quarter of 2003 that protects our
employees and premises while reducing expenses.
o by reducing organizational and legal expenses.
In 2004, we anticipate that our continued growth will require us to hire
additional employees and identify new location(s) for our operations. We also
expect that we will use a portion of the savings realized in other operating
expenses to provide internet banking and other services to our customers.
We are not aware of any current recommendations by any regulatory
authorities, which, if they were implemented, would have a material effect on
our liquidity, capital resources or results of operations.
Results of Operations
Net Interest Income
Net interest income is the difference between income on interest
earning assets and the cost of funds supporting those assets. Earning assets are
comprised primarily of loans, investments, and federal funds sold;
interest-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.
2003 compared to 2002
---------------------
Net interest income after provision for loan losses for the year ended
December 31, 2003 amounted to $2.6 million, which was $458,159 or 21.66% greater
than the 2002 level of $2.1 million.
Interest income increased from $3.8 million for the year ended December
31, 2002 to $4.0 million for the year ended December 31, 2003. The increase was
primarily attributable to substantial increases in earning assets, which was
somewhat offset by decreasing market interest rates. The increase in earning
assets was directly attributable to the increased legal lending limit, the
opening of the Clinton, Maryland branch and increased marketing efforts.
Average loans, net of allowance, were $51.2 million in 2003, compared
to $36.9 million in 2002. The related interest income including fees from loans
was $3.3 million in 2003, or $457,717 greater than the 2002 level of $2.8
million. The average yield on loans decreased to 6.36% in 2003 from 7.58% in
2002, as a result of the reduction in the prime rate from 4.75% at December 31,
2001 to 4.00% at December 31, 2003. Investment securities and other earning
assets, such as federal funds sold, contributed $711,999 to interest income for
the year ended December 31, 2003. This represents a decrease of $219,700 over
the 2002 level of $931,699 as a higher level of assets was maintained in lower
rate federal funds for future deployment into loan growth and interest rates
declined during the period. The yield on earning assets was 5.31% in 2003, which
was 97 basis points lower than the 2002 level of 6.28%.
Interest expense for all interest bearing liabilities amounted to $1.3
million in 2003, which was $238,142 lower than the 2002 level of $1.5 million.
The cost of interest bearing liabilities was 2.28% in 2003, or 86 basis points
lower than the 2002 level of 3.14%. The decrease in interest expense resulted
from declining market interest rates exceeding the increase in interest bearing
liabilities. Consistent with asset growth, average interest bearing funding
sources (deposits and borrowed funds) grew to $71.7 million in 2003, which was
$13.2 million greater than the 2002 level of $58.5 million.
As the result of increased recognition in the Prince George's County
market and the proceeds from the capital offering, we anticipate that we will
continue to grow earning assets during the year. We believe that the anticipated
growth in earning assets, the change in the composition of earning assets as
more funds are deployed to loans and the anticipated historically low cost of
funds will result in an increase in our interest earning income, although there
is no assurance that this will be the case.
18
2002 compared to 2001
---------------------
Net interest income after provision for loan losses for the year ended
December 31, 2002 amounted to $2.1 million, which was $305,703 or 16.89% greater
than the 2001 level of $1.8 million.
Interest income increased from $3.5 million for the year ended December
31, 2001 to $3.8 million for the year ended December 31, 2002.
Average loans, net of allowance, were $36.9 million in 2002, compared
to $27.7 million in 2001. The related interest income including fees from loans
was $2.8 million in 2002, or $455,029 greater than the 2001 level of $2.4
million. The average yield on loans decreased to 7.58% in 2002 from 8.46% in
2001, as a result of the reduction in the prime rate from 9.00% at December 31,
2000 to 4.25% at December 31, 2002. Investment securities and other earning
assets, such as federal funds sold, contributed $931,699 to interest income for
the year ended December 31, 2002. This represents a decrease of $155,640 over
the 2001 level of $1.1 million as a higher level of assets was deployed into
loan growth and interest rates declined during the period. The yield on earning
assets was 6.28% in 2002, which was 87 basis points less than the 2001 level of
7.15%.
Interest expense for all interest bearing liabilities amounted to $1.5
million in 2002, which was $72,314 lower than the 2001 level of $1.6 million.
The cost of interest bearing liabilities was 3.14% in 2002, or 82 basis points
lower than the 2001 level of 3.96%. The decrease in interest expense resulted
from declining market interest rates exceeding the increase in interest bearing
liabilities. Consistent with asset growth, average interest bearing funding
sources (deposits and borrowed funds) grew to $58.5 million in 2002, which was
$11.0 million greater than the 2001 level of $47. 5 million.
19
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
2003 2002 2001
------------------------------------------------------------------------------------------------
Average Average Average
balance Interest Yield balance Interest Yield balance Interest Yield
------------------------------------------------------------------------------------------------
Assets:
Federal funds sold $ 7,990,566 $ 82,300 1.03% $ 6,809,790 $ 109,880 1.61% $ 7,333,393 $ 306,002 4.17%
Interest-bearing deposits 629,041 14,759 2.35% 347,945 8,297 2.38% - -
Investment securities (1) (2)
U.S. Treasury 152,131 5,074 3.34% - - - -
U.S. Agency 10,633,180 412,000 3.87% 11,806,666 609,988 5.17% 12,889,966 758,163 5.88%
Mortgage-backed securities 2,721,922 101,186 3.72% 2,969,958 160,498 5.40% - -
Tax exempt securities 2,741,896 138,725 5.06% 694,697 31,966 4.60% - -
Other 492,883 24,242 4.92% 378,988 20,832 5.50% 363,287 23,174 6.38%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total investment securities 16,742,012 681,227 4.07% 15,850,309 823,284 5.19% 13,253,253 781,337 5.90%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Loans: (3)
Commercial 6,421,338 528,249 8.23% 5,842,925 533,785 9.14% 5,287,806 508,765 9.62%
Mortgage 27,023,348 1,667,368 6.17% 17,156,866 1,243,252 7.25% 12,603,602 1,055,111 8.37%
Installment 18,209,333 1,091,574 5.99% 14,278,193 1,047,597 7.34% 10,111,899 805,729 7.97%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total loans 51,654,019 3,287,191 6.36% 37,277,984 2,824,634 7.58% 28,003,307 2,369,605 8.46%
Allowance for loan losses 481,701 - 330,895 - 260,099 -
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total loans, net of allowance 51,172,318 3,287,191 6.42% 36,947,089 2,824,634 7.65% 27,743,208 2,369,605 8.54%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total interest-earning assets 76,533,937 4,065,477 5.31% 59,955,133 3,766,095 6.28% 48,329,854 3,456,944 7.15%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Noninterest-bearing cash 2,028,452 1,737,089 - 2,197,622 -
Premises and equipment 2,129,028 1,758,886 - 1,756,152 -
Other assets 1,040,509 901,183 - 983,036 -
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total assets $ 81,731,926 $ 4,065,477 4.97% $ 64,352,291 $ 3,766,095 5.85% $ 53,266,664 $ 3,456,944 6.49%
========== ========= ===== ========== ========= ===== ========== ========= =====
Liabilities and Stockholders' equity
Interest-bearing deposits
Savings and Now deposits $ 12,560,842 $ 64,886 0.52% $ 10,320,302 $ 87,873 0.85% $ 8,936,254 $ 139,305 1.56%
Money market and super NOW 12,110,101 69,953 0.58% 8,211,172 69,791 0.85% 5,878,011 79,610 1.35%
Other time deposits 26,375,442 928,560 3.52% 25,176,433 1,144,434 4.55% 20,828,397 1,155,256 5.55%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total interest-bearing deposits 51,046,385 1,063,399 2.08% 43,707,907 1,302,098 2.98% 35,642,662 1,374,171 3.86%
Borrowed funds 4,053,425 195,392 4.82% 4,000,000 194,835 4.87% 4,000,000 195,076 4.88%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total interest-bearing liabilities 55,099,810 1,258,791 2.28% 47,707,907 1,496,933 3.14% 39,642,662 1,569,247 3.96%
Non-interest-bearing deposits 16,643,727 10,839,966 7,914,338
========== ========= ===== ========== ========= ===== ========== ========= =====
71,743,537 1,258,791 1.75% 58,547,873 1,496,933 2.56% 47,557,000 1,569,247 3.30%
Other liabilities 795,882 525,934 477,104
Stockholders' equity 9,192,508 5,278,484 5,232,560
---------- ---------- ----------
Total liabilities and
stockholders' equity $ 81,731,927 $ 64,352,291 $ 53,266,664
---------- ----------- -----------
Net interest spread 3.03% 3.14% 3.19%
Net interest income $ 2,806,686 3.67% $ 2,269,162 3.78% $ 1,887,697 3.91%
----------- ----- ----------- ----- ----------- -----
1) Interest revenue is presented on a fully taxable equivalent (FTE)
basis. The FTE basis adjusts for the tax favored status of these types
of securities. Management believes providing this information on a FTE
basis provides investors with a more accurate picture of our net
interest spread and net interest income and we believe it to be the
preferred industry measurement of these calculations. See
"Reconciliation of Non-GAAP Measures."
2) Available for sale investment securities are presented at amortized
cost.
3) We had no non-accruing loans for the periods presented.
20
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,
----------------------------------------- ----------------------------------------
2003 compared to 2002 2002 compared to 2001
----------------------------------------- ----------------------------------------
Variance due to: Variance due to:
Total Rate Volume Total Rate Volume
----- ---- ------ ----- ---- ------
Interest Earning Assets:
Federal funds sold $ (27,580) $ (46,590) $ 19,010 $ (196,122) $ (174,288) $ (21,834)
Interest bearing deposits 6,462 (228) 6,690 8,297 8,297 $ --
Investment Securities
U.S. Treasuries 5,074 -- 5,074 -- -- --
U.S. Agency (197,988) (137,319) (60,669) (148,175) (84,477) (63,698)
Mortgage backed (59,312) (45,918) (13,394) 160,498 160,498 --
State, county, municipals 106,759 12,588 94,171 31,966 31,966 --
Other 3,410 (2,854) 6,264 (2,342) (3,344) 1,002
Loans:
Commercial (5,536) (58,403) 52,867 25,020 (28,382) 53,402
Mortgage 424,116 (291,204) 715,320 188,141 (192,967) 381,108
Installment 43,977 (244,569) 288,546 241,868 (90,186) 332,054
-------- ---------- --------- ------- --------- --------
Total interest revenue 299,382 (814,497) 1,113,879 309,151 (372,883) 682,034
-------- ---------- --------- ------- --------- --------
Interest Bearing Liabilities
Savings and NOW deposits (22,987) (42,064) 19,077 (51,432) (73,008) 21,576
Money market and super NOW 162 (32,977) 33,139 (9,819) (41,419) 31,600
Other time deposits (215,874) (270,377) 54,503 (10,822) (251,988) 241,166
Other borrowed funds 557 (2,045) 2,602 (241) (241) --
-------- ---------- --------- ------- --------- --------
Total interest expense (238,142) (347,463) 109,321 (72,314) (366,656) 294,342
-------- ---------- --------- ------- --------- --------
Net interest income $ 537,524 $ (467,034) $ 1,004,558 $ 381,465 $ (6,227) $ 387,692
======== ========== ========= ======= ========= ========
1) Interest revenue is presented on a fully taxable equivalent (FTE)
basis. Management believes providing this information on a FTE basis
provides investors with a more accurate picture of our net interest
spread and net interest income and we believe it to be the preferred
industry measurement of these calculations. See "Reconciliation of
Non-GAAP Measures."
Provision for Loan Losses
Originating loans involves a degree of risk that credit losses will
occur in varying amounts according to, among other factors, the type of loans
being made, the credit-worthiness of the borrowers over the term of the loans,
the quality of the collateral for the loan, if any, as well as general economic
conditions. We charge the provision for loan losses to earnings to maintain the
total allowance for loan losses at a level considered by management to represent
its best estimate of the losses known and inherent in the portfolio that are
both probable and reasonable to estimate, based on, among other factors, prior
loss experience, volume and type of lending conducted, estimated value of any
underlying collateral, economic conditions (particularly as such conditions
relate to Old Line Bank's market area), regulatory guidance, peer statistics,
management's judgment, past due loans in the loan portfolio, loan charge off
experience and
21
concentrations of risk (if any). We charge losses on loans against the allowance
when we believe that collection of loan principal is unlikely. Recoveries on
loans previously charged off are added back to the allowance.
The provision for loan losses was $162,000 for the year ended December
31, 2003, as compared to $144,000 for the year ended December 31, 2002, an
increase of $18,000. The increase was primarily the result of growth in loan
balances outstanding in all segments of the portfolio as well as a change in the
composition of the portfolio.
Historically, we have experienced loan losses in the consumer loan
portfolio, specifically indirect automobile loans. We have exited that business
and at December 31, 2003 had reduced that element of the portfolio to an
outstanding balance of $81,061 as compared to a balance of $302,000 at December
31, 2002 and $881,000 at December 31, 2001. During the year ended December 31,
2003, the majority of the charge-offs were related to indirect automobile loans.
For the years ended December 31, 2002 and 2001, significantly all of the
charge-offs were related to indirect automobile loans.
As we have decreased indirect automobile loans, we have simultaneously
increased our mortgage loans, specifically commercial real estate loans, both as
a percentage of loans in the loan portfolio and in total dollar value. From
December 31, 2002 to December 31, 2003, the dollar value of our commercial real
estate loans increased from $16.7 million to $26.9 million, and the percentage
of commercial real estate loans to total loans increased from 38.58% to 44.87%.
From December 31, 2001 to December 31, 2002, the dollar value of our commercial
real estate loans increased from $11.6 million or 34.16% of total loans to $16.7
million or 38.58% of total loans.
Because commercial real estate loans generally have higher loan
balances and greater credit risk than indirect automobile loans, the loss
estimates for these types of loans are generally greater than the loss estimates
for indirect automobile loans. As a result, the reduction in the indirect
automobile loan portfolio was more than offset by increased allowances allocated
to the mortgage loan portfolio as a result of the increase in commercial real
estate loans. The net effect of this change is that our allowance for loan
losses has increased as a percentage of total loans. We expect that this trend
will continue.
The adequacy of the allowance for loan losses is reviewed at least
quarterly. Our review includes evaluation of impaired loans as required by SFAS
No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure. Also incorporated in determining the adequacy of the allowance is
guidance contained in the Securities and Exchange Commissions SAB No. 102, Loan
Loss Allowance Methodology and Documentation; and the Federal Financial
Institutions Examination Council's Policy Statement on Allowance for Loan and
Lease Losses Methodologies and Documentation for Banks and Savings Institutions.
We base the evaluation of the adequacy of the allowance for loan losses
upon loan categories. We categorize loans as installment and other consumer
loans (other than boat loans), boat loans, mortgage loans (commercial real
estate, residential real estate and real estate construction) and commercial
loans. We apply loss ratios to each category of loan other than commercial loans
(including letters of credit and unused commitments). We further divide
commercial loans by risk rating and apply loss ratios by risk rating, to
determine estimated loss amounts. We evaluate delinquent loans and loans for
which management has knowledge about possible credit problems of the borrower or
knowledge of problems with loan collateral separately and assign loss amounts
based upon the evaluation.
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
22
rating for all commercial loans in excess of $250,000 at least annually. We
evaluate loans with a risk rating of five or greater separately and assign loss
amounts based upon the evaluation. For loans with risk ratings between one and
four, we determine loss ratios based upon a review of prior 18 months
delinquency trends, the three year loss ratio, peer group loss ratios and
industry standards.
We also identify and make any necessary allocation adjustments for any
specific concentrations of credit in a loan category that in management's
estimation increase the risk inherent in the category. If necessary, we will
also make an adjustment within one or more loan categories for economic
considerations in our market area that may impact the quality of the loans in
the category. For all periods presented, there were no specific adjustments made
for concentrations of credit or economic considerations. We will not create a
separate valuation allowance unless a loan is considered impaired under SFAS No.
114 and SFAS No. 118. For all periods presented, there were no impaired loans.
Our policies require a review of assets on a regular basis, and we
believe that we appropriately classify loans as well as other assets if
warranted. We believe that we use the best information available to make a
determination with respect to the allowance for loan losses, recognizing that
the determination is inherently subjective and that future adjustments may be
necessary depending upon, among other factors, a change in economic conditions
of specific borrowers or generally in the economy, and new information that
becomes available to us. However, there are no assurances that the allowance for
loan losses will be sufficient to absorb losses on non-performing assets, or
that the allowance will be sufficient to cover losses on non-performing assets
in the future.
The allowance for loan losses represents 0.91% of total loans at
December 31, 2003 and 0.90% and 0.79% of total loans at December 31, 2002 and
December 31, 2001, respectively. We have no exposure to foreign countries or
foreign borrowers. Management believes that the allowance for loan losses is
adequate for each period presented.
23
The following table represents an analysis of the allowance for loan
losses for the periods indicated:
Allowance for Loan Losses
Year Ended December 31, 2003 2002 2001
-----------------------------------------------------------------------------
Balance, beginning of period $ 389,553 $ 268,806 $ 251,631
Provision for loan losses 162,000 144,000 78,000
--------- --------- ---------
Chargeoffs:
Commercial -- -- --
Mortgage -- -- --
Consumer (16,554) (35,748) (68,731)
--------- --------- ---------
Total chargeoffs (16,554) (35,748) (68,731)
Recoveries:
Commercial -- -- --
Mortgage -- -- --
Consumer 12,691 12,495 7,906
--------- --------- ---------
Total recoveries 12,691 12,495 7,906
--------- --------- ---------
Net chargeoffs (3,863) (23,253) (60,825)
Balance, end of period $ 547,690 $ 389,553 $ 268,806
========= ========= =========
Allowance for loan losses to total loans 0.91% 0.90% 0.79%
Ratio of net-chargeoffs during period to
average loans outstanding during period (0.007%) (0.062%) (0.217%)
The following table provides a breakdown of the allowance for loan
losses:
Allocation of Allowance for Loan Losses
December 31,
2003 2002 2001
---- ---- ----
Amount % of Loans Amount % of Loans Amount % of Loans
in Each in Each in Each
Category Category Category
-----------------------------------------------------------------------------------------------
Installment & others $ 9,840 1.29 % $ 29,512 3.08 % $ 58,561 5.60 %
Boat 141,826 31.04 114,282 35.43 57,899 32.08
Mortgage 278,329 53.89 172,277 47.27 97,464 45.65
Commercial 117,695 13.78 73,482 14.22 54,882 16.67
------- ----- ------- ----- ------ -----
Total $547,690 100.00 % $389,553 100.00 % $268,806 100.00 %
======= ===== ======= ===== ====== ======
24
Non-interest Revenue
2003 compared to 2002
---------------------
Non-interest revenue consisted primarily of gains on securities sales,
fee income from service charges on deposit accounts, mortgage origination fees
from a third party processor, credit card fees and ATM fees. Revenues amounted
to $600,741 for the year ended December 31, 2003, or 27.40% higher than the 2002
amount of $471,553. As part of our business strategy, we continued to focus our
efforts on increasing the levels of non-interest income during 2003. As a result
of increased volume as well as an increase in fees assessed on accounts, service
charges on deposit accounts increased $21,930 or 10.07% during 2003 to $239,679
from $217,749 in 2002. Other fees and commissions also increased during the year
by $57,245 or 26.57% to $272,703 versus $215,458 in 2002. This was largely
attributable to an increase in mortgage origination fees received on residential
mortgages brokered to a third party processor caused by the historically low
interest rate environment as well as miscellaneous fees collected on loan
originations. We also realized gains on the sale of securities of $88,359 during
2003 versus $38,346 in 2002.
In 2004, we anticipate we will continue to increase income from loan
fees as compared to prior years. Because we have added new residential builders
to our customer base, we expect that we will have growth in the number of new
loans originated, particularly in the residential construction market.
Additionally, we have seen indications of increased demand in the commercial
real estate market. However, we anticipate any increase will be partially offset
by a decline in mortgage origination fees as a result of the anticipated
stabilization in mortgage interest rates.
2002 compared to 2001
---------------------
Non-interest revenue consisted primarily of gains on securities sales,
fee income from service charges on deposit accounts, mortgage origination fees
from a third party processor, credit card fees and ATM fees. Revenues amounted
to $471,553 for the year ended December 31, 2002, or 46.96% higher than the 2001
amount of $320,880. As part of our business strategy, efforts were focused
during 2002 to increase the levels of non-interest income. As a result, we were
successful in increasing processing fee revenue related to loans. Additionally,
ATM machine activity increased, which resulted in enhanced "foreign" ATM fees,
and we received increased mortgage origination fees from a third party
processor. We also realized gains on the sale of securities of $38,346 during
2002 as compared to $18,180 during 2001.
Non-interest Expense
2003 compared to 2002
---------------------
Non-interest expense was $2.5 million in 2003, which was $395,222
greater than the 2002 level of $2.1 million. Salaries and benefit costs amounted
to $1.4 million in 2003, as compared to $1.2 million in 2002. During 2003, the
Clinton, Maryland branch was staffed for a full twelve months versus
approximately five months in 2002 and we added a commercial loan officer in
January of 2003. These items in addition to annual salary and bonus increases
caused the increase in salaries and benefits.
Occupancy expenses declined $2,911 or 1.44% in 2003. Prior to 2002, we
expensed property taxes in arrears based on the payment date. In 2002, in order
to properly accrue for these expenses, we double expensed the taxes during the
year. As a result, property taxes were $17,639 higher in 2002 than in 2003. The
reduced property tax expense in 2003 was offset by an increase in building
maintenance, improvements and depreciation expenses totaling $16,634.
Other operating expenses increased $128,692 or 21.35% from $602,782 for
the year ended December 31, 2002 to $731,474 for the year ended December 31,
2003. This was primarily the result of a $61,564 increase in organizational and
legal expenses and a $34,684 increase in audit & exam fees. Organizational and
legal fees as well as audit fees increased primarily as a result of the expenses
associated with the formation of the holding company and listing on the Nasdaq
Smallcap market. Additionally, during 2002, the Accokeek and Old Line Centre
branches experienced robbery related losses. As a result,
25
during the year, we increased security at all branch locations which increased
other operating expenses during 2003 by approximately $35,000. In 2003, director
fees increased $15,299 due to an increased number of meetings and an increase in
meeting fees. Data processing fees increased $14,356 as a result of increases in
the number of customers as well as enhanced services.
For 2004, we anticipate non-interest expense will increase as we hire
additional personnel and expand our internet banking services. We expect to
offset a portion of these increases with savings realized in security costs from
the installation of electronic security devices in the third quarter of 2003 and
a reduction in organizational and legal expenses during the year.
2002 compared to 2001
---------------------
Non-interest expense was $2.1 million in 2002, which was $424,436
greater than the 2001 level of $1.7 million. Salaries and benefit costs amounted
to $1.2 million in 2002, as compared to $939,068 in 2001. Staffing of the
Clinton, Maryland branch in 2002 and the addition of an executive officer in
late 2001 caused the increase in salaries and benefits.
Occupancy expenses increased $24,255 in 2002 due to the opening of the
Clinton, Maryland branch during the year.
Other operating expenses increased $156,924 or 35.20% from $445,858 for
the year ended December 31, 2001 to $602,782 for the year ended December 31,
2002. The opening of the Clinton, Maryland branch coupled with the increased
volume of new customers added to processing costs. In particular, data
processing expenses increased by approximately $30,000. Additionally, during
2002, the Accokeek and Old Line Centre branches experienced robbery related
losses. As a result, during the year, we increased security at all branch
locations which increased other operating expenses during 2002 by approximately
$40,000. In 2002, we also incurred approximately $40,000 of additional expenses
associated with the conversion from a national to a state bank charter.
Income Taxes
2003 Compared to 2002
---------------------
Income tax expense was $224,616 (32.32% of pre-tax income) for 2003 as
compared to $164,884 (32.80% of pre-tax income) for 2002.
2002 Compared to 2001
---------------------
Income tax expense was $164,884 (32.80% of pre-tax income) for 2002 as compared
to $155,582 (33.04% of pre-tax income) for 2001.
Net Income
2003 Compared to 2002
---------------------
Net income was $470,262 or $.34 basic and diluted earnings per common
share for the year ended December 31, 2003, an increase of $132,393 or 39.18%,
compared to net income of $337,869 for the same period during 2002. The increase
in net income was the result of increases in net interest income of $476,159 and
non-interest revenue of $129,188, offset by increases in the provision of loan
losses of $18,000, income tax expense of $59,732, and non-interest expense of
$395,222.
2002 Compared to 2001
---------------------
Net income was $337,869 or $.39 basic earnings per common share and
$.39 diluted earnings per common share for the year ended December 31, 2002, an
increase of $22,638 or 7.18%, compared to net income of $315,231 for the same
period during 2001. The increase in net income was the result of
26
increases in net interest income of $371,703 and non-interest income of
$150,673, offset by increases in the provision of loan losses of $66,000, income
tax expense of $9,302, and non-interest expense of $424,436.
Analysis of Financial Condition
Investment Securities
Our portfolio consists primarily of U.S. government agency securities,
securities issued by states, counties and municipalities, mortgage-backed
securities, and certain equity securities, including Federal Reserve Bank Stock
and Federal Home Loan Bank Stock. The portfolio provides a source of liquidity,
collateral for repurchase agreements as well as a means of diversifying our
earning asset portfolio. While we generally intend to hold the investment
portfolio assets until maturity, we classify a significant portion of the
portfolio as available for sale. We account for securities so classified at fair
value and report the unrealized appreciation and depreciation as a separate
component of stockholders' equity, net of income tax effects. We account for
securities classified in the held to maturity category at amortized cost. We
invest in securities for the yield they produce and not to profit from trading
the securities. There are no trading securities in the portfolio.
The investment portfolio at December 31, 2003 amounted to $19.2
million, an increase of $446,190, or 2.38%, from the December 31, 2002 amount of
$18.7 million. Available for sale investment securities increased to $17.4
million at December 31, 2003 from $13.4 million at December 31, 2002. Held to
maturity securities decreased to $1.8 million at December 31, 2003 from $5.4
million at December 31, 2002. This decrease occurred in the second quarter of
2003 when Old Line Bank sold $1 million in investments that were previously
classified as held-to-maturity. As required under SFASB Statement No. 115, all
securities previously classified as held to maturity were reclassified as
available-for-sale. The carrying value of available for sale securities included
net unrealized losses of $109,732 at December 31, 2003 (reflected as unrealized
losses of $69,914 in stockholders' equity after deferred taxes) as compared to
net unrealized appreciation of $141,192 ($93,187 net of taxes) as of December
31, 2002.
The investment portfolio at December 31, 2002 amounted to $18.7
million, an increase of $3.0 million, or 18.92%, from the December 31, 2001
amount of $15.7 million. Available for sale investment securities increased to
$13.4 million at December 31, 2002 from $11.1 million at December 31, 2001. Held
to maturity securities increased to $5.4 million at December 31, 2002 from $4.7
million at December 31, 2001. The carrying value of available for sale
securities included net unrealized appreciation of $141,192 at December 31, 2002
(reflected as unrealized appreciation of $93,187 in stockholders' equity after
deferred taxes) as compared to net unrealized appreciation of $57,194 ($37,176
net of taxes) as of December 31, 2001.
27
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)
December 31, 2003 2002 2001
------------------------------------- ------- ------- -------
Available For Sale Securities
U.S. treasury $ 1,503 $ -- $ --
U.S. government agency 9,332 8,075 11,057
State, county and municipal 3,098 1,472 --
Mortgage backed 3,448 3,841 --
------- ------- -------
Total Available for Sale Securities $17,381 $13,388 $11,057
======= ======= =======
Held To Maturity Securities
U.S. treasury 1,804 -- --
U.S. government agency -- 5,000 4,700
State, county and municipal -- 352 --
------- ------- -------
Total Held to Maturity Securities $ 1,804 $ 5,352 $ 4,700
======= ======= =======
Equity Securities $ 818 $ 374 $ 367
======= ======= =======
The following table shows the maturities for the securities portfolio at
December 31, 2003 and 2002.
--------------------------------------------------------------------------------------------------------
December 31, 2003
--------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
--------------------------------------------------------------------------------------------------------
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
Maturing
3 Months or less $ 235,425 $ 235,470 2.54% $ 299,475 $ 299,662 0.71%
>3 Months through 1 Yr 855,986 762,204 3.72% 1,504,337 1,511,719 3.23%
>1 Year through 5 Yrs 9,723,800 9,735,006 3.15% -- --
>5 Years through 10 Yrs 6,262,624 6,237,861 3.85% -- --
>10 Yrs 413,416 410,978 2.35% -- --
----------- ----------- ----------- -----------
$17,491,251 $17,381,519 $ 1,803,812 $ 1,811,381
=========== =========== =========== ===========
Pledged Securities $ 7,498,999 $ 7,450,798
28
Amortized Cost, Carrying Value and Average Yield
Amortized Cost, Carrying Value and Average Yield
December 31, 2002
---------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------------------------------------------------------------------
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
---------------------------------------------------------------------------------------------------------
Maturing
3 Months or less $ 1,073,641 $ 1,078,252 2.62% $ - $ - -
>3 Months through 1 Yr. 423,328 437,394 4.10% - - -
>1 Year through 5 Yrs. 8,145,105 8,269,934 3.88% 2,500,000 2,529,575 3.44%
>5 Years through 10 Yrs. 3,100,542 3,120,359 5.13% 2,851,588 2,935,873 5.16%
>10 Yrs. 503,745 481,614 3.43% - -
----------- ----------- ----------- ---------
$ 13,246,361 $ 13,387,553 $ 5,351,588 $ 5,465,448
=========== =========== =========== =========
Pledged Securities $ 3,000,000 $ 3,042,987 $ 1,500,000 $ 1,578,819
=========== =========== =========== =========
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.
Loan Portfolio
The loan portfolio, net of allowance, unearned fees and origination
costs increased $16.4 million or 38.22% to $59.5 million at December 31, 2003
from $43.1 million at December 31, 2002. Commercial business loans increased by
$2.1 million (34.03%), commercial real estate loans (generally owner-occupied)
increased by $10.2 million (60.85%), residential real estate loans (generally
home equity and fixed rate home improvement loans) increased by $757,067
(26.25%), real estate construction loans increased by $883,107 (100.51%) and
installment loans increased by $2.7 million (16.14%) from their respective
balances at December 31, 2002.
The loan portfolio, net of allowance, unearned fees and origination
costs increased $9.4 million or 27.65% to $43.1 million at December 31, 2002
from $33.7 million at December 31, 2001. Commercial business loans increased by
$499,734 (8.83%), commercial real estate loans (generally owner-occupied)
increased by $5.1 million (44.12%), residential real estate loans (generally
home equity and fixed rate home improvement loans) increased by $140,809
(5.13%), real estate construction loans decreased by $275,974 (23.90%) and
installment loans increased by $3.9 million (30.41%) from their respective
balances at December 31, 2001.
Loans secured by real estate or luxury boats comprise the majority of
the loan portfolio. Old Line Bank's loan customers are generally located in the
greater Washington, D.C. metropolitan area.
As anticipated, the increase in our legal lending limit from $910,000
to $1,950,000 that occurred as a result of the capital offering allowed us to
retain a higher percentage of loans that we previously participated to other
financial institutions. In 2002, we participated out approximately $7 million in
loans that we originated because they would have exceeded our legal lending
limit. As a result of the capital offering, we were able to retain all or a
portion of these types of loans in the third and fourth quarters of 2003.
29
The following table summarizes the composition of the loan portfolio by dollar
amount and percentages:
Loan Portfolio
---------------------------------------------------------------------------
2003 % 2002 % 2001 %
---------------------------------------------------------------------------
(Dollars in thousands)
Real Estate
Commercial $ 26,859 44.87% $ 16,698 38.58% $ 11,586 34.16%
Construction 1,762 2.94% 879 2.03% 1,155 3.40%
Residential 3,641 6.08% 2,884 6.66% 2,744 8.09%
Commercial 8,251 13.78% 6,156 14.22% 5,656 16.67%
Installment 19,355 32.33% 16,666 38.51% 12,780 37.68%
-------- ------ -------- ------- -------- -------
Total Loans $ 59,868 100.00% $ 43,283 100.00% $ 33,921 100.00%
-------- ====== -------- ======= -------- =======
Allowance for loan losses 547 390 269
Net deferred loan
fees and costs (197) (166) (81)
-------- -------- --------
350 224 188
-------- -------- --------
$ 59,518 $ 43,059 $ 33,733
======== ======== ========
The following table presents the maturities or repricing periods of selected
loans outstanding at December 31, 2003:
Loan Maturity Distribution at December 31, 2003
------------------------------------------------
1 year or less 1-5 years After 5 years Total
------------------------------------------------
(Dollars in thousands)
Real Estate
Commercial $ 12,354 $ 10,286 $ 4,219 $ 26,859
Construction 1,762 - - 1,762
Residential 3,091 360 190 3,641
Commercial 5,129 2,837 285 8,251
Installment 253 890 18,212 19,355
-------- -------- -------- --------
Total Loans $ 22,589 $ 14,373 $ 22,906 $ 59,868
======== ======== ======== ========
Fixed Rates 522 8,882 22,508 31,912
Variable Rates 22,067 5,491 398 27,956
-------- -------- -------- --------
Total Loans $ 22,589 $ 14,373 $ 22,906 $ 59,868
======== ======== ======== ========
30
Asset Quality
Management performs reviews of all delinquent loans and relationship
officers are charged with working with customers to resolve potential credit
issues in a timely manner. Management generally classifies loans as non-accrual
when collection of full principal and interest under the original terms of the
loan is not expected or payment of principal or interest has become 90 days past
due. Classifying a loan as non-accrual results in 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
delinquent principal and interest payments are brought current and we expect to
collect future monthly principal and interest payments. We recognize interest on
non-accrual loans only when received. There were no non-accrual loans as of
December 31, 2003, 2002 and 2001. No loans were 90 days or more past due as of
December 31, 2003 or 2002. As of December 31, 2001 the balance on accruing loans
past due more than 90 days was $643.
We classify any property acquired as a result of foreclosure on a
mortgage loan as "real estate owned" and record it at the lower of the unpaid
principal balance or fair value at the date of acquisition and subsequently
carry the loan at the lower of cost or net realizable value. We charge any
required write-down of the loan to its net realizable value against the
allowance for credit losses at the time of foreclosure. We charge to expense any
subsequent adjustments to net realizable value. Upon foreclosure, Old Line Bank
generally requires an appraisal of the property and, thereafter, appraisals of
the property on at least an annual basis and external inspections on at least a
quarterly basis. As of December 31, 2003, December 31, 2002 and December 31,
2001, we held no real estate acquired as a result of foreclosure.
We apply the provisions of Statement of Financial Accounting Standards
No. 114 ("SFAS No. 114"), "Accounting by Creditors for Impairment of a Loan," as
amended by Statement of Financial Accounting Standards No. 118 ("SFAS No. 118"),
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." SFAS No. 114 and SFAS No. 118 require that impaired loans, which
consist of all modified loans and other loans for which collection of all
contractual principal and interest is not probable, be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, an impairment is
recognized through a valuation allowance and corresponding provision for credit
losses. Old Line Bank considers consumer loans as homogenous loans and thus does
not apply the SFAS No. 114 impairment test to these loans. We write off impaired
loans when collection of the loan is doubtful.
We had no impaired or restructured loans as of December 31, 2003,
December 31, 2002, or December 31, 2001.
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, 2003, the deposit portfolio had
grown to $69.3 million, a $7 million or 11.35% increase over the December 31,
2002 level of $62.3 million. We have seen growth in several key categories over
the period. Non-interest bearing deposits grew $7.3 million during the period to
$19.9 million from $12.6 million while interest-bearing deposits declined
$219,062 to $49.4 million from $49.6 million. The addition of the Clinton branch
in September 2002 and key personnel expanded our non-interest bearing deposit
base as we obtained an increased level of commercial checking accounts. Interest
bearing deposit accounts declined as a result of a decline in real estate
attorney and title company accounts. As refinancings of home mortgages declined,
the balances in these accounts also declined.
At December 31, 2002, deposits were $62.2 million, an $11.4 million
increase over the December 31, 2001 level of $50.8 million. Non-interest bearing
deposits grew $3.9 million during the period to $12.6 million from $8.7 million,
and interest-bearing deposits grew $7.6 million to $49.6 million from $42.0
million.
As a general practice, we do not purchase brokered deposits. During the
periods reported, we had
31
no brokered deposits. As market conditions warrant and balance sheet needs
dictate, we may participate in the wholesale certificates of deposit market.
The following is a summary of the maturity distribution of certificates
of deposit as of December 31, 2003.
Certificate of Deposit Maturity Distribution
December 31, 2003
-------------------------------------------------
Three
Three Months to Over
Months or Twelve Twelve
Less Months Months Total
-------------------------------------------------
(Dollars in thousands)
Certificates of deposit
Less than $100,000 $ 3,358 $ 6,727 $ 7,496 $ 17,581
Greater than or equal to $100,000 773 2,433 4,463 7,669
------- ------- -------- --------
Total $ 4,131 $ 9,160 $ 11,959 $ 25,250
======= ======= ======== ========
Borrowings
Old Line Bank has available lines of credit, including overnight
federal funds and repurchase agreements from its correspondent banks totaling
$8,500,000 as of December 31, 2003. Old Line Bank has an additional secured line
of credit from the Federal Home Loan Bank of $13,430,000. At December 31, 2003,
Old Line Bank had $3,000,000 outstanding in overnight federal funds at 1.24% and
$4,000,000 outstanding with the Federal Home Loan Bank at 4.8% due January 3,
2011. At December 31, 2002 and 2001, Old Line Bank had $4,000,000 outstanding at
4.8% due January 3, 2011. Old Line Bank may not prepay the loan prior to
maturity without incurring a significant prepayment penalty.
Interest Rate Sensitivity Analysis and Interest Rate Risk Management
A principal objective of Old Line Bank's asset/liability management
policy is to minimize exposure to changes in interest rates by an ongoing review
of the maturity and re-pricing of interest-earning assets and interest-bearing
liabilities. The Asset and Liability Committee of the Board of Directors
oversees this review.
The Asset and Liability Committee establishes policies to control
interest rate sensitivity. Interest rate sensitivity is the volatility of a
bank's earnings resulting from movements in market interest rates. Management
monitors rate sensitivity in order to reduce vulnerability to interest rate
fluctuations while maintaining adequate capital levels and acceptable levels of
liquidity. Monthly financial reports supply management with information to
evaluate and manage rate sensitivity and adherence to policy. Old Line Bank's
asset/liability policy's goal is to manage assets and liabilities in a manner
that stabilizes net interest income and net economic value within a broad range
of interest rate environments. Adjustments to the mix of assets and liabilities
are made periodically in an effort to achieve dependable, steady growth in net
interest income regardless of the behavior of interest rates in general.
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.
32
Old Line Bank currently has a negative gap over the short term, which
suggests that the net yield on interest earning assets may decrease during
periods of rising interest rates. However, a simple interest rate "gap" analysis
by itself may not be an accurate indicator of how net interest income will be
affected by changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities may not be
affected uniformly by changes in interest rates. In addition, the magnitude and
duration of changes in interest rates may have a significant impact on net
interest income. Although certain assets and liabilities may have similar
maturities or periods of re-pricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market interest rates,
while interest rates on other types may lag behind changes in general market
rates. In the event of a change in interest rate, prepayment and early
withdrawal levels also could deviate significantly from those assumed in
calculating the interest-rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest rate increase.
The table below presents Old Line Bank's interest rate sensitivity at
December 31, 2003. 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, 2003
--------------------------------------------------------------
Maturing or Repricing
--------------------------------------------------------------
Within 4-12 1-5 Over Total
3 Months Months Years 5 Years
--------------------------------------------------------------
(Dollars in thousands)
Interest Earning Assets:
Investment securities $ 535 $ 2,266 $ 9,735 $ 6,649 $ 19,185
Loans 17,577 5,012 14,373 22,906 59,868
Interest bearing deposits -- 400 300 -- 700
Federal funds sold 4,003 -- -- -- 4,003
-------- -------- -------- -------- --------
Total interest earning assets 22,115 7,678 24,408 29,555 83,756
-------- -------- -------- -------- --------
Interest Bearing Liabilities:
Interest-bearing transaction deposits 9,323 4,512 -- -- 13,835
Savings accounts 3,446 3,446 3,446 10,338
Time deposits 4,131 9,160 11,959 -- 25,250
-------- -------- -------- -------- --------
Total interest-bearing deposits 16,900 17,118 15,405 -- 49,423
-------- -------- -------- -------- --------
FHLB Advances 3,000 -- 4,000 -- 7,000
Other borrowings -- -- -- -- --
-------- -------- -------- -------- --------
Total interest-bearing liabilities 19,900 17,118 19,405 -- 56,423
-------- -------- -------- -------- --------
Period Gap $ 2,215 $ (9,440) $ 5,003 $ 29,555 $ 27,333
======== ======== ======== ======== ========
Cumulative Gap $ 2,215 $ (7,225) $ (2,222) $ 27,333
======== ======== ======== ========
Cumulative Gap/Total Assets 2.47% (8.07%) (2.48%) 30.53% 30.53%
33
Liquidity
Our overall asset/liability strategy takes into account our need to
maintain adequate liquidity to fund asset growth and deposit runoff. Our
management monitors the liquidity position daily in conjunction with Federal
Reserve guidelines. We have credit lines unsecured and secured available from
several correspondent banks totaling $8.5 million. Additionally, we may borrow
funds from the Federal Home Loan Bank of Atlanta. We can use these credit
facilities in conjunction with the normal deposit strategies, which include
pricing changes to increase deposits as necessary. We can also sell or pledge
investment securities to create additional liquidity. From time to time we may
sell or participate out loans to create additional liquidity as required.
Additional sources of liquidity include funds held in time deposits and cash
from the investment and loan portfolios.
Our immediate sources of liquidity are cash and due from banks and
federal funds sold. As of December 31, 2003, we had $2.5 million in cash and due
from banks, and $4 million in federal funds sold and other overnight
investments. As of December 31, 2002 and 2001, we had $1.4 million and $2.0
million in cash and due from banks, and $5.6 million and $6.3 million in federal
funds sold and other overnight investments.
Old Line Bank has sufficient liquidity to meet its loan commitments as
well as fluctuations in deposits. We usually retain maturing certificates of
deposit as we offer competitive rates on certificates of deposit. Management is
not aware of any demands, trends, commitments, or events that would result in
Old Line Bank's inability to meet anticipated or unexpected liquidity needs.
Capital
Our stockholders' equity amounted to $12.8 million at December 31,
2003, $5.7 million at December 31, 2002 and $5.4 million at December 31, 2001.
We are considered "well capitalized" under the risk-based capital guidelines
adopted by the Federal Reserve.
34
The following table shows Old Line Bancshares, Inc." 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
December 31,
----------------------------------------------
2003 2002 2001
----------------------------------------------
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 18 $2,866 $ 2,866
Addl. paid-in capital 12,363 2,600 2,563
Retained earnings 517 127 (105)
Less: disallowed assets - - (23)
------- ------- -------
Total Tier 1 Capital 12,898 5,593 5,301
Tier 2 Capital:
Allowance for loan losses 547 390 269
------- ------- -------
Total Risk Based Capital $13,445 $5,983 $5,570
======= ======= =======
Risk weighted assets $66,574 $50,971 $40,410
======= ======= =======
Regulatory
Capital Ratios: Minimum
-----------------
Tier 1 risk based capital ratio 20.2% 10.9% 13.1% 4.0%
Total risk based capital ratio 19.4% 11.7% 13.7% 8.0%
Leverage ratio 14.7% 7.9% 9.2% 4.0%
Equity to assets ratio 14.4% 7.7% 8.8% 4.0%
35
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,
-------------------------------------------
2003 2002 2001
-------------------------------------------
(Dollars in thousands)
Average total assets $81,732 $64,352 $53,267
======= ======= =======
Average equity $9,193 $5,278 $5,233
======= ======= =======
Net income $ 470 $ 338 $ 315
======= ======= =======
Cash dividends declared $ 80 $ 69 $ 57
======= ======= =======
Divided payout ratio for period 17.07% 20.36% 18.19%
======= ======= =======
Return on average assets .58% .53% .59%
======= ======= =======
Return on average equity 5.12% 6.40% 6.02%
======= ======= =======
Average stockholders' equity to
average total assets 11.25% 8.20% 9.82%
======= ======= =======
Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance
Sheet Arrangements
Old Line Bancshares, Inc. is a party to financial instruments with off-balance
sheet risk in the normal course of business. These financial instruments
primarily may include commitments to extend credit, lines of credit and standby
letters of credit. In addition, Old Line Bancshares, Inc. also has operating
lease obligations. Old Line Bancshares, Inc. uses these financial instruments to
meet the financing needs of its customers. These financial instruments involve,
to varying degrees, elements of credit, interest rate, and liquidity risk. These
do not represent unusual risks and management does not anticipate any losses
which would have a material effect on Old Line Bancshares, Inc.
36
Outstanding loan commitments and lines and letters of credit at
December 31 of 2003, 2002 and 2001 are as follows:
December 31, 2003 2002 2001
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commitments to extend credit and available credit lines:
Commercial $ 1,395 $ 2,385 $ 1,102
Real estate-undisbursed development and construction 3,931 3,582 254
Real estate-undisbursed home equity lines of credit 2,686 3,892 1,752
------- ------- -------
$ 8,012 $ 9,859 $ 3,108
======= ======= =======
Standby letters of credit $ 317 $ 275 $ 87
======= ======= =======
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Old
Line Bancshares, Inc. generally requires collateral to support financial
instruments with credit risk on the same basis as it does for on-balance sheet
instruments. The collateral is based on management's credit evaluation of the
counter party. Commitments generally have interest rates fixed at current market
rates, expiration dates or other termination clauses and may require payment of
a fee. Available credit lines represent the unused portion of lines of credit
previously extended and available to the customer so long as there is no
violation of any contractual condition. These lines generally have variable
interest rates. Since many of the commitments are expected to expire without
being drawn upon, and since it is unlikely that 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. Each
customer's credit-worthiness is evaluated on a case-by-case basis. The Company
is not aware of any loss it would incur by funding its commitments or lines of
credit. Commitments for real estate development and construction, which totaled
$3.9 million, or 49% of the $8 million, are generally short-term and turn over
rapidly, satisfying cash requirements with principal repayments and 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. The Company's 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.
Old Line Bancshares, Inc. has various financial obligations, including
contractual obligations and commitments. The following table presents, as of
December 31, 2003, significant fixed and determinable contractual obligations to
third parties by payment date.
Within One to Three to Over
one year three years five years five years
(Dollars in thousands)
Noninterest-bearing $19,902
Interest-bearing 37,614 9,257 2,701
Purchase obligations 227 375
Operating leases 65 227 89 191
-------- ------- ------- -----
Total $ 57,808 $ 9,859 $ 2,790 $ 191
======== ======= ======= =====
37
Old Line Bancshares, Inc.'s operating leases obligation represents rental
payments for two branches. The interest-bearing obligations include accrued
interest. Purchase obligations represent estimated obligations under agreements
to purchase goods or services that are enforceable and legally binding. The
purchase obligation amounts presented above primarily relate to estimated
obligations under data and item processing contracts, and accounts payable for
goods and services received through December 31, 2003.
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, 2003
(Dollars in thousand)
Investment Interest Total Net Interest Net Interest
Securities Earning Assets Assets Income Spread
GAAP interest income $ 610,101 $ 3,994,350 $ 3,994,350 $ 2,735,559
Tax equivalent adjustment 71,127 71,127 71,127 71,127
--------- ----------- ----------- ------------
Tax equivalent interest income 681,228 4,065,477 4,065,477 2,806,686
GAAP interest yield 3.64% 5.22% 4.89% 3.58% 2.94%
Taxable equivalent adjustment 0.43% 0.09% 0.08% 0.09% 0.09%
----- ----- ----- ----- -----
Tax equivalent interest yield 4.07% 5.31% 4.97% 3.67% 3.03%
Twelve months ended December 31, 2002
(Dollars in thousand)
Investment Interest Total Net Interest Net Interest
Securities Earning Assets Assets Income Spread
GAAP interest income $ 813,522 $ 3,756,333 $ 3,756,333 $ 2,259,400
Tax equivalent adjustment 9,762 9,762 9,762 9,762
--------- ----------- ----------- ------------
Tax equivalent interest income 823,284 3,766,095 3,766,095 2,269,162
GAAP interest yield 5.13% 6.27% 5.84% 3.76% 3.12%
Taxable equivalent adjustment 0.06% 0.01% 0.01% 0.02% 0.02%
----- ----- ----- ----- -----
Tax equivalent interest yield 5.19% 6.28% 5.85% 3.78% 3.14%
In 2001, there were no adjustments to GAAP interest income.
Impact of Inflation and Changing Prices and Seasonality
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike industrial companies, virtually all the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's
38
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, and may frequently reflect government policy initiatives
or economic factors not measured by price index. As discussed above, Old Line
Bank strives to manage its interest sensitive assets and liabilities in order to
offset the effects of rate changes and inflation.
39
Application Of Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and follow general
practices within the industry in which we operate. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments are necessary when
assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried on the financial statements at fair value
warrants an impairment write-down or valuation reserve to be established, or
when an asset or liability needs to be recorded contingent upon a future event.
Carrying assets and liabilities at fair value inherently results in more
financial statement volatility. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based either
on quoted market prices or are provided by other third-party sources, when
available.
The most significant accounting policies 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 significant assets and liabilities
are valued in the financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial
statement amounts to the methods, assumptions, and estimates underlying those
amounts, management has identified the determination of the provision for loan
losses as the accounting area that requires the most subjective or complex
judgments, and as such could be most subject to revision as new information
becomes available.
The provision for loan losses represents management's 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.
The evaluation of the adequacy of the provision for loan losses is
based upon loan categories except for delinquent loans and loans for which
management has knowledge about possible credit problems of the borrower or
knowledge of problems with loan collateral, which are evaluated separately and
assigned loss amounts based upon the evaluation. Loss ratios are applied to each
category of loan other than commercial loans (including letters of credit and
unused commitments), where the loans are further divided by risk rating and loss
ratios are applied by risk rating, to determine estimated loss amounts.
Categories of loans are installment and other consumer loans (other than boat
loans), boat loans, mortgage loans (commercial real estate, residential real
estate and real estate construction) and commercial loans.
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.
40
Recent Accounting Pronouncements
Accounting pronouncements that the Financial Accounting Standards Board
recently approved follow. These Statements will not have any impact on the
financial statements of Bancshares or the Bank.
FASB Statement No. 149, Amendment of Statement 133 Derivative
Instruments and Hedging Activities, improves financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. In
particular, this statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement No. 133 (2) clarifies when a derivative
contains a financing component and (3) amends certain other pronouncements. This
statement is effective for contracts and hedging relationships entered into or
modified after September 30, 2003.
FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity, requires that an issuer
classify a financial instrument that is within its scope as a liability. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003.
FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, An Interpretation of ARB No. 51, requires consolidation of variable
interest entities by the primary beneficiary. This Interpretation is effective
for the first interim period or fiscal year beginning after June 15, 2003, for
variable interest entities created before February 1, 2003. For entities created
after January 31, 2003, the effective date is immediate.
AICPA Statement of Position No. 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer, prohibits the "carrying over" of
valuation allowances in loans and securities acquired in a transfer. At
transfer, the assets are to be recorded at the total cash flows expected to be
collected. The SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004.
Item 7. Financial Statements
The following consolidated financial statements are filed with this
report:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 2003, 2002 and 2001
Consolidated Statements of Income - For the years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity - For the
years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - For the year ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
41
Report of Independent Auditors
The Board of Directors and Stockholders
Old Line Bancshares, Inc.
Waldorf, Maryland
We have audited the accompanying consolidated balance sheets of Old Line
Bancshares, Inc. and Subsidiary as of December 31, 2003, 2002, and 2001, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. 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 auditing standards generally
accepted 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 financial statements referred to above present
fairly, in all material respects, the financial position of Old Line Bancshares,
Inc. and Subsidiary as of December 31, 2003, 2002, and 2001, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Baltimore, Maryland
January 21, 2004
42
Old Line Bancshares, Inc. & Subsidiary
Consolidated Balance Sheets
December 31, 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 2,477,119 $ 1,409,172 $ 2,036,267
Federal funds sold 4,002,828 5,622,983 6,305,716
Time deposits in other banks 700,000 600,000 -
Investment securities available for sale 17,381,519 13,387,553 11,057,194
Investment securities held to maturity 1,803,812 5,351,588 4,700,000
Loans, less allowance for loan losses 59,517,690 43,058,786 33,733,116
Restricted equity securities at cost 818,450 373,750 366,800
Bank premises and equipment 2,279,669 1,920,243 1,741,513
Accrued interest receivable 315,326 305,486 381,216
Deferred income taxes 60,925 - 13,063
Other assets 178,465 215,140 134,221
------------ ------------ ------------
$ 89,535,803 $ 72,244,701 $ 60,469,106
============ ============ ============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 19,902,350 $ 12,614,536 $ 8,759,209
Interest-bearing 49,422,727 49,641,789 42,077,668
------------ ------------ ------------
Total deposits 69,325,077 62,256,325 50,836,877
Borrowed funds 7,000,000 4,000,000 4,000,000
Accrued interest payable 149,831 250,259 241,344
Income tax payable 130,675 - -
Deferred income taxes - 34,021 -
Other liabilities 102,566 17,503 29,381
------------ ------------ ------------
76,708,149 66,558,108 55,107,602
------------ ------------ ------------
Stockholders' equity
Common stock, par value $.01 per share in 2003, $10 per share in
2002, and $5 per share in 2001; authorized 5,000,000 shares in 2003
and 1,000,000 in 2002 and 2001; issued and oustanding 1,756,894.5
in 2003, 286,631.5 in 2002 and 573,263 in 2001 17,569 2,866,315 2,866,315
Additional paid-in capital 12,362,902 2,600,000 2,563,223
Retained earnings 517,097 127,091 (105,210)
------------ ------------ ------------
12,897,568 5,593,406 5,324,328
Accumulated other comprehensive income (69,914) 93,187 37,176
------------ ------------ ------------
12,827,654 5,686,593 5,361,504
------------ ------------ ------------
$ 89,535,803 $ 72,244,701 $ 60,469,106
============ ============ ============
43
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Income
Years ended December 31, 2003 2002 2001
--------------------------------------------------------------------------------------------------------
Interest revenue
Loans, including fees $ 3,282,351 $ 2,824,634 $ 2,369,605
U.S. Treasury securities 4,840 - -
U. S. government agency securities 392,966 609,988 758,163
Mortgage backed securities 101,186 160,498 -
Tax exempt securities 88,397 22,204 -
Federal funds sold 82,300 109,880 306,002
Other 42,310 29,129 23,174
--------- --------- ---------
Total interest revenue 3,994,350 3,756,333 3,456,944
--------- --------- ---------
Interest expense
Deposits 1,063,399 1,302,098 1,374,171
Borrowed funds 195,392 194,835 195,076
--------- --------- ---------
Total interest expense 1,258,791 1,496,933 1,569,247
--------- --------- ---------
Net interest income 2,735,559 2,259,400 1,887,697
Provision for loan losses 162,000 144,000 78,000
--------- --------- ---------
Net interest income after provision for loan losses 2,573,559 2,115,400 1,809,697
--------- --------- ---------
Noninterest revenue
Service charges on deposit accounts 239,679 217,749 187,057
Other fees and commissions 272,703 215,458 115,643
Gain on disposal of assets 88,359 38,346 18,180
--------- --------- ---------
Total noninterest revenue 600,741 471,553 320,880
--------- --------- ---------
Noninterest expenses
Salaries 1,233,855 1,021,878 810,910
Employee benefits 195,579 157,676 128,158
Occupancy 199,567 202,478 178,223
Equipment 118,947 99,386 96,615
Other operating 731,474 602,782 445,858
--------- --------- ---------
Total noninterest expenses 2,479,422 2,084,200 1,659,764
--------- --------- ---------
Income before income taxes 694,878 502,753 470,813
Income taxes 224,616 164,884 155,582
--------- --------- ---------
Net income $ 470,262 $ 337,869 $ 315,231
========= ========= =========
Basic earnings per common share $ 0.34 $ 0.39 $ 0.37
Diluted earnings per common share $ 0.34 $ 0.39 $ 0.36
44
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Changes in Stockholder's Equity
Accumulated
Additional other
Common stock paid-in Retained comprehensive Comprehensive
Shares Par value capital earnings income Income
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 573,263.0 $2,866,315 $ 2,563,223 $ (363,115) $ (31,074)
Net income - - - 315,231 - $315,231
Unrealized gain (loss) on
securities available for
sale, net of income taxes of $36,749 - - - - 68,250 68,250
---------
Comprehensive income $383,481
==========
Cash dividend $.07 per share - - - (57,326) -
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 573,263.0 2,866,315 2,563,223 (105,210) 37,176
One for two share exchange (286,631.5) - - - -
Net income - - - 337,869 - $337,869
Transfer to surplus - - 36,777 (36,777) -
Unrealized gain (loss) on
securities available for
sale, net of income taxes of $27,987 - - - - 56,011 56,011
Comprehensive income - - - - - $393,880
Cash dividend $.08 per share - - - (68,791) -
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 286,631.5 2,866,315 2,600,000 127,091 93,187
Capital Offering 299,000.0 2,990,000 3,924,156 - -
Net income - - - 470,262 - $470,262
Unrealized gain (loss) on
securities available for
sale, net of income taxes of $87,823 - - - - (163,101) (163,101)
Comprehensive income - - - - - $307,161
Exchange of $10 par value - (5,850,459) 5,850,459 - -
shares for $.01 par value
shares
Stock split effected in the form of 1,171,263.0 11,713 (11,713)
a 200% stock dividend
Cash dividend $.09 per share - - - (80,257)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 1,756,894.5 $ 17,569 $12,362,902 $ 517,096 $ (69,914)
========== ========== ========== ========== ==========
45
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Interest received $3,977,615 $ 3,762,405 $3,379,342
Fees and commissions received 512,382 434,678 302,700
Interest paid (1,359,219) (1,488,018) (1,512,608)
Cash paid to suppliers and employees (2,172,857) (2,038,914) (1,542,040)
Income taxes paid (101,064) (170,602) --
----------- ----------- -----------
856,857 499,549 627,394
Cash flows from investing activities
Purchase of investment securities
Held to maturity (2,504,375) (4,351,767) (4,500,000)
Available for sale (15,888,784) (14,508,839) (13,500,000)
Proceeds from disposal of investment securities
Held to maturity at maturity or call 4,000,000 2,700,000 3,800,000
Held to maturity sold 1,040,000 -- --
Available for sale at maturity or call 11,464,166 12,247,933 7,700,000
Available for sale sold 1,249,275 1,036,875 818,180
Loans made, net of principal collected (16,583,046) (9,385,288) (6,903,927)
Purchase of equity securities (444,700) (6,950) (16,600)
Purchase (redemption) of certificates of deposit (100,000) (600,000) --
Purchase of premises and equipment and software (544,253) (302,498) (80,848)
Proceeds from sale of premises and equipment -- 10,500 --
----------- ----------- -----------
(18,311,717) (13,160,034) (12,683,195)
Cash flows from financing activities
Net increase (decrease) in
Time deposits (910,139) 2,365,583 5,318,213
Other deposits 7,978,892 9,053,865 5,373,257
Net change in repurchase agreements 3,000,000 -- --
Proceeds from stock offering 6,914,156 -- --
Dividends paid (80,257) (68,791) (57,326)
----------- ----------- -----------
16,902,652 11,350,657 10,634,144
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (552,208) (1,309,828) (1,421,657)
Cash and cash equivalents at beginning of year 7,032,155 8,341,983 9,763,640
----------- ----------- -----------
Cash and cash equivalents at end of year $6,479,947 $ 7,032,155 $8,341,983
----------- ----------- -----------
46
Old Line Bancshares, Inc. & Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash
provided by operating activities
Net income $ 470,262 $ 337,869 $ 315,231
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 152,312 118,334 110,435
Provision for loan losses 162,000 144,000 78,000
Loss (gain) on disposal of securities (88,359) (36,875) (18,180)
Gain on sale of equipment - (1,471) -
Change in deferred loan fees net of costs (37,858) (84,382) (46,064)
Amortization of premium and discounts 30,963 14,724 -
Deferred income taxes (7,123) 19,098 155,582
Increase (decrease) in accrued interest payable
and other liabilities 115,310 (2,964) 63,973
Decrease (increase) in accrued interest receivable
and other assets 59,350 (8,784) (31,583)
--------- --------- ----------
$ 856,857 $ 499,549 $ 627,394
========= ========= ==========
47
Notes to Financial Statements
1. Organization
Old Line Bancshares, Inc. ("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 ("Bank"). On May 22, 2003, the stockholders of
Old Line Bank approved an Agreement and Plan of Reorganization and
Articles of Share Exchange pursuant to which (i) Old Line Bank would
become a wholly-owned subsidiary of Old Line Bancshares, Inc., and (ii)
each outstanding share (or fraction thereof) of Old Line Bank common
stock would be converted into one share (or fraction thereof) of Old
Line Bancshares, Inc. common stock, and the former holders of Old Line
Bank common stock would become the holders of all the outstanding
shares of Old Line Bancshares, Inc. common stock. The reorganization
became effective at 12:01 a.m. on September 15, 2003.
The reorganization was accounted for in a manner similar to that for a
pooling of interests. Under this accounting treatment, the net assets
and liabilities of Old Line Bank were recorded as the asset of Old Line
Bancshares, Inc. (investment in subsidiary) at book value, and the
stockholders' equity account of Old Line Bancshares, Inc. equals the
stockholders' equity account of Old Line Bank. As part of this
reorganization, $500,000 was transferred from Old Line Bank to fund the
expenses associated with the holding company formation and other
anticipated holding company expenses.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation-The accompanying consolidated
financial statements include the activity of Old Line Bancshares, Inc.
and its wholly owned subsidiary, Old Line Bank. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Business-Old Line Bank is a full service commercial bank operating in
the suburban Maryland (Washington, D.C. suburbs) counties of Prince
George's and Charles. The Bank offers deposit services and loans to
individuals, small businesses, associations and government entities.
Other services include direct deposit of payroll and social security
checks, automatic drafts from accounts, automated teller machine
services, cash management services, safe deposit boxes, money orders
and travelers cheques. The Bank also offers credit card services.
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. Material estimates that are particularly susceptible
to significant change in the near term relate to the determination of
the allowance for loan losses and deferred tax assets.
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, federal funds are
purchased and sold for one-day periods.
Investment securities-As securities are purchased, management
determines if the securities should be classified as held to maturity,
available for sale or trading. Securities which management has the
intent and ability to hold to maturity are recorded at amortized cost
which is cost adjusted for amortization of premiums and accretion of
discounts to maturity. Securities which may be sold before maturity are
classified as available for sale and carried at fair value with
unrealized gains and losses included in stockholders' equity on an
after tax basis. Management has not identified any investment
securities as trading.
In the second quarter of 2003, Old Line Bank sold $1 million in
investments that were previously classified as held-to-maturity. As
required under Statement of Financial Accounting Standards (SFAS) No.
115, all securities held at that time and previously classified as held
to maturity were reclassified as available-for-sale.
48
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
Stock options-The Company accounts for stock options under Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Options
Issued to Employees in accounting for the stock options. Accordingly,
no compensation has been recognized for the stock options granted. SFAS
No. 123, Accounting for Stock-Based Compensation was issued in October,
1995 to establish accounting and reporting standards for stock-based
employee compensation plans. SFAS No. 123 requires measurement of
compensation expense provided by stock-based plans using a fair value
based method of accounting, and recognition of compensation expense in
the statement of income or disclosure in the notes to the financial
statements.
Had compensation been determined in accordance with the provisions of
SFAS No. 123, the Bank's net income and earnings per share would have
been reduced to the following pro forma amounts:
Year Ended 2003 2002 2001
Net income
As reported $ 470,262 $337,869 $ 315,231
Pro forma 448,306 332,617 297,172
Basic earnings per share
As reported $ 0.34 $ 0.39 $ 0.37
Pro forma 0.33 0.38 0.36
Diluted earnings per share
As reported $ 0.34 $ 0.39 $ 0.36
Pro forma 0.32 0.38 0.34
Bank premises and equipment-Bank premises and equipment are recorded at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method.
Foreclosed real estate-Real estate acquired through foreclosure is
recorded at the lower of cost or fair market value on the date
acquired. Losses incurred at the time of acquisition of the property
are charged to the allowance for loan losses. Subsequent reductions in
the estimated value of the property are included in noninterest
expense.
Advertising-Advertising costs are expensed over the life of ad
campaigns. General purpose advertising is charged to expense as
incurred.
Loans and allowance for loan losses-Loans are stated at face value plus
deferred origination costs, less deferred origination fees and the
allowance for loan losses.
Interest on loans is accrued based on the principal amounts
outstanding. Origination fees and costs are amortized to income over
the terms of the loans using an approximate interest method. The
accrual of interest is discontinued when any portion of the principal
or interest is ninety days past due and collateral is insufficient to
discharge the debt in full.
Loans are considered impaired when, based on current information,
management considers it unlikely that the collection of principal and
interest payments will be made according to contractual terms.
Generally, loans are not reviewed for impairment until the accrual of
interest has been discontinued. If collection of principal is evaluated
as doubtful, all payments are applied to principal.
49
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
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's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take 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 were to suffer a severe downturn, the estimate
for uncollectible accounts would need to be increased. Loans which are
deemed to be uncollectible are charged off and deducted from the
allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.
Income taxes-The provision for income taxes includes taxes payable for
the current year and deferred income taxes. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Tax expense and tax benefits are allocated to the
Bank and Bancshares based on their proportional share of taxable
income.
Earnings per share-Basic earnings per common share are determined by
dividing net income by the weighted average number of shares of common
stock outstanding giving retroactive affect to the 200% stock dividend.
Diluted earnings per share are calculated including the average
dilutive common stock equivalents outstanding during the period.
Dilutive common equivalent shares consist of stock options, calculated
using the treasury stock method.
December 31, 2003 2002 2001
------------------------------------------------------------------------------
Weighted average number of shares 1,363,689.0 859,894.5 859,894.5
Dilutive average number of shares 31,611 14,175 4,776
Comprehensive income-Comprehensive income includes net income and the
unrealized gain (loss) on investment securities available for sale net
of related income taxes.
3. Cash and Equivalents
The Bank normally carries balances with other banks that exceed the
federally insured limit. The average balance in 2003 and 2002 did not
exceed the federally insured limit. The average balance carried in
excess of the limit was $933,062 for 2001. The Bank also sells federal
funds on an unsecured basis to the same banks. The average balance sold
was $7,990,556, $5,678,211, and $5,963,820 in 2003, 2002, and 2001,
respectively.
Banks are required to carry noninterest-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.
50
Notes to Financial Statements (Continued)
4. Investment Securities
Investment securities are summarized as follows:
Amortized Unrealized Unrealized Market
December 31, 2003 cost gains losses value
-----------------------------------------------------------------------------------------
Available for sale
U. S. treasury $ 1,497,209 $ 5,837 $ -- $ 1,503,046
U. S. government agency 9,379,090 12,606 59,491 9,332,205
State, county, and municipal 3,067,857 49,763 19,182 3,098,438
Mortgage-backed 3,547,095 3,105 102,370 3,447,830
----------- ----------- ----------- -----------
$17,491,251 $ 71,311 $ 181,043 $17,381,519
=========== =========== =========== ===========
Held to maturity
U. S. treasury $ 1,803,812 $ 7,569 $ -- $ 1,811,381
=========== =========== =========== ===========
December 31, 2002
-----------------------------------------------------------------------------------------
Available for sale
U. S. government agency $ 8,000,000 $ 74,843 $ -- $ 8,074,843
State, county, and municipal 1,485,996 15,527 29,935 1,471,588
Mortgage-backed 3,760,365 82,899 2,142 3,841,122
----------- ----------- ----------- -----------
$13,246,361 $ 173,269 $ 32,077 $13,387,553
=========== =========== =========== ===========
Held to maturity
U. S. government agency $ 5,000,000 $ 104,192 $ -- $ 5,104,192
State, county, and municipal 351,588 9,668 -- 361,256
----------- ----------- ----------- -----------
$ 5,351,588 $ 113,860 $ -- $ 5,465,448
=========== =========== =========== ===========
December 31, 2001
-----------------------------------------------------------------------------------------
Available for sale
U. S. government agency $11,000,000 $ 100,920 $ 43,726 $11,057,194
=========== =========== =========== ===========
Held to maturity
U. S. government agency $ 4,700,000 $ 52,351 $ -- $ 4,752,351
=========== =========== =========== ===========
51
Notes to Financial Statements (Continued)
4. Investment Securities (Continued)
All investment securities with unrealized losses have been in a
continuous loss position for less than twelve months.
The table below summarizes investment securities with unrealized losses
as of December 31, 2003:
December 31, 2003 Amortized Unrealized Market
Cost Losses Value
----------------------------------------
U.S. government agency $6,886,268 $ 59,491 $6,826,777
State, county, and municipal $ 905,267 $ 19,182 $ 886,085
Mortgage-backed $1,842,825 $ 102,370 $1,740,455
---------- ---------- ----------
Total $9,634,360 $ 181,043 $9,453,317
========== ========== ==========
All unrealized losses on securities as of December 31, 2003 are
considered to be temporary losses because each security will be
redeemed at face value at or prior to maturity. In most cases, a
temporary impairment in value is caused by market interest rate
fluctuations.
52
Notes to Financial Statements (Continued)
4. Investment Securities (Continued)
Proceeds from sales of investment securities during 2003, 2002, and
2001 were $2,289,275, $1,036,875, and $818,180 resulting in gross gains
of $88,359, $36,875, and $18,180, respectively. The unrealized gain on
investment securities included in comprehensive income is reported net
of these realized gains.
Contractual maturities and pledged securities at December 31, 2003,
2002, and 2001, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
Amortized Market Amortized Market
December 31, 2003 cost value cost value
--------------------------------------------------------------------------------
Maturing
Within one year $ 1,091,411 $ 997,674 $ -- $ --
Over one to five years 9,723,800 9,735,006 1,803,812 1,811,381
Over five years 6,676,040 6,648,839 -- --
----------- ----------- ----------- -----------
$17,491,251 $17,381,519 $ 1,803,812 $ 1,811,381
=========== =========== =========== ===========
Pledged securities $ 7,498,999 $ 7,450,798
=========== ===========
December 31, 2002
--------------------------------------------------------------------------------
Maturing
Within one year $ 1,496,969 $ 1,515,646 $ -- $ --
Over one to five years 8,145,105 8,269,934 2,500,000 2,529,575
Over five years 3,604,287 3,601,973 2,851,588 2,935,873
----------- ----------- ----------- -----------
$13,246,361 $13,387,553 $ 5,351,588 $ 5,465,448
=========== =========== =========== ===========
Pledged securities $ 3,000,000 $ 3,042,987 $ 1,500,000 $ 1,578,819
=========== =========== =========== ===========
December 31, 2001
--------------------------------------------------------------------------------
Maturing
Within one year $ -- $ -- $ 200,000 $ 200,500
Over one to five years 5,000,000 5,028,135 2,000,000 2,015,601
Over five years 6,000,000 6,029,059 2,500,000 2,536,250
----------- ----------- ----------- -----------
$11,000,000 $11,057,194 $ 4,700,000 $ 4,752,351
=========== =========== =========== ===========
Pledged securities $ 4,500,000 $ 4,513,175 $ 1,200,000 $ 1,210,655
=========== =========== =========== ===========
Securities are pledged to secure a line of credit from the Federal Home Loan
Bank.
53
Notes to Financial Statements (Continued)
5. 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, 2003 2002 2001
-----------------------------------------------------------------------------------------------
Commitments to extend credit and available credit lines:
Commercial $1,394,609 $2,385,000 $1,107,302
Real estate-undisbursed development and construction 3,931,474 3,581,606 254,020
Real estate-undisbursed home equity lines of credit 2,686,224 3,891,297 1,751,804
$8,012,307 $9,857,903 $3,113,126
Standby letters of credit $ 316,705 $ 275,290 $ 86,621
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.
54
Notes to Financial Statements (Continued)
6. Loans
Major classifications of loans are as follows:
December 31, 2003 2002 2001
--------------------------------------------------------------------------------
Real estate
Commercial $ 26,858,597 $ 16,697,757 $ 11,586,143
Construction 1,761,724 878,617 1,154,591
Residential 3,641,498 2,884,431 2,743,622
Commercial 8,250,958 6,156,267 5,656,533
Installment 19,355,178 16,665,758 12,779,906
------------ ------------ ------------
59,867,955 43,282,830 33,920,795
------------ ------------ ------------
Allowance for loan losses 547,690 389,553 268,806
Net deferred loan fees and (costs) (197,425) (165,509) (81,127)
------------ ------------ ------------
350,265 224,044 187,679
------------ ------------ ------------
$ 59,517,690 $ 43,058,786 $ 33,733,116
============ ============ ============
The maturity and rate repricing distribution of the loan portfolio
follows:
December 31, 2003 2002 2001
--------------------------------------------------------------------------------
Maturing within one year $ 22,589,080 $ 10,347,276 $ 9,889,186
Maturing over one to five years 14,373,242 13,287,123 8,093,078
Maturing over five years 22,905,633 19,648,431 15,938,531
------------ ------------ ------------
$ 59,867,955 $ 43,282,830 $ 33,920,795
============ ============ ============
At December 31, 2001, the principal balances of loans past due 90 days
or more, was $643. No loans were 90 days or more past due or considered
impaired at December 31, 2003 or December 31, 2002.
Transactions in the allowance for loan losses were as follows:
For the year ended December 31, 2003 2002 2001
-------------------------------------------------------------------------
Beginning balance $389,553 $268,806 $251,631
Provisions charged to operations 162,000 144,000 78,000
Recoveries 12,691 12,495 7,906
-------- -------- --------
564,244 425,301 337,537
Loans charged off 16,554 35,748 68,731
-------- -------- --------
Ending balance $547,690 $389,553 $268,806
======== ======== ========
The Bank makes loans to customers located in the Maryland suburbs of
Washington D.C. Although the loan portfolio is diversified, the
regional economy will influence its performance.
55
Notes to Financial Statements (Continued)
7. Restricted Equity Securities
Restricted equity securities were as follows:
December 31, 2003 2002 2001
------------------------------------------------------------------------------
Federal Reserve Bank stock $ 356,450 $161,750 $154,800
Atlantic Central Bankers Bank stock 12,000 12,000 12,000
Federal Home Loan Bank stock 350,000 200,000 200,000
-------- -------- --------
Maryland Financial Bank stock 100,000 -- --
Total $ 818,450 $373,750 $366,800
======== ======== ========
8. Bank Premises and Equipment
A summary of bank premises and equipment and the related depreciation
follows:
December 31, Useful lives 2003 2002 2001
------------------------------------------------------------------------------------
Land $ 487,673 $ 390,000 $ 390,000
Building 50 years 1,201,361 1,135,350 1,135,350
Leasehold improvements 5-30 years 469,144 255,754 107,519
Furniture and equipment 5-7 years 738,372 629,953 519,390
-------- ---------- ---------
2,896,550 2,411,057 2,152,259
Accumulated depreciation 616,881 490,814 410,746
-------- ---------- ---------
Net bank premises and equipment $2,279,669 $1,920,243 $1,741,513
======== ========== =========
Depreciation expense $ 126,067 $ 98,346 $ 90,406
======== ========== =========
Computer software included in other assets, and related amortization,
are as follows:
Cost 5 years $198,586 $139,826 $122,990
Accumulated amortization 122,066 95,821 75,391
-------- ---------- ---------
Net computer software $ 76,520 $ 44,005 $ 47,599
======== ========== =========
Amortization expense $ 26,245 $ 19,988 $ 20,029
======== ========== =========
9. Deposits
Major classifications of interest bearing deposits are as follows:
December 31, 2003 2002 2001
--------------------------------------------------------------------------------------
Money market and NOW $ 13,834,126 $ 15,052,542 $ 11,964,509
Savings 10,338,384 8,428,891 6,318,386
Other time - $100,000 and over 7,669,333 7,324,067 5,931,126
Other time 17,580,884 18,836,289 17,863,647
--------- ----------- -----------
$ 49,422,727 $ 49,641,789 $ 42,077,668
========= =========== ===========
56
Notes to Financial Statements (Continued)
9. Deposits (Continued)
Time deposits mature as follows:
December 31, 2003 2002 2001
------------------------------------------------------------------------------------
Within one year $ 13,291,356 $9,946,325 $ 12,621,058
Over one to two years 6,097,076 10,375,593 4,915,569
Over two to three years 3,160,300 4,683,713 5,649,534
Over three to four years 1,008,669 247,247 328,858
Over four to five years 1,692,816 907,478 279,754
--------- ----------- -----------
$ 25,250,217 $ 26,160,356 $ 23,794,773
========= =========== ===========
Interest on deposits for the years ended December 31, 2003, 2002, and
2001 consisted of the following:
December 31, 2003 2002 2001
------------------------------------------------------------------------------------
Money market and NOW $ 74,869 $ 77,414 $ 97,001
Savings 59,969 80,250 121,915
Time deposits - $100,000 and over 290,451 295,294 68,579
Other time deposits 638,110 849,140 1,086,676
--------- ----------- -----------
$1,063,399 $1,302,098 $1,374,171
========= =========== ===========
10. Borrowed Funds
The Bank has available lines of credit, including overnight federal
funds and reverse repurchase agreements from its correspondent banks
totaling $8,500,000 as of December 31, 2003. The Bank has an additional
secured line of credit from the Federal Home Loan Bank of $13,430,000.
At December 31, 2003, the Bank had $3,000,000 outstanding in overnight
federal funds at 1.24% and $4,000,000 outstanding with the Federal Home
Loan Bank at 4.8% due January 3, 2011. At December 31, 2002 and 2001,
the Bank had $4,000,000 outstanding at 4.8%, due January 3, 2011.
57
Notes to Financial Statements (Continued)
11. 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 $10,159,
$18,175, and $3,704 during the years ended December 31, 2003, 2002, and
2001, respectively.
Loans made to officers and directors totaled $1,959,356, $1,484,469,
and $1,841,670 at December 31, 2003, 2002, and 2001, respectively. The
directors and officers and their affiliated companies maintained
deposits with the Bank of $6,149,089, $9,348,805, and $6,619,811 at
December 31, 2003, 2002, and 2001, respectively. 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.
The schedule below summarizes changes in amounts of loans outstanding
to executive officers and directors for the years ended December 31:
December 31, 2003
-----------------------------------------------
Balance at beginning of year $ 1,484,469
Additions 3,486,164
Repayments (3,011,277)
-----------
Balance at end of year $ 1,959,356
===========
12. Income Taxes
The components of income tax are as follows:
For year ended December 31, 2003 2002 2001
-----------------------------------------------------------------------
Current
Federal $ 203,708 $ 145,786 $ --
State 28,031 -- --
--------- --------- ---------
231,739 145,786 --
Deferred (7,123) 19,098 155,582
--------- --------- ---------
$ 224,616 $ 164,884 $ 155,582
========= ========= =========
The components of the net deferred tax assets are as follows:
Provision for loan losses $ (75,018) $ (41,054) $ (5,839)
Organizational costs (28,013) -- --
Deferred loan origination
fees and cost, net 34,951 31,311 18,403
Depreciation 60,957 (753) 4,746
Operating loss carryover -- 29,594 138,272
--------- --------- ---------
$ (7,123) $ 19,098 $ 155,582
========= ========= =========
58
Notes to Financial Statements (Continued)
12. Income Taxes (Continued)
December 31, 2003 2002 2001
--------------------------------------------------------------------------------
Deferred tax assets
Allowance for loan losses $ 177,488 $ 102,470 $ 61,416
Organization costs 28,013 -- --
Net unrealized loss on
securities available for sale 39,818 -- --
--------- --------- ---------
Net operating loss carryforward -- -- 29,594
245,319 102,470 91,010
--------- --------- ---------
Deferred tax liabilities
Deferred loan origination costs 98,771 63,820 32,509
Depreciation 85,623 24,666 25,419
Net unrealized gain on
securities available for sale -- 48,005 20,019
--------- --------- ---------
184,394 136,491 77,947
--------- --------- ---------
Net deferred tax asset (liability) $ 60,925 $ (34,021) $ 13,063
========= ========= =========
The differences between the federal income tax rate of 34 percent and the
effective tax rate for the Bank are reconciled as follows:
2003 2002 2001
--------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from
State income taxes, net of
federal income tax benefit 1.9 -- --
Tax exempt income (3.9) (1.3) --
Nondeductible expenses 0.3 0.1 --
Other -- (1.0)
--------- --------- ---------
32.3% 32.8% 33.0%
========= ========= =========
13. Retirement Plan
The Bank maintains a 401(k) profit sharing plan for employees who meet
the eligibility requirements set forth in the plan. Pursuant to the
plan, which was amended in March 2003 and effective January 1, 2003,
the Bank matches the first 3% of employee contributions to the plan and
50% of the next 2% of employee contributions, for a maximum required
contribution of 4% of employee eligible compensation. This plan, which
covers substantially all employees, allows for elective employee
deferrals. The Bank's contributions to the plan for 2003, 2002, and
2001, were $37,716, $14,255, and $10,947, respectively.
59
Notes to Financial Statements (Continued)
14. Capital Standards
The Federal Deposit Insurance Corporation has 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, 2003, 2002, and 2001, the capital ratios
and minimum capital requirements are as follows:
Minimum capital To be well
(in thousands) Actual adequacy capitalized
December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Consolidated $13,445 20.2% $ 5,326 8.0% $ 6,657 10.0%
Old Line Bank $13,002 19.6% $ 5,312 8.0% $ 6,639 10.0%
Tier 1 capital (to risk-weighted assets)
Consolidated $12,898 19.4% $ 2,663 4.0% $ 3,994 6.0%
Old Line Bank. $12,455 18.8% $ 2,656 4.0% $ 3,984 6.0%
Tier 1 capital (to average assets)
Consolidated $12,898 14.7% $ 3,514 4.0% $ 4,392 5.0%
Old Line Bank $12,455 14.2% $ 3,506 4.0% $ 4,383 5.0%
December 31, 2002
---------------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Old Line Bank $ 5,983 11.7% $ 4,091 8.0% $ 5,114 10.0%
Tier 1 capital (to risk-weighted assets)
Old Line Bank $ 5,593 10.9% $ 2,052 4.0% $ 3,079 6.0%
Tier 1 capital (to average assets)
Old Line Bank $ 5,593 7.9% $ 2,832 4.0% $ 3,540 5.0%
December 31, 2001
---------------------------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets)
Old Line Bank $ 5,570 13.7% $ 3,245 8.0% $ 4,056 10.0%
Tier 1 capital (to risk-weighted assets)
Old Line Bank $ 5,301 13.1% $ 1,623 4.0% $ 2,434 6.0%
Tier 1 capital (to average assets)
Old Line Bank $ 5,301 9.2% $ 2,308 4.0% $ 2,886 5.0%
Tier 1 capital consists of common stock, surplus, and undivided
profits. 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.
60
Notes to Financial Statements (Continued)
14. Capital Standards (Continued)
Failure to meet the capital requirement could affect the Bank's ability
to pay dividends and accept deposits and may significantly affect the
operations of the Bank.
In the most recent regulatory report, the Bank was categorized as well
capitalized under the prompt corrective action regulations. Management
knows of no events or conditions that should change this
classification.
15. Commitments and Contingencies
The Bank leases two branch locations under operating lease agreements
expiring through 2012. Each of the leases provides extension options.
The approximate future minimum lease commitments under the operating
leases as of December 31, 2003, are as follows:
Year Amount
-------------- ------------
2004 $ 65,019
2005 65,846
2006 75,541
2007 85,456
2008 88,622
Remaining 191,427
$571,911
Rent expense was $81,056, $83,651, and $78,972 for the years ended
December 31, 2003, 2002, and 2001, respectively.
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.
61
Notes to Financial Statements (Continued)
16. Fair Value of Financial Instruments
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 with other banks is an
estimate by discounting future cash flows using current rates offered
for deposits of similar remaining maturities.
Investment Securities-The fair values of investment securities
available for sale and held to maturity 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 similar loans would be
made to borrowers with similar credit histories.
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.
Borrowed funds-The fair value of long-term FHLB advances is estimated
by discounting the value of contractual cash flows using rates
currently offered for advances with similar terms and remaining
maturities.
December 31, 2003 December 31, 2002
Carrying Fair Carrying Fair
amount value amount value
----------------------------------------------------------------------------------------
Financial assets
Time deposits 700,000 713,092 600,000 624,920
Investment securities 19,185,331 19,192,713 18,739,441 15,809,545
Loans 59,517,690 60,257,105 43,058,786 44,440,324
Financial liabilities
Interest bearing deposits 49,422,727 50,097,561 49,641,789 50,727,499
Long term borrowings 4,000,000 4,150,607 4,000,000 4,172,581
62
Notes to Financial Statements (Continued)
17. Other Operating Expenses
Other operating expenses that are over 1% of gross revenues are as
follows:
Year Ended December 31, 2003 2002 2001
---------------------------------------------------------------------
Director fees $ 53,499 $ 38,200 $ 28,300
Branch security costs 58,726 28,078 --
Audit & exam fees 74,884 40,200 31,500
Organizational & legal expenses 86,726 25,162 1,152
Data processing 113,260 98,904 72,913
Other 344,379 372,238 311,993
-------- -------- --------
Total $731,474 $602,782 $445,858
======== ======== ========
18. Parent Company Financial Information
The balance sheet, statement of income, and statement of cash flows for
Old Line Bancshares, Inc. (Parent Company) follow:
Old Line Bancshares, Inc.
Balance Sheet
December 31, 2003
--------------------------------------------------------------------------------
Assets
Cash and due from banks $ 113,908
Investment securities held to maturity 299,475
Investment in Old Line Bank 12,384,821
Deferred income taxes 28,013
Other assets 1,437
------------
$ 12,827,654
============
Liabilities and Stockholders' Equity
Stockholders' equity
Common stock, par value $.01 per share; authorized
5,000,000 shares; issued and outstanding 1,756,894.5 shares $ 17,569
Paid-in-capital 12,362,902
Retained earnings 517,097
------------
12,897,568
Accumulated other comprehensive income (69,914)
------------
$ 12,827,654
============
63
Notes to Financial Statements (Continued)
18. Parent Company Financial Information (Continued)
Old Line Bancshares, Inc.
Statement of Income
Year Ended December 31, 2003
------------------------------------------------
Interest revenue
U. S. Treasury securities $ 109
Operating Expenses
Organizational Expense 86,726
---------
Income before income taxes (86,617)
Income tax benefit 29,450
---------
(57,167)
Undistributed net income of bank 527,429
---------
Net income $ 470,262
=========
64
Notes to Financial Statements (Continued)
18. Parent Company Financial Information (Continued)
Old Line Bancshares, Inc.
Statement of Cash Flows
Years Ended December 31, 2003
--------------------------------------------------------------------------------
Cash flows from operating activities
Cash paid for operating expenses (86,726)
----------
(86,726)
----------
Cash flows from investing activities
Purchase of investment securities held to maturity (499,366)
Proceeds from maturity of investment securities held to maturity 200,000
----------
(299,366)
----------
Cash flows from financing activities
Cash from Bank at reorganization 500,000
----------
Net increase (decrease) in cash 113,908
----------
Cash and cash equivalents at beginning of year --
----------
Cash and cash equivalents at end of year $ 113,908
==========
Reconciliation of net income to net cash provided by operating
activities
Net income $ 470,262
Adjustment to reconcile net income to net cash used in operating
activities
Undistributed net income of subsidiary (527,429)
Accretion of discount on debt securities (109)
Increase in deferred income taxes (28,013)
Increase in other assets (1,437)
----------
$ (86,726)
==========
65
Notes to Financial Statements (Continued)
19. Stockholder's Equity
Stock Options
A summary of the status of the outstanding options follows:
2003 2002 2001
------------------------------------------------------------------------------------------------
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 73,500 $ 4.57 62,250 $ 4.51 34,500 $ 4.53
Options granted 15,750 11.50 11,250 5.93 27,750 4.48
Options exercised -- -- -- -- -- --
Options expired -- -- -- -- -- --
------ --------- ------ -------- ------ --------
Outstanding, end of year 89,250 $ 5.92 73,500 $ 4.57 62,250 $ 4.48
====== ========= ====== ======== ====== ========
The weighted average fair value of options granted during 2003, 2002,
and 2001, has been estimated using the Black-Scholes option-pricing
model with the following assumptions:
2003 2002 2001
--------------------------------------------------------------
Dividend yield 0.81% 1.37% 1.27%
Risk-free interest rate 0.94% 3.00% 4.50%
Expected volatility 25.10% 21.37% 17.33%
Expected life in years 10 10 10
Preferred stock-Bancshares is authorized to issue up to 1,000,000
shares of preferred stock with a par value of one cent per share.
20. Common Stock Dividend
The Bank has paid three cash dividends since its inception. In March
2001, the Bank paid a dividend of $0.07 per share, a dividend of $0.08
per share in March 2002, and a dividend of $0.09 per share in February
2003. These dividend amounts have been adjusted to reflect the Bank's
one for two stock exchange in June 2002 and Bancshares' 200% stock
dividend in September 2003.
On September 15, 2003, the Board of Directors of Bancshares declared a
200% stock dividend. The stockholders of record on September 26, 2003
received two additional shares of Common Stock for every one share
held. Holders of fractions of shares received the number of shares
equal to two times the fraction held. The stock dividend was paid on
October 10, 2003 and increased the total shares of Common Stock
outstanding from 555,631.5 shares to 1,756,894.5 shares.
66
21. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of
operations
Three months ended
2003 December 31, September 30, June 30, March 31,
-------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
Interest income $ 1,060 $ 1,019 $ 953 $ 962
Interest expense 279 311 328 341
Net interest income 782 708 625 621
Provision for loan losses 36 48 42 36
Net income 132 76 135 127
Earnings per share-basic 0.08 0.04 0.14 0.15
Earnings per share-diluted 0.07 0.04 0.14 0.14
2002
-------------------------------------------------------------------------------------
Interest income $ 949 $ 976 $ 947 $ 884
Interest expense 358 379 380 380
Net interest income 591 597 567 504
Provision for loan losses 36 42 36 30
Net income 79 82 91 86
Earnings per share-basic 0.09 0.10 0.11 0.10
Earnings per share-diluted 0.09 0.09 0.10 0.10
2001
-------------------------------------------------------------------------------------
Interest income $ 919 $ 901 $ 885 $ 848
Interest expense 390 408 392 378
Net interest income 529 493 493 470
Provision for loan losses 24 21 18 15
Net income 90 34 102 89
Earnings per share-basic 0.11 0.04 0.12 0.10
Earnings per share-diluted 0.10 0.04 0.12 0.10
67
Item 8. 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 8A. Controls and Procedures
As of the end of the period covered by this annual report on Form
10-KSB/A, Old Line Bancshares, Inc.'s Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of Old Line Bancshares, Inc.'s
disclosure controls and procedures. Based upon that evaluation, Old Line
Bancshares, Inc.'s Chief Executive Officer and Chief Financial Officer concluded
that Old Line Bancshares, Inc.'s disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed by Old
Line Bancshares, Inc. in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
In addition, there were no changes in Old Line Bancshares, Inc.'s
internal controls over financial reporting (as defined in Rule 13a-15 or Rule
15d-15 under the Securities Act of 1934, as amended) during the quarter ended
December 31, 2003, that have materially affected, or are reasonably likely to
materially affect, Old Line Bancshares, Inc.'s internal control over financial
reporting.
PART III.
Item 9. Directors, Executive Officers, Promoters, Control Persons; Compliance
with Section 16(a) of the Exchange Act
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 accounting
officer or controller, or persons performing similar functions. That Code of
Ethics for Senior Financial Officers has been posted on Old Line Bancshares,
Inc.'s internet website at www.oldlinebank.com. A copy of the Code of Ethics for
Senior Financial Officers is also included as an exhibit to this annual report.
The remaining information required by this Item 9 is incorporated by
reference to the information appearing under the captions "Election of
Directors," Executive Compensation" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement for the 2004 Annual Meeting of
Stockholders of Old Line Bancshares, Inc.
Item 10. Executive Compensation
The information required by this Item 10 is incorporated by reference
to the information appearing under the captions "Executive Compensation" and
"Board Meetings and Committees" in the Proxy Statement for the 2004 Annual
Meeting of Stockholders of Old Line Bancshares, Inc.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 11 is incorporated by reference
to the information appearing under the captions "Security Ownership of
Management and Certain Security Holders" in the Proxy Statement for the 2004
Annual Meeting of Stockholders of Old Line Bancshares, Inc.
68
Item 12. Certain Relationships and Related Transactions
The information required by this Item 12 is incorporated by reference
to the information appearing under the captions "Certain Relationships and
Related Transactions" in the Proxy Statement for the 2004 Annual Meeting of
Stockholders of Old Line Bancshares, Inc.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report.
Exhibit No. Description of Exhibits
3.1(A) Articles of Amendment and Restatement of Old Line Bancshares,
Inc.
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) Employment Agreement of James W. Cornelsen
10.2(A) Employment Agreement of Joseph E. Burnett
10.3(A) Employment Agreement of Christine M. Rush
10.4(B) 2001 Stock Option Plan, as amended
10.5(B) Form of Incentive Stock Option Agreement for 2001 Stock Option
Plan
10.6(B) Form of Non-Qualified Stock Option Agreement for 2001 Stock
Option Plan
10.7(C) 1990 Stock Option Plan, as amended
10.8(C) Form of Incentive Stock Option Grant Letter for 1990 Stock Option
Plan
10.9(C) Form of Director Non-Qualified Stock Option Agreement for 1990
Stock Option Plan
10.10 Lease Agreement dated April 29, 1999 between Live Oak Limited
Partnership and Old Line National Bank
10.11 Commercial Lease Agreement dated February 14, 2002 between Adams
and Company Commercial Brokers, Inc. and Old Line National Bank
14 Code of Ethics for Senior Financial Officers
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 Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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
(A) Previously filed by Old Line Bancshares, Inc. as a part of (and
with the same exhibit numbers), 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) Items 10.4, 10.5 and 10.6, as listed above, were previously filed
by Old Line Bancshares, Inc. as a part of (and with Exhibit
Numbers 10.1, 10.2 and 10.3), and are 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) Items 10.7, 10.8 and 10.9, as listed above, were previously filed
by Old Line Bancshares, Inc. as a part of (and with Exhibit
Numbers 10.1, 10.2 and 10.3), and are 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).
Note: Exhibits 10.1 through 10.9, relate to management contracts or compensatory
plans or arrangements.
69
(b) Reports of Form 8-K.
Form 8-K filed, dated November 7, 2003, Items 7 and 9.
Item 14. Principal Accountant 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, 2003
and December 31, 2002 and fees billed for other services rendered by Rowles &
Company, LLP during those periods.
Year Ended
December 31
2003 2002
Audit Fees(1) $31,013 $22,375
Audit Related Fees (2) 34,154 -
Tax Fees (3) 7,177 1,765
All Other Fees(4) 5,698 6,302
Total $78,042 $30,442
======= =======
(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 are normally
provided by Rowles & Company, LLP in connection with statutory and regulatory
filings or engagements.
(2) Audit-Related Fees consist of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of Old
Line Bancshares, Inc.'s consolidated (or Old Line Bank's) financial statements
and are not reported under "Audit Fees." In 2003, these fees included costs
associated with reviews and advisory services related to the public offering.
(3) Tax Fees consist of fees billed for professional services rendered for
federal and state tax compliance, tax advice and tax planning.
(4) Except for $560 incurred during 2002 and which related to costs associated
with discussions about increasing capital, other fees relate to fees for
internal auditing services rendered for periodic audits of Old Line Bancshares,
Inc.'s and Old Line Bank's internal practices and procedures to ensure they
remain compliant with Federal Reserve and supervisory guidelines. These services
were contracted prior to May 1, 2003 and Rowles and Company, LLP will complete
these services prior to May 6, 2004.
70
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.
71
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Old Line Bancshares, Inc.
Date: April 8, 2004 By: /s/ James W. Cornelsen
---------------------------------
James W. Cornelsen, President
(Principal Executive Officer)
---------------------------------
72
In accordance with the Exchange Act, 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 April 8, 2004
James W. Cornelsen (Principal Executive Officer)
s/Christine M. Rush Chief Financial Officer
------------------------------- (Principal Accounting and
Christine M. Rush Financial Officer) April 8, 2004
s/Charles A. Bongar, Jr. Director April 8, 2004
-------------------------------
Charles A. Bongar, Jr.
s/Craig E. Clark Director and April 8, 2004
-------------------------------
Craig E. Clark Chairman of the Board
s/Daniel W. Deming Director April 8, 2004
-------------------------------
Daniel W. Deming
s/James F. Dent Director April 8, 2004
-------------------------------
James F. Dent
s/Nancy L. Gasparovic Director April 8, 2004
-------------------------------
Nancy L. Gasparovic
Samuel V. Goekjian Director
-------------------------------
Samuel V. Goekjian
s/Randy A. Lakes Director April 8, 2004
-------------------------------
Randy A. Lakes-
s/Franck Lucente, Jr. Director April 8, 2004
-------------------------------
Frank Lucente, Jr.
s/Gail D. Manuel Director April 8, 2004
-------------------------------
Gail D. Manuel
s/John D. Mitchell Director April 8, 2004
-------------------------------
John D. Mitchell
73
EXHIBIT INDEX
Exhibit No. Description of Exhibits
3.1(A) Articles of Amendment and Restatement of Old Line Bancshares,
Inc.
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) Employment Agreement of James W. Cornelsen
10.2(A) Employment Agreement of Joseph E. Burnett
10.3(A) Employment Agreement of Christine M. Rush
10.4(B) 2001 Stock Option Plan, as amended
10.5(B) Form of Incentive Stock Option Agreement for 2001 Stock Option
Plan
10.6(B) Form of Non-Qualified Stock Option Agreement for 2001 Stock
Option Plan
10.7(C) 1990 Stock Option Plan, as amended
10.8(C) Form of Incentive Stock Option Grant Letter for 1990 Stock Option
Plan
10.9(C) Form of Director Non-Qualified Stock Option Agreement for 1990
Stock Option Plan
10.10 Lease Agreement dated April 29, 1999 between Live Oak Limited
Partnership and Old Line National Bank
10.11 Commercial Lease Agreement dated February 14, 2002 between Adams
and Company Commercial Brokers, Inc. and Old Line National Bank
14 Code of Ethics for Senior Financial Officers
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 Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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
(A) Previously filed by Old Line Bancshares, Inc. as a part of (and
with the same exhibit numbers), 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) Items 10.4, 10.5 and 10.6, as listed above, were previously filed
by Old Line Bancshares, Inc. as a part of (and with Exhibit
Numbers 10.1, 10.2 and 10.3), and are 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) Items 10.7, 10.8 and 10.9, as listed above, were previously filed
by Old Line Bancshares, Inc. as a part of (and with Exhibit
Numbers 10.1, 10.2 and 10.3), and are 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).
Note: Exhibits 10.1 through 10.9, relate to management contracts or compensatory
plans or arrangements.
74